Some Questions our Financial Statements don’t answer

The business owners, like many others we have trained over the years, struggle to make sense of our main deliverable, financial statements. They want more context around their business results.

Just looking at our deliverable, The Financial Statements’, they have unanswered questions like:

  1. Why I am making less profit than last year?
  2. Is this good? How are others like me doing?
  3. What should I be producing in gross margin?
  4. What should I spend on marketing?
  5. What is the average cost per —-in the same industry?
  6. What changes should I make to improve my results?
  7. Do I need to hire more employees?
  8. Would a banker lend me money?

For us, the most critical question for a business owner was

“What would you do differently tomorrow based on the information provided on these financial statements? “

Other than cutting expenses and firing all of the staff, there was consensus among the group that

no obvious actionable strategies could be gleaned from the financial statements themselves.*

The answer is very clear that our Financial statements are not enough.

Business owners need different information. They want visual data, benchmarks, what-ifs and information presented in plain English. They want to help the different teams understand the connection between their individual actions and financial results. And mostly, they want to work with accounting experts (both inside their organizations and outside) who know how to provide this information in a way they can understand.

This is the high time that we start using some automated tools readily available in the market, most of them are from foreign countries costing anything between Rs.25 k to Rs.100k per month. But we Indians, believe in tools which cost less but deliver highest value, and hence there are some Indian companies as well who are into developing MS -Excel based Dashboards which would be of similar style.

All of these tools are designed to provide insights that lead to changes in behaviour, new actions, and improved results. They have Key Performance Indicators (KPIs) including financial and non-financial measures, which are usually leading (not lagging) indicators of future business success.

Using these tools, we could be able to offer the following answers to the above unanswered questions above:

  1. Why I am making less profit than last year? Your cost per product sold has increased over last year by xx%, result in lower gross profit. At the same time your operating expenses increased, leading to lower net income.
  2. Is this good? How are others like me doing? You are showing a loss, while other companies in similar industry of your size are able to generate a bottom line profit of about XX%.
  3. What should I be producing in gross margin? It varies by type of product being sold, but in general, the margins are lower than the industry average of XX% by xx%, but you are under-performing the industry’s highest achievers by xx%.
  4. What should I spend on marketing? You should spend as much as it takes to drive the revenues you have planned for the current year. (You need to know the relative return on different marketing investments. We can help you make those calculations.) We are seeing smaller companies spend around X% of revenue on direct marketing.
  5. What is the average cost per product in the similar industry? We are seeing costs of around XX. Your costs exceed that by Rs. xx per unit.
  6. What changes should I make to improve my results? In order to achieve positive operating cash flow, you must first generate a profit, which can be accomplished by increasing your effective price per unit, selling more units, or reducing expenses. Once you have generated a profit, you also need to reduce your Accounts Receivable Days Outstanding and monitor the relationship between production and sales so that Inventory doesn’t grow faster than sales.
  7. Do I need to hire more employees? If you keep the same number of staff, the same number of visitors to your plant, but increase the sales per customer by xx unit per day, you can achieve your revenue targets. (Profit Equation Planner tool.)
  8. Would a banker lend me money?  Your debt to equity ratio and negative operating cash flow (which ison the Cash Flow Statement that no one ever reads) results don’t bode well for a traditional bank loan. ($COPE It! tool)

There is plenty of opportunity in our industry for accounting professionals who look further than the financial statements, who learn new skills, invest time in finding the right tools, and learn how to communicate financial information in a way that works for their clients. Your clients have questions that need to be answered. Are you ready to answer them?

Hope you all like it! Do share your valuable comments!!

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