Resource Articles Back to Article List

Financial Statements: An Opportunity to Tell Your Story

As published in the November 2008 issue of The Greater Lansing Business Monthly.

Financial statements communicate to a variety of audiences. Investors and lenders typically come to mind, but financials can also demonstrate your ability to pay for products, convince customers of your long-term viability, or demonstrate to donors that you engage in responsible stewardship. In these instances, financial statements communicate your organization’s opportunities, challenges, and successes to the stakeholders who can contribute to your future success. This makes financial statements important external communications that should be thoughtfully produced to clearly and artfully communicate to decision makers.

Accounting standards provide a common framework, giving users pertinent information in similar ways for various organizations by prescribing the content and general format of financial statements. At a minimum, accounting standards require three basic financial statements (balance sheet, income statement, and cash flow statement) and accompanying notes (footnotes).

The balance sheet is a snapshot of the assets a company has to work with and the liabilities that it must fulfill. While the balance sheet shows the organization’s position at a given point, the income statement displays changes over time. It includes revenues, expenses, and net profits for the period. The cash flow statement communicates where the organization is generating and spending cash and how those influxes and outflows affect its position.

Although there are requirements for the balance sheet and income statement, the writer has control over the level of detail displayed and the captions used to describe line items. For example, fixed assets may be aggregated into one line item or shown separately, depending on your organization and audience. If equipment investments are important to the reader or significantly impact business, it is helpful to show detail in the fixed assets section of the balance sheet. Similar choices are available on the income statement. Is it important that readers see how much you spent on an advertising campaign or salaries for new customer service staff, or will one administrative expense line item suffice?

The balance sheet and income statement cannot tell a complete story without the cash flow statement, which communicates facts that are not readily discernible from the other statements. For example, although a company shows a net loss, it may have free cash flow from operations due to noncash charges like depreciation. The cash flow statement also displays how the organization finances operations; for example, whether the company is paying current liabilities with cash from operations or by selling off vital assets. While there are few options concerning the content of the cash flow statement, clear captions, and a detailed balance sheet and income statement can make it more effective. For example, if the cash flows show large investments in fixed assets, but the balance sheet shows fixed assets on one line, it becomes impossible to tell specifically where the organization invested.

There are significant choices concerning the footnotes that can influence their effectiveness. One way to make footnotes effective is to use clear concise language. The nature of disclosures and the amount of information conveyed can make it easy to slip into cumbersome language. As a remedy, evaluate whether long lists or notes covering multiple years can be condensed into an easily readable table or chart that still incorporates all required information. While accounting standards dictate note disclosures, sometimes preparers interpret this to mean they cannot go beyond the requirements. In fact, you can disclose as much information as necessary for your readers to understand the statements, as long as the information is accurate. Consider footnotes an opportunity to expound on the information shown in the statements.

Finally, consider aesthetics. Financial statements benefit from color, quality paper, and good binding to add a sophisticated look that positively reflects on your organization. If you spend the time and effort producing quality financial statements, it gives the impression that you also spend time and effort providing quality products and services.

Financial statements are what you make them – a cumbersome requirement, or an opportunity to communicate your organization’s unique successes and opportunities in order to forge and strengthen relationships. As such, statements should present your organization’s financial information accurately and artfully while adhering to accounting standards.