Man at a crossroads

Reporting series – Post 1: Why do you even have a system?

Here at Navigate, it is our primary aim to enable businesses to grow by making great decisions, facilitated by accurate, timely reporting, and expert advice to add alongside it. Numbers by themselves are nothing – It’s the action plan behind them that gives them relevance.

So we wanted to start with a simple question: Why do you even have a system? Go with us here….

Have you looked at your chart of accounts lately? OK, after the concerned look on your face recedes, and you consider why anybody would look at the list of GL codes that make up the Assets, Liabilities, Revenue, Expenses and Equity in your accounting system, consider this:

In dealing with a number of companies of various sizes and maturity over the last few months, I have noticed that the structure of their reporting is confusing. Without change, I would wager (and they have confirmed) that they will never be able to make good decisions with those reports.

In some cases, expenses were sitting in cost of sale. In other cases, well-intending but clearly misguided people added a new GL code for every single event that happened, or employee that joined the company, so the profit and loss statement had become up to 250 lines long and had actually people’s names in in the lines.

While this might make it easy for the accountants to match to what was received or paid from the bank, it creates ugly reports, and kills any hope that a senior manager will want to review them. Human nature dictates that our brains will take the easiest route to understanding something, so as “professional reporters”, let’s make it as easy as possible for people to read their own financials.

So, to why we have a system in the first place?

To allow an action plan to be generated.

In order to make those decisions for the action plan, the information clearly needs to be accurate, timely and understandable. If any of those three elements are missing, the decision has a good chance of being wrong or even just a bit off.
The timely and accurate parts are table-stakes – no-one’s going to applaud you for providing reports that are correct, even if they are on time – it’s just what’s expected. And to be honest, people aren’t going to applaud for reports being understandable…… But, if they are on time, accurate, but not understandable, they simply won’t be used or trusted.

One tip for useful reporting is to start with the structure. Analyse the business needs – ask questions of the CEO or Owner as to what they want to focus on. For the P/L, do they want revenue broken down by product type, or expenses grouped by functional area, or Gross profit per product? Once this is decided, set out the Chart of Accounts so your P/L shows clearly what they want to see.

If you check yours right now, are you confident that all of the lines are in the right place. There is a surprisingly large number of companies I have dealt with that don’t have the chart of accounts setup to make it easy to report.

If reports are structured well, then analysis (such as ratio analysis) is easy. If analysis is easy, then good decisions can be made. If good decisions can be made, the action plan can be produced.

The action plan itself is the key outcome of any financial report review. Assigning accountability for delivering on a target or budget (they are not the same thing – more on that later) to people within the business, and following through on this action plan is crucial. The numbers by themselves mean nothing.