22,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Complete guide to understanding and writing financial reports with clear communication
Accompanying the hugely successful How to Read a Financial Report, How to Write a Financial Report is your non-specialist and jargon-simplified guide to the art of writing a financial report and effectively communicating critical financial information and operating results to your target audience. This book also covers utilizing different KPIs and types of reports and statements to convey a cohesive quantitative story to everyone reading your report, even if they aren't experts in accounting and finance.
This book pays special attention to the “big three” financial statements, the differences between internal and external financial information/reports, and confidentiality factors, disclosure levels, and risk elements when deciding which information to include. This book also discusses important elements in financial reports, including:
- Providing an expanded understanding of the big three financial statements and how these act as the base food which feeds the financial reporting beast.
- Producing financial reports that keep the audience engaged, focused, and educated.
- Learning how to speak the base language of accounting and finance.
- Diving deeper into financial stability and operating results by using ratios, trends, and variance analyzes to improve financial reporting.
- Offering examples of real financial reports for hands on reference and use in the real world.
With everything readers need to write, analyze, and communicate financial accounting reports, How to Write a Financial Report earns a well-deserved spot on the bookshelves of investors, lenders, business leaders, analysts, and managers seeking to improve their writing and comprehension skills, along with investors seeking to better understand where financial information comes from and how it is presented.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 332
Veröffentlichungsjahr: 2024
Ähnliche
Table of Contents
Cover
Table of Contents
Title Page
Copyright
LIST OF EXHIBITS
PREFACE
Part One: FINANCIAL REPORT WRITING BASICS – WHAT YOU ABSOLUTELY MUST KNOW!
1 COMMUNICATE OR DIE!
Remember the Basics
It Always Helps to Speak the Language
A Friendly Reminder About the Era of Technology
A Final Word About This Book
2 TARGET AUDIENCE “E” – EXTERNAL USERS
The Role and Importance of External Financial Reporting
Primary External Reporting Drivers
Types of Externally Prepared Financial Statements
The Financial Report versus Financial Statements
3 TARGET AUDIENCE “I” – INTERNAL CONSUMERS
The Basics of Generating Internal Financial Information
A Deeper Dive and Example of Internal Financial Information
In Summary – Don’t Make These Rookie Mistakes!
4 INTRODUCING CART – TO START, THE BIG “C,” COMPLETENESS
Essential to Understanding the Big Picture
Barely Acceptable (the World of Small Businesses)
Better and Appropriate for the External Audience
Let’s Take It Up a Notch to Best in Class
Completeness Revisited
5 EMBRACING CART – ACCURACY, RELIABILITY, AND TIMELINESS, THE BEST OF FRIENDS
Producing Reliable Financial Information
Better Late Than Never, Okay for External Parties
Better Late Than Never Does Not Fly Internally!
Reliability, Timeliness, and the Financial Story
Part Two: FINANCIAL STATEMENTS – THE ECONOMIC HEARTBEAT OF A COMPANY
6 UNDERSTANDING THE INCOME STATEMENT
The Income Statement – A Closer Look
The Income Statement – for External Users
The Income Statement – for Internal Consumers
7 TRUSTING THE BALANCE SHEET
Reporting Financial Condition: The Balance Sheet for External Users
The Balance Sheet for Internal Consumers
8 RELYING ON THE STATEMENT OF CASH FLOWS
Cash versus Accrual Accounting
Financial Tasks of Business Managers
The Statement of Cash Flows for Internal Consumers
9 CONNECTING THE FINANCIAL STATEMENT DOTS
One Problem in Financial Reporting
Connecting the Dots
10 THE SIGNIFICANCE OF FINANCIAL FORECASTS
The Importance of Business Forecast Models
Managing the Forecasting Process
Increasing the Power and Value of Your Forecast
Forecast Examples
Financial Forecasts and the Big Picture
Part Three: THE TYPES AND TARGETSOF FINANCIAL REPORTS
11 THE ROLE OF ACCOUNTING
A Crash Course in Accounting
Key Accounting Theories, Concepts, and Trends
Rounding Out Our Discussion
12 PREPARING FINANCIAL REPORTS FROM COMPANY FINANCIAL STATEMENTS – EXTERNAL USERS
Financial Reports from Financial Statements – External Users
A Final Thought
13 PREPARING FINANCIAL REPORTS FROM COMPANY FINANCIAL STATEMENTS – INTERNAL CONSUMERS
Financial Reports from Financial Statements – Internal Consumers
Some Additional Perspective
14 PREPARING FINANCIAL REPORTS FROM COMPANY FINANCIAL INFORMATION
The Flash Report
Key Performance Indicators
A Second Internal Financial Report Example
A Few Parting Thoughts
15 REVISITING OUR EXAMPLE COMPANY WITH A SLIGHT TWIST
Base Case Financial Reports and Story
Preferred Case Financial Reports and Story
An Alternative Ending
A Very Short and Concise Conclusion
ABOUT THE AUTHOR
INDEX
End User License Agreement
List of Tables
Chapter 4
EXHIBIT 4.3 TOP HALF OF INCOME STATEMENT – PRESENTED IN COMPLETE FORMAT...
