Module 8.4 – Different Types of Financial Information

 

Module Introduction

            There are many different types of financial information. These include those that are obviously financial: stock prices, quarterly or annual reports, and profit and loss statements, amongst others. All organizational information, however, can have a price tag attached to it, an impact on profitability, and thereby be considered financial information.

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1. Different Types of Financial Information

            There are many different types of financial information. These include those that are obviously financial: stock prices, quarterly or annual reports, and profit and loss statements, amongst others,

            All organizational information, however, can have a price tag attached to it, an impact on profitability, and thereby be considered financial information. These include catalogs, pricing sheets, service rates, or anything else that puts any sort of value or price tag on goods or services.

            Other information, while not overtly financial, can also have a definite economic impact. It can be nearly impossible, in many cases, however, to put an exact price tag on many of them. You may be able to put a price tag on absenteeism, but what about tardiness, staff turnover, morale, poor or improper training, beneficiary satisfaction surveys and indexes, and so on?

            For that matter, what is the economic value of your organization’s reputation? How much is “good will” worth? Is there an economic impact from having stories in the media about your organization being sued? About the government investigating the way you do project/programme purpose? Of having products recalled? Awarding scholarships to deserving students? Or sponsoring a community event?

            In this module we will look at the types of information we may deal with and learn how to recognize the financial meaning and ramifications they represent. The focus, however, will be on the most important financial information you produce—your annual report.

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2. The Annual Report

            Mission and vision statements are important. An attractive look and well-designed list of organization publications are a definite plus. Good advertising, marketing and public relations can make you look like an sector of activity leader.

            But when people want to take a serious look at you and at what you do, they want to see your annual report.

            One of the best ways to learn how to produce an effective annual report and other financial information is to examine at how your stakeholders actually use—and look at—annual reports and other financial information. What gets your attention? How do you feel they could be improved/ Ask others to look at such reports and get their reactions as well. This will give you some guidance in preparing your annual report.

            Two articles, Tips for Reading an Annual Report and Tips for Creating a Good Annual Report, both from The Annual Reports Library online at http://www.zpub.com/sf/arl/ provide excellent insight into why people read annual reports.

            The way people read an annual report depends upon why they are reading it.

            Investors are trying to assess profitability, survivability, growth, stability, dividends (if any), and learn of any problems, risks or other factors that could affect their investment in that organization. A organization’s annual report provides a convenient and free way to do this. They are always available to all and provide an important source of information on how your organization is perceived by others, especially in terms of its financial performance.

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3. The Annual Report (Continued)

            Investors are not the only people who read annual reports. Since there are other readers, their needs also have to be taken into consideration when you are preparing one.

            Employees read them to find out how the organization is doing and to give themselves a better idea of what they are working for and how well they are doing. After all, it is a report on how they are doing, as well.

            The competition reads them so they can measure themselves against you. Vendors read them to get a better idea of what sort of project/programme purpose opportunities you represent. Prospective employees read them to determine if you are a organization they would like to work for. Stock traders and financial analysts read them to make investment decisions about individual organizations .

            Even though you might refer to your annual report as your “book,” it is not really a book. It is more of a organizational “work of art.” There is no one author. While it may tell a real, and at times, exciting (or frightening) story to those people who really know how to read it, there is no “plot” in the conventional sense of the word. As a result, people do not read it from cover-to-cover. There is no actual beginning and no end.

            Annual reports are actually a kind of “never ending story;” an ongoing history of a organization that can, to a certain extent, be read as much like an annual almanac summing up the events of the previous 12 months.

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4. Anatomy of an Annual Report

            Most annual reports have nine distinct sections. The good ones will usually contain all nine. Here is a list of the sections, where they are generally located and who is usually responsible for them.

1. Letter from the Chairman of the Board: This normally comes early in the report, and should cover changing developments, goals achieved (or missed), actions taken and the overall state of both the organization and the sector of activity. It should run no more than two pages. This is one section of the report that is not filled with numbers, and there is often less said than there is unsaid. While it can be taken at face value, organization and sector of activity insiders normally read between the lines to get a deeper meaning, as well as a feel for what is actually being said and, in some cases being apologized for.
2. Sales and Marketing Statement: This is the basic statement of how the organization makes money, what products it sells or services it offers, and where. It should offer a clear and understandable portrait of the organizational structure, its divisions, lines, and operations.
3. 10 Year Summary of Financial Figures: This is usually issued by the CFO. If it is not included, ask why. It should clearly show how the organization has done over the past 10 years, the ups and the downs. Trends should be pointed out, especially graphically, and explained. What sort of growth, or shrinkage, has the total organization and its various division experienced and why.
4. Management Discussion and Analysis: This is also normally a CFO report. It discusses the significant trends over the past two years. Is it clear? Does it focus on specifics or is it filled with generalities? How candid and accurate is it?

