The three main financial statements, balance sheet, cash flow, and income statement are the building blocks of organization-wide financial analysis. With them, the finance office, shareholders, lenders, and any other interested parties can look at the total performance of the organization from revenue-generating activities to the organization’s capital structure. Decision-making within the organization should be influenced by the information contained within the main financial statements and their relationships, I.e., profitability, asset turnover, debt to equity, and gross margin. For these reasons and more, these financial statements are the most important for the finance office.
Despite the benefits and uses of these statements, there are still ways in which organizations can improve their financial process to produce statements that are better in terms of their analytical depth and the speed of their production. Financial statements can become dynamic and interactive as well as more accurate and quicker to produce. As we’ve mentioned previously on this blog, financial statements are immensely improved when an organization adds flexibility, interactivity, and automation to its financial processes. The three main financial statements can deliver so much more than they already do.
Optimizing the FP&A Process
Any finance professional will be intimately familiar with the struggles of the traditional finance process. Organizations store their data in difficult-to-access areas and formats (data silos) that make collecting information and using it difficult. Once assembled, the data must be filtered through error-prone Excel spreadsheets where typos or incorrectly entered formulas can cause cascading effects that disrupt the entire financial process. Studies have found that close to 90% of spreadsheets contain these errors, putting every data-backed decision and assumption in doubt. Collaborating on static spreadsheet platforms like Excel is difficult because of the requirement to create different versions which can also lead to further cascading errors.
Beyond making it difficult for finance teams to work, traditional FP&A methods also degrade the analytical value of financial statements. Data silos make holistic assessments difficult, thus robbing the Cc-suite of an accurate look at their organization’s performance and structure, things which can impact potential investors as well. Excel errors produce similar difficulties and take away the value of data-backed decision-making by removing its base. Additionally, structural shortcomings of Excel in terms of data aggregation and disaggregation mean that finance teams will not have access to the granular level of detail that is required for planning and forecasting.
Finance teams that are encountering these issues should consider upgrading their FP&A process and switching to cloud-based FP&A software. Limelight, for example, integrates directly with an organization’s ERP software, meaning that financial data can now be standardized and centralized, eliminating cascading errors and data silos. Platforms like Limelight provide finance teams with a central location to work and collaborate, increasing transparency and facilitating collaboration. Limelight’s built-in data aggregation features enable the level of granularity that is necessary for performing forecasts and planning with the main financial statements.
The result of the upgrading process will be higher-quality financial statements produced in a timelier fashion. Less time and energy need to be used to receive improved accuracy and analytical depth in financial reporting. Internal leaders can forecast and plan with standardized figures while shareholders can enjoy a more accurate portrait of their investments. Data-backed decision-making only works well if the processes and data that are put into it are of high quality or else it risks becoming glorified guesswork.
The Finance Office, Transformed
Moving away from traditional methods of FP&A is about re-orienting the office of finance on a philosophical basis. Historically, the finance office was relegated to the technical roles of data stewardship and assembly while the rest of the c-suite would make decisions. The now standard practice of data-backed decision-making has meant that the finance office can emerge from the margins and take a more direct role in strategic planning and decision making.
Transforming the office of finance is just one component of holistic changes that organizations can undertake to gain competitive advantages over the competition, deliver expanded returns to investors, and a better product for customers. The digital revolution is here to stay, and all finance teams can benefit personally and financially from participating in it.