Chapter 5
EXHIBIT 5.1 LOCAL SAMPLE SERVICE COMPANY – INCOME STATEMENT, ACCURACY VERSUS...
Chapter 8
EXHIBIT 8.2 UNAUDITED – REVENUE & EXPENSE COMPARISON, CASH VERSUS ACCRUAL...
Chapter 9
EXHIBIT 9.3 CALCULATING CHANGE IN BALANCE SHEET ACCOUNTS BETWEEN TWO YEARS...
Chapter 12
EXHIBIT 12.1 AUDITED FINANCIAL STATEMENTS – BALANCE SHEET
EXHIBIT 12.3 AUDITED FINANCIAL STATEMENTS – STATEMENT OF CASH FLOWS...
EXHIBIT 12.4 COMPANY EXPANDED INCOME STATEMENT
EXHIBIT 12.5 COMPANY EXPANDED BALANCE SHEET
Chapter 13
EXHIBIT 13.1 INTERNALLY PREPARED INCOME STATEMENT – BASE CASE
EXHIBIT 13.2 INTERNALLY PREPARED INCOME STATEMENT – PREFERRED CASE
Chapter 14
EXHIBIT 14.1 SALES FLASH FINANCIAL REPORT
EXHIBIT 14.2 PRODUCT DIVISION P&L FINANCIAL REPORT & ANALYSIS
Chapter 15
EXHIBIT 12.2 AUDITED FINANCIAL STATEMENTS − INCOME STATEMENT
EXHIBIT 13.2 INTERNALLY PREPARED INCOME STATEMENT − PREFERRED CASE
EXHIBIT 15.1 ALTERNATIVE ENDING – INCOME STATEMENT COMPARISON
EXHIBIT 15.2 ALTERNATIVE ENDING – BALANCE SHEET COMPARISON
List of Illustrations
Chapter 3
EXHIBIT 3.1 INTERNALLY PREPARED INCOME STATEMENT – COMPANY LEVEL
EXHIBIT 3.2 INTERNALLY PREPARED INCOME STATEMENT – BY PRIMARY OPERATING DIVI...
EXHIBIT 3.3 SALES REVENUE BY PRODUCT TYPE FLASH REPORT – SOFTWARE/SAAS OPERA...
Chapter 4
EXHIBIT 4.1 LOCAL SAMPLE SERVICE COMPANY – SIMPLE INTERNALLY PREPARED BALANC...
EXHIBIT 4.2 LOCAL SAMPLE SERVICE COMPANY – SIMPLE INTERNALLY PREPARED INCOME...
Chapter 6
EXHIBIT 6.1 AUDITED FINANCIAL STATEMENTS – INCOME STATEMENT
EXHIBIT 6.2 INTERNALLY PREPARED INCOME STATEMENT – COMPANY LEVEL
Chapter 7
EXHIBIT 7.1 AUDITED FINANCIAL STATEMENTS – BALANCE SHEET
EXHIBIT 7.2 INTERNALLY PREPARED BALANCE SHEET – COMPANY LEVEL
Chapter 8
EXHIBIT 8.1 AUDITED FINANCIAL STATEMENTS – STATEMENT OF CASH FLOWS
EXHIBIT 8.3 SOURCES & USES OF FUNDS
Chapter 9
EXHIBIT 9.1 CONNECTING ANNUAL INCOME STATEMENT WITH YEAR-END BALANCE SHEET...
EXHIBIT 9.2 CONNECTING BALANCE SHEET CHANGES WITH STATEMENT OF CASH FLOWS...
Chapter 10
EXHIBIT 10.1 HIGH, MEDIUM, & LOW CASE FORECASTS – INCOME STATEMENT
EXHIBIT 10.2 HIGH, MEDIUM, & LOW CASE FORECASTS – BALANCE SHEET...
EXHIBIT 10.3 HIGH, MEDIUM, & LOW CASE FORECASTS – STATEMENT OF CASH FLOWS...
Guide
Cover
Table of Contents
Title Page
Copyright
LIST OF EXHIBITS
PREFACE
Begin Reading
ABOUT THE AUTHOR
INDEX
Advertisement
End User License Agreement
Pages
ii
iv
vii
viii
ix
x
xi
xii
xiii
1
3
4
5
6
7
8
9
10
11
12
13
15
16
17
18
19
20
21
22
23
24
25
27
28
29
30
31
32
33
34
35
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
61
63
64
65
66
67
68
69
70
71
73
74
75
76
77
78
79
80
81
82
83
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
125
126
127
128
129
130
131
132
133
134
135
137
138
139
140
141
142
143
144
145
146
147
148
149
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
197
199
200
201
202
203
204
205
206
HOW TO WRITE A FINANCIAL REPORT
COMMUNICATING CRITICAL FINANCIAL SIGNS FROM THE NUMBERS
TAGE C. TRACY
Copyright © 2025 by Tage C. Tracy. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data
Names: Tracy, Tage C., author.
Title: How to write a financial report / Tage C. Tracy.
Description: Hoboken, New Jersey : Wiley, [2025] | Includes index. | Summary: “Improve your ability to write and produce financial reports and analyses that are more effective, better understand where information comes from, and obtain a deeper understanding of how financial reports are prepared and how they are used”—Provided by publisher.
Identifiers: LCCN 2024017350 (print) | LCCN 2024017351 (ebook) | ISBN 9781394263349 (paperback) | ISBN 9781394263363 (adobe pdf) | ISBN 9781394263356 (epub)
Subjects: LCSH: Financial statements. | Report writing.
Classification: LCC HG4028.B2 T74 2025 (print) | LCC HG4028.B2 (ebook) | DDC 658.15/12—dc23/eng/20240514
LC record available at https://lccn.loc.gov/2024017350
LC ebook record available at https://lccn.loc.gov/2024017351
Cover Design: Wiley
Cover Image: © John Wiley & Sons, Inc.
LIST OF EXHIBITS
Exhibit 3.1 Internally Prepared Income Statement – Company Level
Exhibit 3.2 Internally Prepared Income Statement – By Primary Operating Division
Exhibit 3.3 Sales Revenue By Product Type Flash Report – Software/Saas Operating Division
Exhibit 4.1 Local Sample Service Company – Simple Internally Prepared Balance Sheet
Exhibit 4.2 Local Sample Service Company – Simple Internally Prepared Income Statement
Exhibit 4.3 Top Half of Income Statement – Presented in Complete Format
Exhibit 5.1 Local Sample Service Company – Income Statement, Accuracy versus Reliability
Exhibit 6.1 Audited Financial Statements – Income Statement
Exhibit 6.2 Internally Prepared Income Statement – Company Level
Exhibit 7.1 Audited Financial Statements – Balance Sheet
Exhibit 7.2 Internally Prepared Balance Sheet – Company Level
Exhibit 8.1 Audited Financial Statements – Statement of Cash Flows
Exhibit 8.2 Unaudited – Revenue & Expense Comparison, Cash versus Accrual
Exhibit 8.3 Sources & Uses of Funds
Exhibit 9.1 Connecting Annual Income Statement with Year-End Balance Sheet
Exhibit 9.2 Connecting Balance Sheet Changes with Statement of Cash Flows
Exhibit 9.3 Calculating Change in Balance Sheet Accounts Between Two Years
Exhibit 10.1 High, Medium, & Low Case Forecasts – Income Statement
Exhibit 10.2 High, Medium, & Low Case Forecasts – Balance Sheet
Exhibit 10.3 High, Medium, & Low Case Forecasts – Statement of Cash Flows
Exhibit 12.1 Audited Financial Statements — Balance Sheet
Exhibit 12.2 Audited Financial Statements — Income Statement
Exhibit 12.3 Audited Financial Statements — Statement of Cash Flows
Exhibit 12.4 Company Expanded Income Statement
Exhibit 12.5 Company Expanded Balance Sheet
Exhibit 13.1 Internally Prepared Income Statement — Base Case
Exhibit 13.2 Internally Prepared Income Statement — Preferred Case
Exhibit 13.3(A) Internally Prepared Balance Sheet — Preferred Case (Top Half)
Exhibit 13.3(B) Internally Prepared Balance Sheet — Preferred Case (Bottom Half)
Exhibit 14.1 Sales Flash Financial Report
Exhibit 14.2 Product Division P&L Financial Report & Analysis
Exhibit 12.2 Audited Financial Statements — Income Statement
Exhibit 13.2 Internally Prepared Income Statement — Preferred Case
Exhibit 15.1 Alternative Ending — Income Statement Comparison
Exhibit 15.2 Alternative Ending — Balance Sheet Comparison
PREFACE