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5. Anatomy of an Annual Report (Continued)

5. CPA Opinion Letter: This is written by the outside auditor, giving its professional and unbiased opinion of the organization’s financial condition. Before the Enron bankruptcy and complicity of the Arthur Andersen LLPO accounting organization was discovered, the CPA organization’s part in it, the outside auditors are beginning to come under the same scrutiny as the organizations they audit, and new rules will have to be developed to ensure that they really are qualified to offer an opinion and that the opinion is unbiased.
6. Financial Statements: This is normally comes from the CFO or CAO. This is a true treasure trove of all the money that has come in and gone out; the to-and-from whom, as well as the when, where and why. It deals with sales, profits, Research and Development, spending, inventory and debt levels. It is essentially a summary of the income and expenses of the organization. It helps us understand how it makes and how it spends its money. There will be numerous footnotes. The footnotes are often a wealth of information for the thorough and well-informed reader. This is the section where graphic representations (for example bar charts, pie charts, and so forth) are very valuable. People often find such graphs easier to understand than they do numbers.
7. Subsidiaries, Brands and Addresses: Normally toward the back of the report, this is normally a listing provided by the legal department that says where the organizational headquarters and branch offices are, and includes the standard contact information: mailing address, phone and fax numbers, web sites and e-mail address. It will also list what product lines and brand names or services the organization offers, and what its overseas distribution network is if it has one.

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6. Anatomy of an Annual Report (Continued)

8. List of Directors and Officers:  This is also at the back of the report. Provided by the organizational secretary, it lists the directors. Careful readers want to know who is an inside director and who is from the outside. The careful reader will also want to know who they are, their reputations and what their qualifications are for being on the board. Investors and others tend to wonder if there are fewer than five directors, or more than twelve.
9. Stock Price: This is for the market analysts, and is normally near the front of the report. It should say what the stock symbol is, and where it is traded. It should include the stock price history—the high and the low—and the price/dividend trends. It should also talk about any dividends or bonuses that have been paid out. Many people prefer to see this in chart form so they can quickly see how the price has changed over the past 12 months. People are often more interested in such trends than they are in actual prices.

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7. It’s Always About the Money

            The annual report is not the only place that you will need to provide financial information. Media releases, brochures, and speeches might include financial information.

            If there is an actual, or even a potential, price tag attached to information—a report, media release, speech whatever—it’s about money. And one way or another, it’s pretty much all about money.

            Where there is money, there will be questions.

            Sometimes you will include the answer in the information that you release: “The CEO explained why it costs X million…” Sometime you don’t: “The CEO said it costs X million …”

            Always assume that there will be questions. It is better, and looks better, to have immediate answers to the questions that people ask than it does to have to go searching for them, even if you wind up with answers to questions that they don’t ask. People will seek out the information from other sources if you don’t provide it to them.

            To find out what kinds of questions your financial information might raise for those who read such reports, ask trusted outsiders to look at a draft before you send it out. Their Perspectives can be especially helpful.

            Many organizational public relations departments require that a complete cost breakdown and analysis be prepared for any financial issues that are mentioned ore referred to in any information that will be released in a media release, speech, brochure, or anything else, even though it might be included in the actual information being released. The same is true for information in the annual report as well.

            It’s a lot like the automatic airbag in your car’s dashboard. You may need it only once, but when you need it you need it NOW!

8. Anticipating Questions

            The main reason that journalists always want to know Who, What, When, Where, Why and How is because those are the questions that their readers, viewers and listeners want answered.

            They are the exact same questions that the board of directors, senior management, employees, stockholders, government regulators, vendors, partners, and beneficiaries all want answered.

            They are the normal questions that you could reasonably expect to answer.

            If you have not anticipated the questions you will look unprepared or, even worse, as if you are either incompetent or have something to hide.

            Let’s look at those six questions one at a time:

1. Who: “Who” can be a person, a group, the organization, or even a product. Who is involved in this? Who will it affect? As far as financial information goes: who prepared it, who checked it, who has financial responsibility for the organization?
2. What: What is “who” doing or what is happening to “who”? What does the financial information mean?
3. When: When did—or will—all of this take place?
4. Where: Where did—or will—it happen? Give a location.
5. Why: Explain exactly why it did—or will—happen. When it comes to financial information, let people know why you had a profit of loss. Why your dividend was what it was.
6. How: Go into process or the mechanics to explain exactly how it all happened. In terms of financial information let people know how you got to your result.

9. Common Questions

            Here are some of the more common questions that you will often have to answer, especially about financial information. This is not an exhaustive list. It is merely designed to get you thinking.

• How Much Did/Does/Will It Cost? This applies to equipment, organizational acquisitions, expansion, machinery, raw material, R&D, licensing rights, and even personnel. It also applies to recalls, mistakes, fires, and other disaster, lawsuits government or regulatory agency regulations, transportation, tariffs and foreign competition.
• Why? Could it be done more cheaply or economically? What does it do to overall profitability? How does it compare to other similar expenses? And so on.
• Profitable? Is the organization making or losing money on it? In the short term? What about the long term?
• Why? Or Why Not? How much of a profit or loss does it involve? Again, what does this do to overall profitability? And so on.
• Was This Anticipated? When did you know that you would be spending money on this? Will you have to do this again?
• