Presenting the Financial Statements (#203)
/In this podcast episode, we provide tips for the chief financial officer (CFO) on how to present monthly financial statements. Key points made are noted below.
The Need for CFO Insights
The CFO deals with financial information all day, and so has a deep understanding of what’s being reported in the financial statements. No one else on the management team has that level of knowledge. So, if the CFO just hands out the financials without any additional commentary, this is doing quite a disservice to anyone reading them. They need the insights of the CFO.
The Cover Letter Approach
At the most modest level, you could prepare a standard cover letter that tells the reader how much assets have gone up or down, and how much of the line of credit is left, and so on. But that’s just a clerical enhancement. The CFO needs to provide a more in-depth view.
The Strategy Discussion Approach
To do this, it’s necessary to understand the organization’s strategy, and then use the financials as a backdrop to show management how the strategy is progressing. This is something that only the CFO can do, because the accounting staff has no idea what’s going on with the strategy.
For example, the management team has decided to direct money towards a new product line. If they were to look at the financial statements, everything associated with that product line is merged in with the results from the rest of the company, so the CFO needs to break out this information. This could include talking about how much money has been invested in the product line, as well as the sales and profits generated by the new products. But if the CFO wants to give a really detailed view of the situation, he could point out the level of returns from customers for the new products in comparison to product returns for the company as a whole. There could be a discussion of what’s happening with the accounts receivable investment, since the new products might be sold to an entirely different group of customers that wants longer payment terms. Same goes for the investment in inventory, since it might be necessary to stock more of it to meet customer demands.
The point here is that there’s always some new initiative going on, and it’s the CFO’s job to point out the financial impact. This is important, since there’s a strong chance that the initiative will fail. The CFO is in the best position to see a failure coming, and so needs to warn management as soon as the information is available.
The same goes for an outstanding success. If it appears that some product or service is suddenly selling like crazy and generating all kinds of profit, the management team won’t see it in the financial statements unless the CFO tells them. The financial statements are so aggregated that it’s not possible to see the relevant information.
The Selected Variances Approach
Another issue is that most organizations have a steady core business that doesn’t change much over long periods of time. The product line is established and profits are consistent. The CFO needs to keep a close watch over these items, too, since a twitch in the numbers could indicate the start of a major problem. This type of analysis is harder than reviewing the results of new products, since you don’t know what might happen. This means the CFO needs to look at a large number of variances, and drill down when there seems to be a pattern worth reporting to management.
The Policy Changes Approach
And then we have reporting on policy changes. For example, a large customer might ask for longer payment terms. The president doesn’t really know what the impact is, and so he agrees. It’s the CFO’s job to report on what that did to the company, in terms of longer days of receivables. This could also happen if there’s a decision to increase the number of products that’ll be stocked, which translates into longer days of inventory.
The way policy change reporting usually works out is that working capital increases in size – which is bad, since it requires more funding. So the CFO needs to be careful not to get into an “I told you so” mode when describing what happened to the company after management made a policy change. This calls for some politeness.
The Pattern Analysis Approach
And so far, we’ve only talked about what has happened. What about what will happen? The CFO may see a pattern developing in the financial statements, so it makes sense to carry the pattern forward and see what happens. So, for example, a policy decision to increase the number of days of credit to customers can be translated into a projected increase in working capital, which in turn means that the company will have used up all of its cash in three months in order to fund accounts receivable.
The Upcoming Events Approach
Another area is presenting to management some options for running things differently from what’s happened in the past. For example, the office lease is expiring soon, and if we move to the facility down the road, we can save X amount of money per year. This type of reporting isn’t really about an interpretation of financial results. It’s more about presenting an alternative view of the financials if certain things were to change.
The Need for In-Person Investigations
It is possible to write a great cover letter that highlights the main points. But to really make an impression, the CFO has to present the key points in person. That way, it is easier to expand on them.
A good presentation takes time to formulate. It’s entirely possible that you spend as much time working on the presentation as you did developing the recommendations.
So in short, the CFO should put a lot of effort into digging out just those key pieces of information in the financials that will really make a difference, and then make a persuasive presentation.