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The Gray Lady and Financial Statements - Mar 29, 2010

Posted by: Edward Baloga in Articles

A number of years ago, shortly after joining a multi unit retailer with approximately 200 locations, the assistant controller faxed me the monthly income statement given to the board of directors. It looked like a trial balance of every account. It was 2 pages and contained close to 100 lines and had 10 columns. It was the wrong document.

I picked up the phone. “Steve, you sent me a trial balance. I wanted an income statement.” He told me that is what he sent. I looked and it was indeed an income statement. Upon closer inspection, I noticed that there was something wrong with the variance figures. Actual revenue in one category exceeded the budget but yet the variance was negative as it had a minus sign in front of it. I asked him about the error. He replied that the calculation was correct. I needed to look at the small print at the top of the column which showed Dr./Cr. (I will save you the accounting jargon, but basically, an increase in revenue is shown as a Credit (Cr.), which is sometimes shown with a minus sign).

“Steve, how many accountants do we have on the board?”

“None,” he replied.

I proceeded to explain that not everyone understands the idea of debits and credits. What if there was dirt on the glass of the copying machine? That speck of dirt might look like a minus sign on the copy changing the meaning of the variance. I told him to use parentheses instead of minus signs and not to use them for debits versus credits. When someone sees a variance, they understand that brackets are bad and positive numbers are good.

Next was the length of the report. Why so long? It had every conceivable income and expense detail in it. Steve said that he was trying to cover everything in the one document. I asked him to take a look at the New York Times (a/k/a the “Gray Lady”). The most important story for the day is always above the fold and in the extreme right-hand column. Not every angle to the story was covered in that particular article. There were additional stories inside about the headline event. I told him to keep his audience in mind - stay away from the technical accounting stuff and stick to the message he was trying to convey, i.e., we exceeded revenue estimates for the month and were able to keep payroll costs well under budget.

He ended up creating a summary statement with basic information that showed key drivers and indicators. It was a simple document. Senior executives and board members could easily get a sense of what was going on in the business with a quick scan of the statement. If they wanted details on a particular revenue or expense category, the details were inside.

If you need help organizing the headline stories for your stakeholders, call Ed Baloga, Partner with B2B CFO® at 914.474.9547 or via email at ebaloga@b2bcfo.com.