The original concept for this book originated with, of all parties, Wiley, the publisher of this book as well as countless other books I’ve written or co-authored with my late father, John A. Tracy (who passed away in 2022). As we were discussing revising the latest edition of How to Read a Financial Report (with the latest 10th edition of the book set for release in the spring of 2024), Wiley inquired about what it would take to produce a book on how to write a financial report. My first response was, wow, what a great idea, and then my second response shifted to finding a way to tie these two books together to provide an even deeper and more complete understanding of how companies produce, report, and present financial information, financial statements, and financial reports. Thus, the idea was born and launched to produce the first edition of this book, How to Write a Financial Report.
This book represents a companion or sister book to How to Read a Financial Report, but tackles financial and accounting topics from a different perspective. That is, How to Read a Financial Report takes the reader on a journey from the perspective of how a party would evaluate a company or business from the outside looking in. How to Write a Financial Report takes our reader on a new and exciting journey of how individuals within a company or business produce and communicate financial information and financial statements to both external and internal parties. Or more simply put, this book helps readers understand the opposite side of the process by gaining significant insight from the inside looking out.
This book has been structured along the same lines as How to Read a Financial Report in terms of its base architecture and primary financial and accounting concepts covered but does so with a shift in focus from external financial statement and report analysis to internal production, presentation, and communication of critical financial information, financial statements, and financial reports. In fact, you will find that our fictious example company utilized in How to Read a Financial Report is used in this book again, but with a focus on presenting far more detailed, informative, and valuable financial information.
Critical concepts covered in this book include:
The art of communicating to both internal and external parties, in a complete, accurate, reliable, and timely manner (i.e., CART), and why differences exist. Included is an overview of key accounting and financial terminology to help build your verbiage and master this unique language.
The all-important and overriding concept of making sure you completely know and understand your target audience before writing a financial report.
Why financial information, statements, and reports are prepared with different levels of detail, analysis, and confidential information for eventual distribution to both internal and external parties.
Diving deeper into our fictious example company’s financial performance, financial statements, and analyses to further your understanding of how business economic decisions are made and how financial operating results are communicated.
Continuing to focus on essential accounting and financial concepts introduced in
How to Read a Financial Report
by expanding our discussions on the importance of understanding and managing
cash flows
(a hallmark and focal point in all the books I’ve published) as well as providing a refresher course on further mastering your knowledge of financial statement
connections
(i.e., how the big three financial statements are interconnected with one another).
Offering multiple real examples of financial reports prepared from different sources of company financial information that is directed toward external parties and multiple levels of internal company personnel, ranging from the “C” suite and Board of Directors down to managers and even staff.
And finally, offering a few twists and turns along the way with our fictious example company and how its financial outcome could have changed and how a financial report represents an essential part of communicating its business plan.
Countless financial statements and related financial exhibits are presented in this book, which are basically spreadsheets. All exhibits in the book are prepared as Excel spreadsheets. If you would like a copy of the Excel workbook of the exhibits, please contact me at my email address: [email protected].
