As accountants, we know what balance sheet, income statement and the statement of cash flows are. We also know that we have responsibility for more than just the numbers. We also understand the story those numbers tell about the business. Financial statements are the primary means of communicating financial results to executives, stakeholders, and investors. So, we must take a deep dive into what’s behind the numbers.
Discrepancies and Expectations
Accountants must not only know their numbers but also how to present those numbers in a meaningful way that company leaders understand. That’s not an easy task. Management in various departments of a company may each paint a different picture for you about how the company is doing. However, you as the accountants may see a different reality through the numbers. What people tell may be different than what the numbers mean, and it’s our job to communicate what’s off course and how to correct it.
Your Financial Statement Arsenal
Our recent experience tells us that business owners typically have a pretty good idea on how the business is doing. When they see financial information that doesn’t match up with their expectations, they begin to doubt the reliability of the financial information. The first step to effective and meaningful financial reporting is to have accurate information. If a company is lacking accounting expertise, we at CFO Connections can act as the company’s outsourced controller to offer review and supervision of the accounting department.
Once a company is confident in the accuracy of its financial information, here’s what the business owner should review and why these statements and information are important.
- Balance Sheet. What are the major assets and liabilities? Are there any items that may affect future profitability or cash flow? For example, are there long-term debt payments? Perhaps there are assets that will need to be replaced in the near future? A balance sheet also provides liquidity information and the company’s ability to obtain working capital.
- Income Statement. Most business owners focus their attention on the income statement since it shows whether the company is profitable. Most business owners have a god pulse on the business and often time they form an expectation of what they believe the numbers would show. Comparing important line items such as revenue, gross margin, operating expenses and net profit to their expectation would identify discrepancies that may need corrective action.
- Cash Flow Statement. Cash is king and it is the lifeblood of a business. When evaluating cash flows, it is often extremely helpful to compare a company’s historical cash flows over a period of time to projections. It will help you see if the company is swimming or sinking. In our recent experience, the company executives we talked to were especially interested in how the company spends its cash, from paying down debt, payroll, other operating expenses, or loaned to other related entities. We also found that business owners prefer a simpler presentation of cash flows information over the traditional GAAP basis cash flows statement.
- Management Discussion and Analysis (MD&A). If a company has audited financials and is required to publicly publish its financial statements, the MD&A would reveal historical insights or future impacts that may not have been included in your executive discussions.
- Budgets. Does your company have a budget? With an unusual year we’ve had, it is particularly important to plan your next year taking into account some of the lessons learned this year. Afterall, your business may never be the same and that means taking a fresh approach in budgeting for the future. If your business has a budget, is it communicated and followed? Budgets provide needed structure and discipline, so engaging top-down support for company-wide compliance is extremely crucial. Comparing budget-to-actuals show where resources may be leaking.
Communication is Key
At CFO Connections, we are your strategic partner. We’re in a unique position to provide information that guides the trajectory of the business. We will customize any reports that meet your needs. We are also educators who will tell the story behind the numbers, correlating operational and financial performance. We’re part detective, part educator, and 100% strategist. Contact Us so we can help make sense of your numbers for you.