Evaluating a Product's Financial Reporting Capabilities

 

Financial Reporting is the Key Point

According to the Kieso-Weygandt Intermediate Accounting text book, the primary objective of an accounting system is to "summarize transactional data into useful management reports that management can use to manage the business". In other words, the whole point of an accounting system is financial reporting. I have observed that many people seem to miss this most important point. Too often companies tend to view an accounting system primarily as a tool for getting money in and out the door. While invoicing and payables are important, they fall well short of the more critical activity of monitoring and managing the overall health of a company through financial reporting.

How Companies Miss this Key Point

For a wide variety of reasons, financial reporting is not properly performed in many companies. Listed below are a few of the more common problems I see in the typical American company.

1. Lack Basic Financial Information – In order for financial information to be valuable to a company, it must be shared in a timely manner throughout the organization. For example, the sales manager and sales representatives should receive periodic sales reports. Accounts receivable clerks should be provided with an aged listing of invoices so that the appropriate collection calls can be made. Accounts payable clerks should receive a listing of bills that need to be paid, listed by due date in order to take advantage of early payment discounts. Management should receive financial reports by division, department, manager, product line, location, etc. Too often this information exists, but is not provided in a timely manner to the appropriate personnel.

 

2. Lack of Sophisticated Financial Information – Each company should produce sophisticated analytical reports related to virtually each balance sheet, revenue, and expense item. Calculations such as days in receivables, days in payables, and days in inventory can instantly reveal problem areas or unfavorable trends. Creative calculations related to costs per unit, gross margins by item, trend reports, and statistical information is essential to properly managing a company. Often, these sophisticated calculations are never prepared and this critical information is not available to decision makers.

 

3. Financial Information is Ignored – Even when basic and sophisticated financial information is prepared and shared with the appropriate personnel, often the recipients of this information either do not take time to adequately study this information, or they do not possess adequate skills to understand the information. In either case, preparing and presenting the information is pointless if the recipient refuses to use it.

 

4. Inaccurate or Incomplete Information – The financial information prepared by many companies is either inaccurate or incomplete. In many cases, the recipients know that the data is inaccurate or incomplete and they have told me so. I’ve had bookkeepers tell me that inventory, cash, and accounts receivable balances are dramatically wrong. Usually, reasonable extenuating circumstances seem to explain these discrepancies. For example “customer returns have not been entered in to the system” or “the balance sheet does not reflect all consolidated divisions”. Yet the company continues to produce reports that for all practical purposes are completely useless.

 

5. Lack of Comparison Data – In order for a number to be useful, it needs to be compared to another number. For example, if a company reports a gross margin of 22% - is this good or bad? You can’t tell. To answer this question, you need to know what was the gross margin was in prior periods; what is the budgeted gross margin; or what is the industry average? Only after you have compared this gross margin to the 20% gross margin in prior periods, 21.5% budgeted amount, and 19.5% industry average can you report that 22 % is favorable. Too often companies fail to include comparison data in their reports.

 

6. Lack of Forward Looking Reports – Too often companies drive down the road looking in their rear view mirror at where they have been – this is known as historical cost accounting. Too infrequently do companies drive down the road looking out their windshield to see where they are going – this is known as projections. The problem is if you are constantly looking at where you have been, you might run head on into an obstacle that you could have avoided. Reports such as cash flow calendars constantly predict cash balances for the upcoming three month period and can signal warnings in time to take corrective measures. Too often companies fail to produce projections, especially revised projections throughout the year.

 

7. Lack of Event Triggered Reporting – Today’s accounting systems have the ability to crunch large volumes of calculations on a continuous basis and compare the results to predefined criteria. For example, today’s automated accounting systems can warn the appropriate people when cash balances fall too far, when inventory levels are too low, or when the gross margin for a specific item has declined below acceptable levels. These events typically trigger e-mails which are sent to the appropriate personnel in order to take corrective measures. Too often companies do not take the time to establish such criteria and set up trigger events notices.

The problems mentioned above are not isolated to small mom and pop operations; larger corporations with hundreds of millions of dollars in revenue are often just as guilty of poor financial reporting. In some cases the accounting systems utilized by these companies are simply unable to produce many of the reports described above. In other cases, the companies have not taken time to create these reports. Sometimes the company has this information but for various reason has failed to share it with the necessary personnel. In most cases the company personnel are not adequately trained in the use of the accounting system, and the ability to properly read and interpret the resulting reports. For what ever reason, many companies would receive poor grades for their financial reporting efforts.

Solving Financial Reporting Problems

The key to solving these problems is fairly simple. First, install an accounting software system and financial reporting solution that is capable of meeting your needs. Next, identify, design, and prepare the financial reports your company needs and disseminate this information periodically. Finally, teach each recipient of these reports how to properly read and understand the data in those reports.

I know that these measures sound simple, and they are. However, many companies fail to specifically address financial reporting. I challenge you to compare the above list of common financial reporting problems against your company’s normal procedures. If you fall short, perhaps you would benefit by conducting your own evaluation of financial reporting needs in an effort to identify the holes in your system.

