As Edward Demings, the famous management consultant, once said, “In God we trust. All others bring data.”
Getting (and digesting) good data is key to running your company wisely and well. For our new clients, typically high-growth startups, one of the first things we do is to put together a comprehensive financial reporting package.
I know that sounds sexy in itself, but it serves a real purpose. For management teams, it creates a clear financial lens for the business, “the source of truth.” It creates consistency and cadence as well, and instills good management practices.
And let me tell you how many problems that having good financial reporting could prevent, including catching embezzling and costly mistakes.
Your financial package is for your review, for the analysis of your business. It’s also designed for control and good corporate hygiene. Certainly financials don’t tell the complete picture of the business. (Nothing tells the full picture.) But it does create a fact-based viewpoint that’s difficult to negotiate or argue about, in terms of bias.
Let’s walk through the eight parts of a strong financial package. Here is a link to an example of the AVL FinPakTM that we create for our clients.
1. The Overview, in Three Parts
Business owners are busy folk. The summary gives you a snapshot view and has three sections.
A 3-month view. What’s happened in the last three months to revenue, gross profit, net profit, cash, accounts receivable, inventory and maybe a few KPIs for your company. Also possible to track: number of customers, number of orders, web traffic, service calls.
Eight little rows, lots of insight. Data for the last three months gives you a quick picture of your recent activity and growth.
Year-to-date v. Budget. The second part is usually in the same rows with the year-to-date versus budget numbers. It’s good to keep tabs on this info. Do you know your gross profit year-to-date, and vs. budget, off the top of your head? Now you will.
Current Month v. Budget. Third, a current month versus budget gives you the latest news for those same eight stats. “What did we think we were going to do in July vs. what did we do?”
The overview is a compact summary of what’s in the rest of the financial package.
2. The Income Statement x 3
On to the income statement or P&L. Here, I like to review three unique versions on separate worksheets.
P&L Monthly Trend. The first one is a P&L trend, which shows the monthly P&L in each column. At this writing, it would show January to August, a good eight columns. For every account from the beginning of the year to now.
P&L v. Budget. The second worksheet is the P&L versus budget (if applicable), for the current month and year-to-date. While the Overview worksheet shows just the highlights, this is the full P&L.
P&L by Area. The third one I like—and not every company needs this—is a P&L by department, class or location. If you have a marketing group, or an ops team, or sales team, they have their own P&L. You can see what’s going on with each department.
These three are my “core 3” P&L views. In working with different businesses, we often discover other needs to see a bit more, and there might be 4-5 P&Ls in the FinPak, which are easy to produce and update.
3. Balance Sheet x 2
The third section is the balance sheet—and I like two reports here. One is the monthly trend, and one is versus budget. First, I like to see the balance sheet trend, like the P&L trend, with a column for every month.
Then I like to have the balance sheet versus budget because it really helps you understand where you thought you were going to be vs. where you are. And it helps you see the cash flow impact. If you budgeted cash based on a certain P&L or profitability, you can see what’s driving cash or the balance sheet, month over month, versus what you projected.
It’s critical for companies to budget for both the income statement and the balance sheet. It’s the best way to forecast for cash and figure out how the cash is going to grow in the business. And if you are growing fast, cash is king.
4. Margin Analysis
The fourth component is margin analysis. The purpose of this report is to look for weaknesses or opportunities. What’s below and above target margin? What’s the root cause and how can we effect change?
Different companies need to analyze margins differently. A consulting firm may look at margin by project. A services company may look at margin by service area or by customer. And a product company will likely review product margins.
A retail brand or product company might want to look at their margins by channel. They might have an online business and a physical retail business, for instance. Again, this analysis varies by company and business model.
At AVL, as a consultancy, we look at margins by customer. We can see we might have had one project that didn’t do well, yet another project is going very well. This allows us to drill down quickly and potentially identify some root causes of larger challenges.
5. Balance Sheet Reconciliations
This fifth report rolls forward key balance sheet accounts that have a lot of complexity. This page, too, will vary significantly by industry. Some companies don’t have much in the way of fixed assets, others do. And I would say, for those that do have significant assets, there should be a detailed fixed asset reconciliation report included in the FinPak. If you have a lot of inventory, there should be an inventory roll-forward, by product, by account, and by location, so that you can really keep an eye on inventory shortages and overages. And even look at how much inventory is on hand of each product in that inventory reconciliation.
You can see examples of these balance sheet reconciliations in the link to a sample financial package, here. You can see how some of these balance sheet reconciliations are set up.
6. Journal Entries
Every month, accountants make several journal entries for various reasons. I like to see one report in the financial package of all the general ledger journal entries made. This way, you can keep a good record of them on a monthly calendar basis.
Like the others, this report can help find errors. It can be a source for finding issues that create a material accounting impact to the business. I think it’s just good control and hygiene as well, as you continue to keep strong financial acumen practices in your business.
7. Spend Details
A spend deep-dive report will also vary by your company’s specific areas of focus or importance. For example, a medical device company I worked with spent a lot on R&D, so we looked more in depth at R&D spend across a number of projects. If the company had seven projects going, they could see how much spend is happening per project, what was that spend accomplishing, who are the vendors to whom checks are being written, etc. All these projects had budgets, too, so they could also report on how the spend is tracking relative to budget and relative to the progress of the project.
In a B2C SaaS company, there might be a lot of marketing spend. You have events, online marketing, ad banners, a huge variety of types of spend. A detailed spend report would say, “Okay, this is all our marketing or advertising expense by type.”
Next, breaking it down even further to see where money is going out the door of the company is a valuable tool for both review and to understand and trend over time.
8. Nonfinancial Data & Ratios
The eighth component is not eighth in terms of priority at all. I call it the nonfinancial data and ratios. So far, we have all this financial information, but there’s so much other useful nonfinancial information. When it’s combined with the financials, it creates many interesting ratios and insights.
Think about information such as: headcount, web traffic, conversion rates, bookings or billings, number of clients served, number of calls received, or social media traffic. The ratios you might want to see are things like CAC (cost of acquiring a customer) and LTV (lifetime value), revenue per employee or per customer, or upsell and expansion ratios.
In this financial package, we track the critical few. What things really drive your business? Then bring those data forward to your summary page.
Nonfinancial Data & Ratios is the page where you’re tracking your key data over time—very important. Another non-financial component is sales pipeline. You can look at it and say, “Hey. We have 50 deals in the pipeline. Here’s their weighted value.” Now track the weighted value so that you can start to get a sense for when you have this level of win rate and that much in your pipeline, you always seem to make your revenue numbers. You can begin some analysis and predictability between pipeline and revenue.
Start Here and Evolve
These eight sections are a very strong starting point for building a monthly financial package from which to run your company. Of course, your financial package will evolve and morph as you continue to figure out and adjust what’s important to know to drive your business.
To get you started and give you a visual on what your financial reporting could look like, as I mentioned, here’s a link to a generic AVL FinPak. Shoot your questions at me in the comments, thanks.