I cannot thank my late father and John Wiley & Sons enough for providing me the opportunity to write this book that communicates essential, must-know concepts and strategies on how to effectively communicate financial information, reports, and statements. As with all the books I’ve written, an emphasis is placed on accounting being just as much of an art form as science, which will be on full display in this book. While it’s one thing to master the art of accounting, it’s something completely different learning how to master the art of the financial report story, spin, pitch, and for lack of a better term, BS that is so often produced and distributed in this day and age of financial engineering. My sincere hope is not just that you learn how to write a financial report but just as importantly, how to read through a financial report and separate fact from the art of the spin.
TAGE C. TRACY
Anthem, ArizonaMarch 2024
Part OneFINANCIAL REPORT WRITING BASICS – WHAT YOU ABSOLUTELY MUST KNOW!
1COMMUNICATE OR DIE!
Let me be as frank and blunt as possible to start this book, keeping in mind that the following statement is coming from an accounting and financial professional that has spent the better part of his entire career, almost 40 years, primarily “crunching numbers” (for lack of a better term) and on occasion, writing a book or two.
Writing a financial report cannot be achieved unless you can effectively communicate. Period!
When I mean communicate, I mean it in the broadest sense possible as communication skills extend far beyond what a typical financial or accounting professional may view as representing essential communication skills such as simply stating that 2 plus 2 equals four. What you will quickly learn from this book is that in order to effectively communicate, you must be able to speak, listen, observe, write, read, calculate, educate, lead, interpret, analyze, and direct, all equally well, and be able to package and present your financial report and deliver it via a story to your target audience in a format that they can understand, trust, and believe.
As you work through this book, a primary goal will be to find the proper balance between helping you (in the role of producing a financial report) understand how to prepare best in class financial reports as well as assisting you (in the role of student attempting to learn more about financial reports and financial statements) to expand and improve your knowledge of accounting and financial concepts and topics.
To start, I’ll warn you that I tend to emphasize using acronyms to remember key concepts, so out of the gate keep in mind the acronym FIK, which stands for fundamentals, interest, and knowledge. That is, you must have the proper fundamentals to write and communicate (e.g., can you structure a sentence?), have an appropriate level of passion and interest in the subject matter (nothing more painful than reading content that the author has limited interest in), and have advanced knowledge in the subject matter (to ensure your target audience understands the financial report and the conclusions you’re drawing).
To help you navigate the book, I have prepared this simple summary of the book’s structure that covers the how, who, what, where, and why of preparing financial reports:
Chapter 1
, How to Communicate Financial Information: To start, I dive into the subject matter of How to Write a Financial Report, focusing on strategies, techniques, etc. that are essential to the process of communicating financial information in financial reports. Further, I expand on the “how” to communicate concept by diving deeper into a simple but powerful acronym CART (covered in
Chapters 4
and
5
). This stands for providing Complete, Accurate, Reliable, and Timely financial reports.
Chapters 2
and
3
, Who Are You Communicating Financial Information To?: Next up, I then turn the book’s attention to gaining a better understanding of your target audience, both between external users of financial reports and information and internal parties such as board members, the management, and others. If you don’t have a clear understanding of who you are communicating to, not only do you run the risk of having your financial report get lost in translation but more importantly, you may be preparing financial reports that contain vital and confidential financial information that falls into the wrong hands.
Chapters 6
through
10
, What Financial Information Are You Communicating?: An entire section of the book has been dedicated to gaining a better understanding of what financial information you will be communicating by providing a thorough understanding of the big three financial statements (i.e., the income statement, balance sheet, and statement of cash flows), why developing best in class financial forecasts should always be a priority, and closing out our discussion on revisiting the importance of gaining a handle on how financial statements and financial information are connected.
Chapter 11
, Where Does Financial Information Come From?: In this chapter, I move my attention to gaining a better understanding of where critical financial information comes from that will be presented in a financial report. Simply put, I spend some time helping you as a reader understand basic concepts associated with accounting and financial reporting systems, basic accounting principles and concepts, and other critical information.
Chapters 12
through
15
, Why Are You Communicating Financial Information?: Finally, I cover the subject of why you are communicating financial information. Of course, this should be obvious as any type of business, organization, governmental entity, etc. needs to ensure it has CART financial reports on which to base sound economic decisions. In these chapters I offer real-life examples of different internal and external financial reports, as well as tips and tidbits on making sure your financial statements are more effective in delivering the Why!
Finally, I would like to mention that throughout this book, I sometimes will use the phrases of financial information and financial reports interchangeably. To be clear, financial information really represents the source accounting and financial data that needs to be communicated in a financial report. Or thinking of it differently, you cannot produce a reliable financial report without having quality financial information and vice versa; having quality financial information unto itself does not mean a business will have access to a reliable financial report. Both are highly connected and are dependent on one another, but it is important to not confuse these two concepts as one does not automatically produce the other.
Remember the Basics
To master the art of preparing the most effective financial reports, you will gain a new appreciation of just how important developing communication skills is and why, in all the books I’ve written by myself and/or in partnership with my late father, five critical concepts should be kept in mind at all times:
Accounting – Art vs. Science:
Accounting is just as much an art form as it is a science. I, along with my late father, have driven home this concept, time and time again, in the books we’ve published including our sister book to
How to Write a Financial Report
,
How to Read a Financial Report
(10th edition),
Accounting for Dummies
(7th edition), and others. As you will discover reading this book, writing a financial report is often even more of an art form than having to apply generally accepted accounting principles (i.e., GAAP) to produce financial statements. Examples will be provided throughout this book.
Financial Report Range:
The concept of a financial report is extensive, broad, and extremely diverse. Financial reports range from something as big and complex as preparing an annual financial report for a publicly traded company such as Microsoft (most recent, 83 pages for 2023) read by thousands of external parties to something as small and simple to understand as an e-commerce company selling products online and trying to understand how much they can spend on advertising and promotional expenses (one page of information, read by two executives). Which brings me to the third critical concept.
Financial Report Audience:
Similar to understanding just how broad the range of financial reports is, the audience for financial reports is even broader. Financial reports are read by all types of parties, ranging from some of the most sophisticated financial professionals in the country to small business owners, managers, sales professionals, staff, lenders, lawyers, students, etc., etc., etc. that are on the opposite end of the technical spectrum. That is, these parties are not experts in financial and accounting matters and as such, need to be treated in a completely different manner (when financial reports are prepared) than the top financial minds and experts spread across the financial centers around the world. Translation – you better be keenly aware of and know your target audience for the financial report (a topic covered throughout this book). A much deeper dive on this topic is provided in
Chapter 2
, “Target Audience ‘E’ – External Users.”
Never Assume:
Being direct as possible again, assumption is the mother of all f-ups. Don’t just assume that after you’ve produced a financial report that you deliver old school via paper or new school in an electronic file, your job is done. This represents an absolute fatal error as after a financial report is produced, delivered, and discussed, you will almost always need to respond in a follow-up fashion that encompasses verbal discussions, listening attentively, reading feedback, observing reactions, etc. For example, if you provide a financial report to a party that is not professionally trained in the field of accounting and finance, assuming that this party understands the financial report and its primary financial message or critical output, without discussing the financial report with them, often represents a significant mistake. To combat this potential problem, direct discussions should be held with the target audience to walk through the financial report (line by line if needed), help educate the party(s) as to the structure and findings of the financial report, and confirm that they understand the output. From a factual standpoint, confirming without a doubt that you provided a financial report to the target audience and discussed it with them is always a much better path to pursue than assuming the target audience received, read, and understands the financial report.
Always the Storyteller:
As a storyteller, you must remember to be confident, credible, focused, and clear when communicating financial information. Just as important, the financial story presented must flow in an easy to follow and efficient manner that includes using the proper report format, structure (i.e., ensure the report conclusion is easily identified), level of detail, information, and data and is delivered with a style that is effortlessly digested. To expand on the concept of being an effective storyteller, I’m often drawn to a quote from the movie
Caddyshack
that Judge Smails delivers – “It’s easy to grin when your ship comes in and you have the market beat, but the man who is worthwhile is the man who can smile when his shorts are too tight in the seat.” The reason I offer this quote is to remind everyone about the critical importance of delivering bad, challenging, and difficult news (as part of the financial reporting process). It’s even more important than being the hero when providing good news. Mastering the art of communicating difficult news (and providing possible solutions) is a skill set that very few have, and which is desperately needed. Always provide full disclosure (to the right parties), especially with bad news.
It Always Helps to Speak the Language
If you’re heading to France or Italy, it goes without saying that you should brush up on the basics of French and Italian as, let’s face it, being able to communicate in the local dialect can really improve your trip’s experience. Same goes for accounting and finance; if you can at least master some basic terminology and begin to speak the “language,” you will be well ahead of the game. This section of the chapter covers two buckets of terminology, basic and advanced.
