How effective are your company’s financial statements? Do they tell your company’s story clearly and communicate the information readers need to know about your business?
Accuracy in financial statements is essential of course, but when it comes to financial reporting, “accurate” and “effective” are not necessarily synonymous. Financial statements that are scrupulously accurate and thoroughly audited could still fail to present information in a way that fully conveys the message you’d like to share with lenders, sureties, investors, and other interested parties.
Beyond the Basics—Add Supplemental Information
Publicly traded companies need to publish financial statements that fully comply with both generally accepted accounting principles (GAAP) and Securities and Exchange Commission (SEC) requirements. While privately held companies typically do not face SEC scrutiny, most of them still need to provide GAAP-compliant reports to various audiences.
Yet even within the constraints of GAAP and SEC rules, businesses still have some flexibility in how they present financial information. Often it makes sense to prepare a special package of financial statements that is tailored to the needs of the specific audience you are addressing.
Sometimes the conventional package of financial statements—balance sheet, income statement, cash flow, changes in equity, and notes—does not adequately present the whole picture you need to convey. For instance, breaking down revenues and costs by specific markets or job types could help explain certain aspects of your company’s financial performance or demonstrate the reasoning behind certain strategic decisions.
In such cases, it can be helpful to augment the traditional package with supplementary statements that elaborate on important points. Charts, graphs, and certain non-financial data can provide further clarification.
Know Your Audience
The key is to understand your various audiences, their specific reasons for looking at your financials, and their familiarity with your company and the construction industry in general. For example, lenders and sureties who review construction company financial statements every day will almost certainly understand all standard industry metrics such as overbillings and under billings, profit fade, and backlog. Most also have their own software requirements and templates, and a growing number now require that financials be transmitted directly through a secure online portal using formats they specify.
But other financial statement users—a potential new investor or board member, for example—might be less familiar with some of the industry-specific terms and methods. When presenting the financials to such readers it is wise to spell out key ratios and indicators, demonstrate how they are calculated, and explain their significance.
Sometimes Less Is More
There also could be times when you can reasonably withhold some parts of the full financial package. For example, a new vendor or equipment supplier might routinely request full financial statements prior to granting credit, even though the information it actually needs can be found on the balance sheet alone.
In the same way, if you choose to share your financials with managers and employees, take time to think through what information you wish to communicate and then tailor a financial statement package to that specific purpose. Be sure to include clear explanations of any terms or financial metrics that might be unfamiliar to non-management workers.
Finally, remember that—beyond responding to the requirements of lenders, sureties, and other third parties—one of the primary reasons for preparing financial statements is to provide management with the information it needs to make prudent decisions. (See the sidebar on this page for examples of some key financial statement indicators.)
That means timeliness is critical. Regardless of whether you’re preparing financial statements on a monthly, quarterly, or annual basis, managers should be given firm closing deadlines for submitting the information the accounting department needs to complete the statements on time.