As a business owner, how often have you heard accountants refer to ‘reading the financial statements’? Have you ever thought to yourself, what is there really to read? A balance sheet and an income statement contain descriptive yet factual words and numbers, but that hardly constitutes ‘reading’!
We believe that numbers tell stories, and this is why we ‘read’ the financial statements.
Numbers Tell the Story of Your Company
I love numbers for their ability to tell precise stories. They convey the pure, undistilled truth about your company. They show whether you’re a fact or fiction. They scream of your company’s action or inertia. They do communicate, vociferously.
There is no room for interpretation. Numbers hate being lied about and in time their honest essence will typically bubble to the surface, usually with serious consequences.
I have ‘read’ a great many financial statements over the years. Some numbers have told glowing stories about a business’ progress and some have told the exact opposite.
While the ‘reading’ can be interesting, the stories simply illuminate what has already happened. There is nothing anyone can do to influence a story that has already been told. It’s history!
So who are the authors of these stories?
It’s business owners like yourself, who have the most impact on and ultimately tell the company story. The accountant simply reports it.
In the absence of any change in the environment within which the business operates, and any change in the focus of the CEO and management team, the numbers will tell a similar story year after year after year. This is not a good thing. Why?
Because the business environment is rapidly changing, it would be most unusual if your business was not affected. But even if it hasn’t yet, it will be. At that point, it’s your choice, either grow or become obsolete.
The business leaders who are creating success stories are constantly pushing, adapting to the changing environment, trying new strategies, becoming more competitive. They are committed to growth and change.
Two prerequisites from great company story tellers that you need to adopt:
Of course there are many things that business owners with successful companies do but we find that the following two attributes consistently surface amongst the best of the best:
1. Great company story tellers have compelling reasons to grow their businesses.
Having a compelling reason behind business growth is hands down the single most important factor in a CEO producing an outstanding story.
The reasons can be almost anything but they are compelling to you. A reason could be a need for greater personal compensation, or to empower more customers with your product or service, or to become the best version of yourself as a CEO, or to achieve notoriety in your industry, or to achieve your articulated goal of building a 200-person company, and so on. However, for your reasons to be compelling they will need to be specific, measurable, and associated with a timeline.
If you aren’t convinced that compelling reasons are a must, think about this: what will enable you to persist when the going gets tough: when you execute at a high level and still don’t get the results you were looking for? when your star team member leaves to join a competitor? when you’re faced with making a large business investment in an uncertain environment or when you become financially independent?
We toil in a global world today where your competitors may operate on an entirely different continent. Many reside in parts of the world where they have very little in the way of comforts by our standards but what they have are compelling reasons to generate income. For the most part, they are hungrier and they want your gross margin.
If you are not currently authoring a great company story it may be because you don’t have compelling reasons to do so. Finding these reasons will lead to a better company story.
2. Great company story tellers have a financial reporting system composed of people and tools that deliver timely, accurate and meaningful information.
If your sales exceed $2 million per year and all you receive is an annual financial statement from your accountant six months after year end, you’re going to struggle. You’re so far behind the reality curve that by the time you understand the changes you need to make, you’ve already been left in the dust. You may be making decisions based on your understanding of changes taking place in your market, but these decisions are not supported by reliable, current numbers. Numbers which may provide a different, more tactical path forward.
A detailed planning process should take place well in advance of year end. A successful planning process brings together the CEO and management team to financial strategies and allocates resources to deliver on the vision of the organization. This planning process is the birthplace of the stories that the CEO intends to tell through the numbers at the end of each period. Whether the numbers will actually tell the intended story will depend on the effectiveness of the strategy and its execution by the management team.
One of the outputs of the planning process should be an operating budget. Ideally, the financial team should produce reliable financial information within two weeks (three weeks at most) of each month end. At that time the management team should reassemble, digest the numbers, and take action to resolve any negative trends.
There are many types of reports a company might utilize to run an effective business and these can differ quite significantly between companies. At a minimum, a balance sheet, income statement, and cash flow statement should be produced by every enterprise, regardless of sales revenue. And if the management team is deep enough, a cash flow projection should also be included in the slate of reports.
As you embrace the importance of a comprehensive financial reporting system, the need for additional and better data will become apparent. The term Key Performance Indicators (KPIs) should find its way into the management jargon. Larger companies are quite familiar with the need for KPIs (which may be why they are larger companies). Think about that for a moment.
I would contend that some companies are larger because they have produced numbers that tell bigger stories. Stories of compelling reasons, great vision, planning and execution.
These are some of the most important prerequisites for your company’s numbers to tell better stories year after year. Yes, there are more, but you will be surprised how far having compelling reasons and excellent financial reporting systems will take you. What stories do your numbers tell about the state of your company? It will take both passion and tenacity, but my wish is that you will craft those stories into a best seller.
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