The company financial statements are the key indicator of your business’s health and as such have a unique place in building enterprise value. As a summation of your revenue streams, the efficiency of your technology and services, and the productivity of your employees, these reports tell the story of your company. They give you the data to evaluate recent performance and project future goals.
There are several important features of these reports, that when adhered to, can lead to increased business value.
Quality and Accuracy
The quality of your financial statements is heavily dependent upon the accuracy of the data within. It is important that the recurring and non-recurring line items are reliable, relatable, and clean. When considering intermingling outside items, such as personal home maintenance or using a corporate credit card for private expenses, with your company financials be prudent and exceedingly selective. This helps ensure that these reports, and enterprise value they speak to, are accurate.
In addition to the data, the type of reporting also speaks to quality. At a minimum, a company should obtain an outside compilation or, even better, a review with high-level footnotes and income tax preparation. In fact, there can be added enterprise value by having reviewed financial statements produced by a reputable outside firm. And while audited financial statements are preferred in large financial transactions, a well-known and highly credible firm can add substantially to the quality of reviewed statements.
A powerful way to utilize your financial statements is to regularly and promptly review them. Regular review is obvious to the wise executive. Prompt review should be as well. By analyzing the data in a timely manner, there is opportunity to identify potential issues and take appropriate corrective action before it is too late. Case in point is the manufacturer with the potential for erratic spikes in labor costs throughout a year. Monthly financials are prepared anywhere from 20 to 30 days after month-end, and reviewed by the executive team potentially 10 to 20 days later, depending on schedules. October saw one of these spikes in costs, and historic trends project November will have higher labor needs. Given that October’s review didn’t occur until early December, corrective action couldn’t be taken until at least 75 days after the costs began to spike.
Whether via physical reports, spreadsheet analysis, or dashboard monitoring, a timely review of your data can not only bring savings but can increase value.
A review of your financial statements most certainly includes understanding and watching for trends. The data lends itself to be analyzed and broken down in unlimited ways. It is important that the critical metrics of your business, markets, and industry are noted and tracked over multiple historic periods. Dashboards are excellent tools for highlighting these trends. Of equal importance in this analysis is to watch for anomalies. Through a regular, deep dive into your financial reports, red flags can be uncovered, and corrective action can be taken.
Another significant part of your financial statements is how they compare to your market and industry. It is often difficult to obtain such statements due to competition and privacy. However, larger accounting firms, reputable advisors, and some association and membership organizations have access to this data. They can assist in analyzing the data on an apples-to-apples basis which can provide a benchmark, guide, or goal for your company.
You cannot have sophisticated KVI analysis without a well-functioning system of compiling and analyzing of your financial statements. These reports are the senior summary of how your business is operating. Taking the time to ensure that system is functioning efficiently will help to guarantee performance and strengthen enterprise value.