Basic Terminology
Basic terminology is primarily associated with communicating the results of financial statements (from an accounting perspective), with a heavy weighting toward the income statement. Below, I’ve provided a sampling of the most commonly used basic accounting and financial terminology (which I will use frequently through this book):
Top Line: A company’s net sales revenue generated over a period of time (e.g., for a 12-month period).
COGS or COS: Pronounced like it is spelled; stands for costs of goods sold (for a product-based business) and costs of sales (for a service-based business). COGS or COS tend to vary directly (or in a linear fashion) with the top-line sales revenue.
Gross Profit and Margin: Sometimes used interchangeably, gross profit equals your top line less your COGS or COS. The gross margin (a percentage calculation) is determined by dividing your gross profit by the top line.
Op Ex: Is a broad term that is short for operating expenses, which may include selling, general, administrative, corporate overhead, and other related expenses. Unlike COGS or COS, Op Ex tends to be fixed in nature and will not vary directly with the top-line sales revenue.
SG&A: Selling, general, and administrative expenses. Companies may distinguish between Op Ex and SG&A to assist parties with understanding the expense structure of its operations in more detail.
Bottom Line: A company’s net profit or loss after all expenses have been deducted from net sales revenue. Being in the “black” indicates that a net profit is present and being in the “red” indicates that a net loss was generated.
Breakeven: The operating level where a company generates zero in profit or loss as it “broke even.” Or, conversely, it is the amount of sales revenue that needs to be generated to cover all COGS/COS and Op Ex.
Contribution Margin: You may hear companies reference the term
contribution margin
. What this generally refers to is the profit generated by a specific operating unit or division of a company (but not for the company as a whole). Most larger companies have multiple operating units or divisions, so the profit (or loss) of each operating unit or division is calculated to determine how much that specific unit or division “contributed” to the overall performance of the entire company.
Cap Ex: While Op Ex is associated with the income statement, Cap Ex stands for capital expenditures and is a calculation of how much a company invested in tangible or intangible assets during a given period (for equipment, machinery, new buildings, investments in intangible assets, etc.).
YTD, QTD, MTD: These are simple and stand for year to date, quarter to date, or month to date. For example, a flash report may present QTD sales for the period of 10/1/20 through 11/15/20 (so management can evaluate sales levels through the middle of a quarter).
FYE and QE: These two items stand for fiscal year-end and quarter-end. Most companies utilize a fiscal year-end that is consistent with a calendar year-end of 12/31/xx (which would make their quarter-ends 3/31/xx, 6/30/xx, 9/30/xx, and 12/31/xx). Please note that several companies utilize FYEs that are different than a calendar year-end to match their business cycle with that of a specific industry. For example, companies that cater to the education industry may use a FYE of 6/30/xx to coincide with the typical operating year for schools or colleges (which tend to run from 7/1/xx through 6/30/xx).
Advanced Terminology
Advanced terminology tends to be centered in references to financial concepts that are focused on cash flows, forecasts, projections, and financing topics (i.e., raising capital such as securing loans or selling equity in a company). With that said, here’s a summary listing of advanced terminology to reference.
EBITDA: This is one of the most used (and abused) terms in finance today and stands for earnings before interest, taxes, depreciation, and amortization. A shorter version that is also used frequently is EBIT or earnings before interest and taxes. The reason for EBITDA’s popularity is that capital sources want to clearly understand just how much earning a company can generate in the form of operating cash on a periodic basis. EBITDA strips out interest, taxes, and depreciation and amortization expense (both noncash expenses) to calculate what is perceived to be a company’s ability to generate internal positive cash flow (which is widely used when evaluating the value of a company and its ability to service debt).
Free Cash Flow: FCF is closely related to EBITDA but takes into consideration numerous other factors or adjustments such as the need for a company to invest in equipment or intangible assets on a periodic basis (to remain competitive), the required or set debt service the company is obligated to pay each year (for interest and principal payments), any guaranteed returns on preferred equity, and other similar adjustments. FCF can be a highly subjective calculation based on the estimates and definitions used by different parties.
