The current issues of CFO magazine (May 2012, p. 32) points out a critical flaw in financial reporting that was mostly directed toward large company finance departments with staff dedicated to financial planning and analysis. But it’s a problem for smaller company finance departments as well, perhaps even more so because they are typically understaffed and overworked. The result is the numbers get out – mostly – but the real thinking doesn’t.
The article’s key point is about the thinking part. If a company gets financial reports every month, produced diligently by their accounting staff from the canned formats that come with every software package, they often feel complacent about the quality of their financial information, when in fact the most important elements of good financial reporting are missing.
Financial information only starts when the canned reports come out – income statement, balance sheet, maybe but not usually cash flow. The real work of understanding the implications of those reports comes afterwards: the metrics against established performance goals, the budget variances WITH clear explanations and proposed corrective action, the trend reports that give advance warning of negative (or positive) developments. If the accounting department issues its reports the day the books are closed it’s a very safe bet that none of that analysis has been done, and that means that none of the qualitative insights that should come from financial reports will be available to management. The accountants are by then off onto something else that got backed up while they were closing the books, never to look back.
The problem: If you don’t ask, you don’t get. Learn what to ask for and make it a standing requirement. And it shouldn’t be restricted to the monthly reports either. Analysis and subjective commentary should be welcome anytime, but required at least monthly when your financial reports are prepared. If your CFO/Controller can’t provide the qualitative thinking behind the numbers, you have a serious handicap. Don’t let that happen to your company.
As always, I welcome your comments and feedback.