(a.k.a) – A Series on Business Financials and the Stories They Tell
What stories do your financials tell you about your business? When you look at your P&L report, do you only see the story of your past business month, or two months, or year? Have you developed the ability to immediately recognize current financial trends that prompt relevant and timely questions? Do you regularly engage in building the story of your future with financial forecasting?
I ask these questions because I frequently encounter entrepreneur/CEOs that under utilize or just misunderstand the power of financial reporting. Financial reports and/or metrics present numbers, but what they really do is tell the true stories of your business, past, present, and future – if you fully create and use the tools you need.
Financial Reporting vs. Legal Tax Reporting
Before continuing there is one very important nuance to embrace. The way you choose to build internal financial reports is not related specifically to tax reporting. In other words, you are not required to use specific financial reports to review daily, monthly, yearly, or future financials in any way. You can, and should, create your general ledger and financial reporting tools that are going to tell you the story you need to understand to manage your business.
Introduction – Past, Present, and Business Yet to Come
I chose to mimic the themes of the Dicken’s classic, A Christmas Carol, because that is a great way to convey the types of stories that your financials should tell you.
This series is about financial reporting and how you as a CEO can create financial reports that enhance your ability to lead your business effectively. You should consult a certified accounting professional and/or tax attorney to ensure that your accounting aligns with the Generally Accepted Accounting Principles (GAAP) standards and that you are correctly identifying, recording, and reporting all financial transactions and totals for tax purposes.
Past Stories
Some financial reports serve to reflect the past. For many entrepreneurs-turned-CEOs, these types of reports are the primary (perhaps even only) focus when examining overall financial performance. These take the form of YTD type reports for revenue and expenses, a monthly P&L report you receive after you close a month, annual P&L reports, and even spreadsheets and charts that document historical year-over-year financial performance as a comparison.
The past is one source of information, but the past alone primarily tells stories of victories or failures where lessons were learned. At the same time, there are narratives in the past story that do shed light on the present and future, and this series will address the effective use of those financial trends (narratives).
Present Stories
I once worked for a $365M/year manufacturer where the owner (privately owned) asked that the same (but updated) single-page financial report be on his desk by 8am every work day. This report had only eight lines of numbers. He ran the entire business, making all key decisions, from the story this report revealed to him each day.
Creating financial reports and/or financial scorecards that reveal what is going on in the present (in contrast to the past narrative/trends) is where you can start to harness the power of financials to make present and important decisions.
This is where you discover those KPIs (Key Performance Indicators) that truly relate the present to the past and the future. The present state no longer just represents numbers, but a real storyline that connects the past with the future. As a caution, never mistake your “progress” toward established goal (e.g., we’re at 50% of our revenue goal) as a KPI. That is not the right story to follow.
As the series develops we will dive much deeper into the types of present financial data that can empower you to make quick, decisive decisions, or at the least, point you in the right direction.
Business Yet to Come Stories
The last grouping of financial reports is focused on business yet to come. I break these down into two distinct types – short-term tactical views, and longer-term modeling.
Short-term tactical views for business yet to come would be reports like
- cash-flow analysis
- inventory analysis
- capacity planning report (for those that need this)
- AR Aging report
- quarterly P&L forecast
- sales forecast (if it is a true forecast)
If you do not have these types of reports, then I am glad you will be following this series.
The longer-term future financial reports are actually views of the future that are generally labeled as “proformas.” These types of reports are used to launch new businesses, launch new products, create long-term business growth strategies, or for acquisition-divestiture analysis. To me personally, this is some really fun stuff, but beware, this is a lot of work. The reason why so many CEO’s of small businesses don’t have this type of reporting is that you have to create this yourself in spreadsheets or use specific financial planning tools.
Either way, you are starting with financial reality trends, adding in what you know about your future plans, adding to that what you know about market trends, competitive trends, and buyer behavior — all to end up with confident guessing. Does that make is less important? No, it is essential to map out where you want to go and provide as much reality to how you are going to get there.
Overview of the “Financial Carol” Series
My plan in writing this series is to dive deeply into what you need to know as a CEO to build the right reports and to understand the stories of past, present, and business yet to come that your financial reporting offers you. We’re going to explore topics such as:
- Building the right General Ledger to tell your story
- Percentages paint the visuals that enhance the story
- COGS (Cost of Goods Sold), gross margins and the pricing story
- The nut that’s hard to crack – G&A expenses (a.k.a. Indirect Expenses)
- The role of the monthly P&L report
- Building proformas that mix truth with “other” truth or the unknown
- Capital and Operating, one-time events, and all that “ITDA” of “EBITDA”
I welcome you to follow the series in my newsletter (From EtoC Newsletter signup here if you are not a subscriber) or on this blog. In the next post, we will start with a few simple guidelines for setting up your general ledger as the foundation for your business story.
