Are monthly internal financial statements obsolete?

Jim,

I've been a financial analyst for 12 years, putting together the kinds of metrics/kpis/dashboards you speak of. You're right, the monthly income statement seems to be a bit of a dinosaur, in light of all the new ways we have to measure the business.

That said, I've come to gain a new respect for the lowly income statement over the past few years, for three reasons:
1) It gets audited. Of all the data coming out of the company, only the financial statements are reviewed externally. This level of review and rigour helps to ensure that the underlying data (which is often the source for many metrics & kpis) is also correct.
2) It provides a basis for comparison. It is often difficult to benchmark performance metrics, because most companies are loath to share this data with competitors. However, public companies must publish their financial statements, making them a good source of initial comparison.
3) It forms a framework for understanding business processes. The income statement acts as a framework which ties other operating metrics together. Words like "Operating Margin" or EBITDA, important operating metrics in themselves, have no meaning in a world without a P&L.

Finally, as fond as I am of factored pipelines, they are highly subjective, based on the data provided (or held back) by the individuals entering data to the SFA system - they can be "gamed". Having an externally-reviewed basis of comparison for the historical veracity of the factored pipeline is a great way to keep that useful document "grounded".

So, Jim, I'd say the GAAP income statement still plays an important role, it's just got to share the limelight now with other outputs that further illuminate the business' operations.

The only way this could be a real question is if you are asking it to start controversy. Yet in these times I am not surprised if it is a serious question. WIthout financial statements , particularly monthly ones, how will you seriously know the financial position of your company. I find less than 1% of the business owners having a capable grasp of financial operations that come from looking at the connections between their income statement, balance sheet, and cash flow statement. Every month the companies I work with find and correct new issues or improve positive operations. I would dare say that a good part of the GREAT PANIC was due to our lack of financial knowledge in business.

There are some really great comments posted so I will only add a couple of thoughts:
1) I have seen a number of instances where I have joined a company and spent the first few weeks and months correcting internally produced reports and one of the things I do is tie the figures back to the general ledger, where possible, as that is where your revenues and costs are being captured accurately so most financially based reports must tie to the g/l.
2) It is critical to manage and analyze your business with the key metrics that you feel are important to running your business but you also have to understand your business in the same manner as the external users do so you have to manage your internal financial statements. I would suggest that any business owner that does not understand their financial statements should take some time or speak to a financial professional to help them get a good grasp of how others see their business. Email me if you would like to talk - johnvhamilton@sympatico.ca.

I dont know why this question was unanswered for so long. Just stumbled upon it.
Using modern ERP tools (SAP etc.), most CEOs in large financial companies in India - some in the Fortune 50, 500 list have a DAILY Financial statement on their desks the first thing in the morning. It is placed there BEFORE they come to work.
This first. BI and others later

Jim,

It seems like there are two parts to your question. The first part has to do with the frequency of your reporting and analysis. Looking at a daily *operational*, as opposed to financial, dashboard can provide a lot of value for certain types of businesses. For example, internet businesses spit off a lot of data in real time that you can use to optimize your core processes. Businesses with high velocity supply chains do the same thing. But other businesses can make do with monthly or quarterly reporting. Legacy software businesses that live and die by end of quarter deals might be an example of this.

The second part of your question concerns what types of data can provide the most value to your business. I have found that financial statements are ex post facto in nature. In other words, if you are looking at financial statements to determine how to optimize the business, you're too late. Instead, look at operating metrics that you pull out of the systems that your business units and teams use. A simple, well understood example of this is looking at factored pipeline in your SFA system to get forward visibility into upcoming revenue achievement. If you have a demand-lead business, meaning you sell something first and then tell the rest of the business what to do to fulfill that deal, then your CRM system is a treasure trove of data on forward visibility and not just for sales/revenue, but for the entire business.

The internal statements are probably most important at the lowest level that the business is being managed.

GAAP based financial statements are prepared to present financial results to the outside world, not for use internally. There purpose was never intended for internal reporting or for use in managing the business. Whether these reports are prepared monthly or annually, they have limited usefulness for internal reporting. Go to http://www.linkedin.com/groups?gid=1907934&trk=myg_ugrp_ovr and begin learn how to prepare financial reports on a daily, weekly, & monthly basis that will help you steer the ship rather than look at the wake.

As for ABC, BI, Dashboards, KPI's, metrics, etc. you are

If the previous link does not work, or if you are not a member of Linkedin.com, try this -

http://www.tpacc.com/ta4u

There is still a need for interim financial statements but this should be at the birdseye view level, senior management, and should include comparisons to prior period to date and to budget. If everything is as projected review of such statements takes a total of less than 10 minutes. More often such statements raise questions - something varies from the expected result that requires further follow up. This is the power of these tools - just pointing out something that might not fit. I do not see them as a planning tool but rather as one more item to address internal controls.