Financial Reporting is a crucial area for companies of all sizes. Too often companies fail to devote adequate time or resources to implementing a well rounded financial reporting system which includes powerful tools, proper implementation, and adequate training. Companies seeking to improve the financial reporting within their companies would be well advised to implement solutions such as Excel (ODBC links and Pivot Tables), FRx, Crystal Reports, Hyperion, Cognos, or F9 to help them meet their financial reporting needs.  

Evaluating Financial Reporting, Print A Financial Statement To the Screen

The process of printing a financial statement to screen can be very revealing. To start with, this allows you to see how many default financial statement formats come standard with the system. Some products provide a balance sheet and income statement while others provide numerous standard reports including a Statement of Cash Flows which, last time I checked, was a required financial statement according to FASB 52. This process also allows you to see the flexibility of reporting options prior to printing. For example:

1.      Can you define the desired date range?

2.      Can you easily report on a single a department, division or fund?

3.      Can the report be scheduled to print automatically at regularly scheduled intervals?

4.      Can the reports be printed to someone’s e-mail address or fax machine?

5.      Can multiple reports be grouped together and printed as a single group, instead of selecting dozens of
   reports individually each month?

6.      Can the report format be easily customized to add new columns or rows?

Printing a report to screen also allows you to see how fast the product produces reports. Some products are much faster than others. For example, Navision produces reports very fast because of the way it was designed. Each time transactions are posted in Navision , all necessary day end, week-end, month-end, quarter-end, and year-end balances are updated. In this manner Navision produces financial reports simply by grabbing the balances and instantly constructing the report. Other products such as Great Plains are designed to tabulate all transactions to calculate the necessary balances. Only then is the system able to grab the balances and build the financial report. Because you will typically be using demo data, most financial statements should print in a few seconds. If the product you are evaluating requires more than 30 seconds or so to produce a simple financial report, watch out.

It is important to be able to print financial reports to the screen. If you come across a product that does not provide this capability, don’t walk away – run away. Without this capability, users are forced to print reports to paper every time they want to read a few bits of data. Printed reports, of course, take time, waste paper, fill landfills, cost money for paper and toner, and result in wear and tear on your printer. It is true that printed reports are a necessity – especially when it comes to month end reporting. However, for day-to-day tasks, printing reports to screen should be the preferred approach. Reports printed to screen are available  to everybody quickly and always reflect the most current data and adjustments. Paper reports may be obsolete which could lead to other problems. Further, reports printed to screen can typically be cut and pasted into other tools such as Microsoft Excel for easy “what-if” analysis or charting.

Another important feature to watch for is fixed headers. Some products allow the user to scroll reports on screen, while the column and row headings stay fixed – only the data scrolls. In other products the column and row headings disappear completely when scrolling the data, which makes it impractical to read financial reports on screen.

Once the report is visible on screen, some products provide the capability to e-mail the report to a mail recipient, or group of mail recipients. In many cases the report can be exported or saved to a web page (HTML) format, an Adobe Acrobat (pdf) format, or to one of many popular delimited formats. Many products, such as QuickBooks Pro 2004, Peachtree Complete Accounting, and Great Plains provide one-click export capabilities which instantly transfers the report to Microsoft Excel and Word.

The final feature to look for in a report printed to the screen is “drill-down” and “drill-around” capability. Some products allow you to double-click on any number, such sales, and instantly drill to a list of all sales orders and entries that comprise the sales balance. From here, the user can drill further all the way down to the underlying invoice, and in some cases, to a scanned in image of the hand-written source document. The more powerful products will then provide “drill around capabilities that would allow you to drill to data in other modules. For example, clicking on a line item on the underlying invoice displays purchase and sales statistics on that particular inventory item.

Example:

Presented below are two screens taken from Sage MAS 90, the first is the options screen for printing a financial statement, and the second is the resulting financial statement itself.

In this options screen, Sage MAS90 does a great job of providing the user with complete control over the format, periods, departments, and locations. Other options allow you to specify footnotes and other attributes. This options screen is fairly strong.

The resulting financial statement in Sage MAS 90 is fairly basic. There is a nice copy button that makes it easy to copy the contents of the financial statement and paste it into Microsoft Excel, but the data is pasted as text, and must then be parsed to perform additional calculations. As an alternative, Sage MAS 90 offers ODBC connectivity, an Export Utility called exchange, as well as strong integration to Crystal Reports and other tools. The rest of this financial report is rather basic. The titles scroll off the top of the screen when you preview the data, there is no button for easily e-mailing this report to other users (although Sage MAS 90 does offer this functionality from other screens), you can not drill down from the financial statement. 

As you can see, the simple act of printing a financial statement to the screen gives you many opportunities to digest the various capabilities of a given system. Still, analysis of this feature is merely an appetizer. Keep reading below as we get to the main course.

 

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