By Priyanka Jackson, EPM Business Consultant, Futuresense
Financial analysis and reporting are the bedrocks of modern business. While you may already know that financial reporting is important (mainly because it’s a legal requirement in most countries), you may not understand its untapped power and potential.
Imagine your organisation’s financial reporting process, in its current state, was a song. Just like every song – regardless of genre of music – there are certain fundamentals that need to be in place to create the perfect melody.
Every instrument must be finely tuned and played to the right tempo to ensure that the song flows properly, and that it delivers a pleasurable experience.
Far too often, financial reporting ends up discordant rather than melodious, mainly because the instruments are not playing to the right tempo. The tempo is dictated by the frequency of reports published in a financial year.
A company reporting on an annual basis would have a tempo with a slow build up that culminates in a crescendo. This would sound like an opera.
A company reporting on a monthly basis would have a consistent metronome-like beat. This would sound like electronic dance music. A company reporting quarterly would have four distinct choruses. This would sound like a pop song.
The Budgeting and Forecasting processes are based on the tempo of a company’s song for the year, but may be sped-up or slowed down, depending on what the CEO would like to listen to in the coming years.
In fact, the tempo will be defined as much by the economic and business environment in which the company operates as it will by the tastes of the company’s leadership.
Finding the right tempo is as essential to creating the right melody as using the right instruments. These include the ERP system as well as the reporting. An ERP system is the drum beat. Ideally this would have a consistent tempo regardless of the reporting frequency, with a beat determined by the general ledger close dates. Monthly reporting would represent a guitar baseline.
This is the basic profit and loss, balance sheet and cash flow information. Statutory reports themselves require some specific instruments, highlighting key financial considerations. Balance sheet movements, for example, could be seen as different piano keys, while tax reporting could be a flute.
The right combination of these, at the right frequency, will ensure that the company’s song is a hit. It will ensure that the leadership can rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows or to judge whether the resulting estimate of value was fairly represented in the current stock price.
It will allow the company to make wise decisions about investments and acquisitions, as well as the efficient allocation of capital.
Surveys reveal that many financial executives believe that financial reporting has ‘degenerated’ into an ever-more-burdensome ‘compliance exercise’, rather than an endeavour to inform stakeholders.
This has resulted in growing dissatisfaction with the relevance and usefulness of financial report information, largely because many of those reports are more often a jumble of noise than a symphony.
With the right instruments, keeping the right tempo, played by experts, a company’s financial reporting can become a smash hit among all stakeholders.