By Brian McKay
Few things are worse than seeing financial statements that are a complex mess. Having seen thousands of company financials, it was painful every time a financial statement with completely superfluous information showed up. Digging through five or six pages to find what should be on two, says horrific things about the management of a company.
The income statement and balance sheet exist as an overview of the company from which to draw conclusions and ratios. At no time should they be used as a way to list every single piece of equipment and where every dollar is spent. Someone should be able to look over the financials and draw conclusions in a matter of minutes, not see a breakout of each restaurant where the entertainment budget was spent.
Here is an example.
Marketing can be fairly big expense for a company. The temptation is often to break out everything to see where the dollars go. It might look like this:
Marketing
TV
KREN $5467
KTVB $6478
Lifestyle Magazine $1500
You get the idea.
The problem here is that if you aren’t seeing these number elsewhere except on the income statement, that is a sad excuse for business management. Seeing a breakout on the income statement is only telling you what was spent on what, but not its effectiveness or value. An effective income statement would simply have marketing with just general breakouts, not specific expenses.
To really see how effectively funds have been spent, other internal reporting should be in effect that provides a better picture. In this case, a database or spreadsheet that tracks where the marketing dollars specifically go and the traffic each source creates, would be the correct way to judge the effectiveness of the dollars spent. This information will never be found in the financials and they shouldn’t be relied on for such reports.
The same tenant goes for breakouts on cost of goods sold items, employee expenses, cost of sales expenses, etc. Keep it zen on the top and know that you can always dig down into the expense it if needed.
Your company’s balance sheet is the same story. No one wants to see a list of every piece of equipment the company owns. Keep it simple. Things like plant, property and equipment can be general categories that can also be dug down into as needed. Breaking out desks, lighting and chairs instead of just calling the category “office furniture” is horrible. A balance sheet that is over one page long is a travesty. Having seen more than a few four and five page balance sheets (yes, just the balance sheet), it was always far too much information that ended up detracting from the actual picture of the company.
Sure, Jan in accounting had good intentions by listing every damn thing. She thought she was being helpful and thorough. What she did is created a mess that any underwriter or consultant will look at and throw up in her mouth a little.
If your current financials are this level of complexity, start considering how to clean them up. Think about what picture your business was trying to create in the complex financials that would be better and more effective in a standalone report for those items. Ask yourself, if an underwriter were looking at these to decision a loan for my company, would it look like a frustrating mess? If the answer is yes, your financials are certainly not zen.
Keep them simple. Know that they are only an overview of your company. There is no excuse for them not to be zen.
Go forth and zenrupt some business.
Brian McKay is a co-founder of zenruption and has his MBA from Boise State University. He has spent hours combing through bad, complex financials in the past and hated every minute of it. Clean your financials up and don’t give him another excuse to drink.
Feature photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license