Monthly financial reports are important, however there is a need that the report generates more that just financial information or GAAP accounts. The balance scorecard, I believe is a tool that all financial officers should adopt when generating monthly reports. When a report looks at the financial perspective of the business, Customer perspective, Business process perspective and learning and growth perspective, management will be better equipped to form decisions that will make the company competitive in the industry and generate value for the stakeholders

Dan - I might suggest that the fact that most owners and managers do not grasp the monthly financials could be evidence that they are not very useful.

I don't seriously suggest that monthly financial statements should not be produced, but I DO suggest that they are often not very useful to owners and business managers.

That suggests to me that they need to be signficantly revised and/or alternative means must be found to give them the important information.

the fact that Financial statement is not ex post facto in nature does not make it irrelevant to every level of management in an orgarnisation. Financial statement helps to provide stewardship of management to the business owner and thus it's historical nature makes it more relevant in looking into the past costs,expenses and incomes.

without it, analysis of business performance will be difficult and budget tracking will be a tasking activity.

Business owners can still help their businesses by learning how to read financial statement.

Most small business owners and managers, have little or limited knowledge regarding which platform to use or not use. At the small business stage it is all about survival. What they want to know is "Am I making money or Losing money!" Given this premise it is therefore more important to the sustainability of their company in their market, to focus on the basics and grow into the sophistication these platforms provide later in their development.

Many small businesses tend to overspend and rarely if ever adhere to a budget. The cost of going to a Bl Solution, requires much more knowledge, skill sets, and usually needs more than the BI Solutions software product itself.

I am not an IT person and don't profess to being one. But, don't these solutions based software's require a specific platform, etc., etc, which more often than not, become extremely costly for the small business. I am a firm believer in increasing the efficiencies of operations within the organization, but, I am pragmatic enough to know, that the basics need to be taken care of first.

Some small companies will move to these BI Solutions early on in the hope of capturing what they believe will help their business grow and of course saving them time and money in the process. In doing so they end up spending usually way beyond what they should, which tend to take away resources that could and possibly should be used elsewhere for a more sustained growth.

Small companies as they grow can become adopter's of new technologies and better more efficient modeling. However, if they choose to be an innovator and move that along faster than it should be, that is not thinking outside the box, it is draining cash, when there are more moderate less costly approaches that can bring them to the level that is needed at that point in their growth. Then they can move to the Dashboard's and special reports and reporting requirements that will prove more valuable to that next level of their growth. But, regardless of their level they will still need financial's each month and they will also need to close the books and file their taxes, etc., etc..

Yes, GAAP rules are and at times can be extremely demanding however, hopefully when implemented correctly produce the reports the small business owners can use to help guide them. Knowledge of where your money is going and how your expenses are being managed will save your business.

Having worked as a Controller for several small companies both as a direct hire and consultant I know from experience that small companies that go this route without cleaning up their Accounting and ultimately producing financial's they can rely on and use. Well, they would or could go under rather quickly.

It is our job as their Controllers, Accounting Mangers, and/or CFO’s to help manage their cash in the most effective and efficient way possible. That means providing them with the tools and a basic and reasonable understanding of their internal monthly financials and to give them advice and direction as to when and where their money is best spent. Uplifting to new technologies early on and it may seem like the right path at the time, but, in many instances at the small business level, that may prove to be a costly mistake.

Externally banks still require them for a reason. The reason is: Are you making money or losing money? So I guess my question then should be: "Why wouldn't you produce them internally?"

It is my belief that monthly financials do still have some impact on the business and are still needed; however, not in the day to day management of the business. From a segment, location or department level, KPI's should be the tool of choice for management. KPI's provide the manager with actionable information in real time. I agree with some of my colleagues that Monthly Financials are best suited for Variance Analysis and "attachment" for the Monthly Financial Memo to the President or Board. In order for information to be actionable it must be in real time; monthly financials are historical in nature.

GAAP based internal financial statements do more harm than good. The accountants have conditioned managers & leaders to live in the cost world and thus they spend an inordinate amount of time trying to manipulate "their" numbers instead of improving the companies' performance. Absorption-based unit cost measurements, departmental efficiencies, Purchase Price variance, Material usage variance, direct labor variance, indirect labor cost per unit sold, etc. etc. etc.! These "measurements" and "KPI's" all based on traditional absorption costing serve only to drive a business further and further from the goal.

We produce a variable contribution (throughput) based weekly P&L. For many companies, their current accounting systems have all the necessary data collection to do this. You just need someone that understands how to extract it and put it together correctly. The accounting staff will need to learn to do some things weekly rather than monthly (but believe me it is worth it). With weekly throughput information, management can clearly see where they are headed and make course corrections weekly, rather than waiting till the 2nd week of next month to see how last month fared.

I was only speaking of internal reporting. GAAP external reporting would still be required as would audits. Sorry if I didn't make myself clear here.