You can’t blame the small business owner for rolling their eyes when their accountant says they want to review their monthly financial statements. As a fractional CFO, I have more than once thought I heard an audible groan from a potential client when I suggest monthly meetings to review their reporting package. The truth is, the accounting profession has not done a good job in presenting financial statements in a way that helps drive business decisions.
Understanding the Disconnect
Actionable financial reporting can lead to transcendent results. Most owners may have a hard time believing in this potential. However, almost all owners have, at one point, felt lost about where their business is at or what steps to take next. Why is there a disconnect between fulfilling the users’ need for actionable financial statements and what they are receiving from their outsourced CFO or other advisors?
The Reality of Small Business Owners’ Knowledge
Intuit provides a State of Small Business survey annually. The results of the survey from 2018 through 2022 show a consistent fact: between 60-65% of small business owners admit to not feeling confident in their knowledge of accounting and finance. Additionally, a survey done by the National Association of Small Business Accountants in 2023 revealed that 70% of small business owners delegate the financial aspect of their business to an outside accountant.
Couple the results above with the fact that most accountants do a mediocre job in presenting data to their clients, and you have an information deficit. Most accountants present an income statement and balance sheet to walk through what has happened in the business. However, these are often not the most effective tools or indicators of strategic performance.
In this article, we will walk through the requirements for actionable financial statements and how to build a better system for your business.
The Foundation of Actionable Reporting
Accounting: The Basic Building Block
To have reliable numbers to build actionable reports, there must be a solid process around accounting. Your accounting must be timely and accurate.
Timeliness refers to the ability to produce financial statements within days after the period end. Too often, businesses review financial statements weeks after the end of a month. This delay means information is often stale and worse, any projections from that information are often already occurring.
Accuracy in accounting is also crucial. If your accounting data is not accurate, then it can’t be relied upon for strategic decisions. Both of these can often be accomplished with a well-thought-out closing process. For most accountants, the closing process involves a checklist that walks through the steps required to produce an accurate set of financial statements. This checklist outlines which accounts must be reconciled and adjustments that must be made.
Enhancing the Value of Data
When I talk with clients about how to produce high-quality reports, I tell them that financial data is often half the battle. It is the combination of operational data and financial numbers that can produce higher value reports.
For example, for a service company, computing the average billable rate on an hourly basis is not purely a financial metric. You must combine operational data (hours worked) with financial data (invoiced value). Without combining this data, you would merely be left with interpreting revenue on a holistic basis. Getting a better metric to analyze revenue allows you to make key decisions around workflow, employee levels, and more, driving more profitability.
Building a Customized Reporting System
As mentioned above, 60-65% of owners have a difficult time understanding traditional financial statements. Therefore, you need to build a system that presents information in a way that is digestible to most users.
I have found that displaying graphs, charts, and digestible tables is the best way to facilitate a discussion on actionable steps. Looking at the cash balance over time in a balance sheet presents the same data as a chart showing the same. However, most financial statement users will interpret the visual better than the table.
I take great strides in trying to present a visual income statement. There are two keys to a visual income statement. The first is that it is visual. The second is that it condenses the income statement into material categories. For instance, it presents employee expenses (wages, taxes, benefits, and insurance). By presenting the 5-8 material categories that drive the business, people don’t get lost in immaterial details.
The Importance of Financial Modeling
The Past vs The Future
Financial statements talk about the business’s past, while financial modeling attempts to predict the future. Financial modeling can take many forms, such as a rolling 12-month forecast or an updated 90-day cash flow forecast.
Financial statements become much more actionable when paired with forecast reporting. With several of my clients, we often discuss upcoming cash flow issues or changes that need to be made to buying practices based on what a rolling forecast shows.
Again, presentation is important. Financial models are often large Excel sheets with several assumptions that culminate in some sort of projection. Presenting this data can be overwhelming and also get readers lost in the details. An actionable financial statement presentation merely presents the significant assumptions and results.
Where to Start with Financial Modeling
To include a detailed analysis of how to create a financial model would significantly lengthen this article. However, I have gone into detail in several other articles about how to create impactful financial models. See some of these linked articles:
- Demystifying Financial Modeling
- Four Forecasting Tips for Small Business Owners
- Advantages of Financial Planning and Forecasting
- Setting Standards: Business Models vs. Budgets vs. Forecasting
Driving Strategic Discussions with Actionable Insights
One of my clients, a mid-sized software company, had been experiencing stagnant growth. The management team, led by their owner Jordan (not a real name), was under pressure to increase profits. They had a wealth of data at their disposal but struggled to translate it into actionable strategies.
Enter actionable reporting. Our first step was to begin to integrate operational KPIs with financial data, creating a new breed of reports that not only reflect the company’s performance but also highlight areas ripe for improvement.
During one of our monthly financial reporting meetings, we discussed a new actionable report that revealed a surprising insight: despite an increase in sales, the customer acquisition cost (CAC) has been rising, eating into the profit margins. This report, rich with operational data around acquisition costs by different channels, allowed the management team to pinpoint the inefficiencies in their sales process.
Armed with this information, we then took a deep dive into the sales funnel. The actionable report guides the discussion, leading to a decision to invest in AI-driven CRM tools to optimize lead scoring and nurturing processes. This strategic move aimed at reducing CAC and improving the ROI on marketing spend.
Six months down the line, we began to see a marked improvement in profit sparked by a decrease in CAC and therefore marketing costs. Sales processes became more efficient, and the customer sales process was more efficient, and Jordan was able to meet his personal income goals by increasing profit.
Through this story, we see how actionable reporting can transform data into a powerful tool for strategic discussions. By providing clarity and direction, these reports can drive growth and operational improvements, turning challenges into opportunities for success.
Summary
Transforming data into actionable insights isn’t just about crunching numbers; it’s about creating a strategic tool that drives business decisions and fosters growth. The example of Jordan’s software company demonstrates the transformative power of integrating financial and operational data.
Actionable financial statements are essential for any business owner looking to stay competitive and make informed decisions. By focusing on timeliness, accuracy, and the integration of operational data, business owners can turn their financial statements into a powerful tool for strategic planning. As a fractional CFO, my goal is to bridge the gap between numbers and strategy, helping business owners harness the full potential of their financial data to achieve their goals.
Krieger Analytics Can Help
Krieger Analytics has several small business owners who rely on them as their outsourced CFO. These businesses range in size ($1M to $15M in sales) and industries. We are an expert in servicing small businesses because we have been entrepreneurs. Our expertise doesn’t just come from theory, it comes from practice.
Contact us now if you want to learn what a CFO can do for your small business. We’d love to see if we are a good fit and can help you accomplish your goals.