When financial reports are produced they tend to be a formality for many businesses, meaning that the information is not analysed. What should happen is that the key decision makers should challenge the data to find out more about what it really means.
Many Financial Directors within small and medium-sized businesses often say that profit and loss reports prepared for any monthly board meeting is met with little or no reaction. In some instances, this could be because the data is not being interpreted fully or accurately enough, or else it lacks the layer of interpretation needed to make it meaningful. It could also mean that the information is not being explained properly and if key decision makers don’t really understand some areas and don’t ask the right questions (for fear of looking stupid), the real position is never revealed.
When smaller businesses grow, business leaders may find that the financial data being reported back by the in-house finance team is no longer as useful as it once was. For example, it may be too historical or focused in an area that is no longer relevant or necessary. Or businesses owners may need to see different data in order to make the decisions for growth.
How does the past impact the future? How can we use this information to spark positive change? If a financial report has grown to 25 pages or more and is at best skim read, or at worst, ignored completely, it would probably benefit from a review. In general, reports tend to get more favourable feedback if they are much shorter, more relevant and focused on the future.
As Financial Directors you can help the process by:
Keeping a close eye on those businesses that operate on a project basis, such as those in the construction industry is key to know whether a project is profitable or not. To calculate this accurately, the financial team will need to stay in touch with operations and make sure they know what stage the project has reached and whether it is likely to complete on time and on budget, and if not, make sure provision is made. This is especially important if a project loses money in its early stages, but turns cash rich towards the end of the project as this cash position needs to be carefully forecasted. Too many of these at the same time can kill cash flow.
Forecast modelling could be introduced to provide a view of how strategic decisions could impact the performance of the business over time. For example, the board may wish to know what would happen if the business increases or reduces prices by 1%, or if it recruits a new senior manager to head up an expanding sales function. Demonstrating the cash impact of changes or differing scenarios should keep the whole management team engaged. This type of cash modelling can help to make financial data more meaningful and integral to the running of the business.
Above all, make sure that your figures are explained, are not over complicated and welcome challenge from the key decision makers. It is only when owners question their data do they start to really understand it, so don’t make that a barrier. Reassure people that questions are welcomed and expected – make it easy for owners to really understand the financials.
Need any help getting to grips with financials, talk to Stuart Smith, Specialist Finance Director for SMEs on 07785 556 450.