The Traps of Financial Reporting

May 12, 2023

Financial reporting is indispensable for organizations. It has two different audiences – banks, investors, and members of the board who need a consolidated report to see the big picture necessary for strategic decisions. The second group, the company's management, needs, in addition to it, detailed financial reporting, necessary for running the company day to day effectively and efficiently.

The Board level reporting provides an overview of a company's financial health by consolidating revenues and expenses into categories, analyzing the relative sources of income and the relative weight of different costs. It compares the previous year or quarter's results to the current results. It gives them an understanding of the company's overall condition and the trend of its performance.

While this might be sufficient for the Board, using exclusively this financial reporting format in managing the company day-to-day, can generate major faulty decisions. Over-reliance on financial metrics such as revenue, profit margin, and return on investment can lead to a myopic focus on short-term gains at the expense of long-term value creation created by non-financial factors, such as employee engagement, customer satisfaction, and environmental impact.

Furthermore, the consolidated numbers do not identify who is specifically accountable for each category in either income or expense. The consolidation makes the CEO responsible for everything. That might be satisfactory for the Board, but the CEO needs to identify what corrective actions to take and whom on the managerial team to hold accountable if the company is going to be the best it can be.

Comparing the current year to last year's results is suitable for analyzing a trend but useless for making corrective actions in the future. For that, an analysis of the plan vs actual results is needed.

In the Adizes Symbergetic Methodology, we prescribe a rolling budget (plan)updated quarterly, adding the quarters for the coming year to always have a twelve months horizon.In addition, in a separate report, we define goals to be achieved in the coming year which are not financial but focus on the underlying drivers of performance, like market share, brand loyalty (repeated sales), turnover of inventory, new market development, new technologies adapted, etc.

The difference between data and information is that information is data organized to yield decisions. Some of the financial reports are just data and do not provide information.

Written by
Dr. Ichak Adizes