YOY and CAGR: YOY stands for a year-over-year change in a financial performance (e.g., sales change for the current 12-month period compared to the prior 12-month period). CAGR stands for compounded annual growth rate and represents a financial calculation that evaluates a financial performance over a number of periods (e.g., sales increased at a CAGR of 15.5% for the five-year period of 2016 through 2020).
Sustainable Growth Rate: This calculation estimates a company’s maximum growth rate it can achieve by using internal operating capital (i.e., positive cash flow) only. When a company exceeds its sustainable growth rate, external capital such as loans or equity from new investors may need to be secured to support ongoing operations.
Debt Service: Total debt service includes both required loan interest and principal payments due over a period of time.
B2B and B2C: A company that sells primarily to other businesses is B2B (business-to-business) whereas a company that sells primarily to consumers is B2C (business-to-consumer).
Burn Rate and the Runway: A burn rate is generally used for newer businesses or starts-up that have not achieved profitability and are “burning” a large amount of cash. The burn rate calculates the amount of cash burn a company is incurring over a specific period, such as a month or a quarter. If a company has a burn rate of $250,000 a month (before generating any sales), then an investor could quickly calculate that this company would need $3 million of capital to support it for one year. The runway calculates how much time a company has before it runs out of cash. In our example, if the company has $1 million of cash left and is burning $250,000 per month, it has a remaining runway of four months.
TTM and FTM: TTM stands for trailing twelve months and FTM stands for forward twelve months. These figures are often used by parties to help understand a company’s annual operating results that are not in sync with its FYE (e.g., how much sales revenue was generated for the period of the QE 9/30/19 through the QE 6/30/20, 12 months of operating history). TTM and FTM can be especially useful when evaluating companies that are growing rapidly or have experienced a recent significant change in business.
Throughout the remainder of this book, I will reference these concepts frequently so you may want to bookmark this section to help refresh your memory as needed. There’s no harm in reading and re-reading this section of Chapter 1, as when you’re swimming with the financial sharks out in the open water, there’s nothing worse than becoming the “chum” (or chump) and looking overmatched when you can’t even understand basic accounting and financial terminology.
A Friendly Reminder About the Era of Technology
As I write this book and prepare it for distribution with my publisher, I would be remis if a discussion on technology was not included. And oh, what a world of high technology we live in as over the past two decades, we’ve graduated from the web and internet, to data mining/big data and the cloud, to all the promise associated with the Metaverse to the latest buzz words, yes, artificial intelligence (“AI”). So with this in mind, I would offer you these pieces of advice as it relates to the interface, or some may refer to it as more of a collision, of financial reporting and technology.
Significant risks and dangers are present when using artificial intelligence to produce a financial report. The first question that you must ask is do you, as the author (of the financial report), even understand the output and conclusion drawn? If you trust and rely on the output generated, your target audience that trusts you will rely on it. As such, the entire information flow runs the risk of becoming polluted if AI incorporates what it deems as facts into the financial report that lead to an incorrect conclusion. I’m not debating that AI can be a useful resource or tool. It certainly can be but in the same breath, AI must be controlled, understood, and managed to produce CART financial reports.
Furthering our discussion on AI, you must ask another important question related to if AI is even producing an appropriate response or output in the financial report. If you are not educated and/or familiar with the financial topics of primary importance in the financial report, how would you know if AI is producing accurate information? My point here is that relying on AI, without having a complete and thorough understanding of the issues, can be a fatal error.
Moving past AI, I would note that accounting and ERP systems (enterprise resource planning systems) range from relatively simple platforms such as QuickBooks to extremely complex ERP systems, such as SAP/Oracle. From easy-to-use platforms such as QuickBooks (but a platform that lacks proper controls so financial transaction recording risks tend to be elevated) to complex systems that require far more knowledge and technical experience, these systems are great but if they are not properly implemented, managed, and controlled, the risk of DIGO (data in, garbage out) can be significantly increased.
And just to complicate this matter further, it’s worth chewing on this concept. Most companies utilize multiple data sources and systems that feed into their ERP systems and flow through to financial reporting. It is important to remember that invaluable financial data and information comes from not just an accounting or ERP system, but data and information located elsewhere such as customer relationship management systems (CRM), third-party payroll providers, and proprietary database management systems, just to name a few. It’s incredibly important to manage the flow of digital financial information, from multiple sources, with proper policies, procedures, and controls to avoid the often fatal virus of DIGO (data in, garbage out).
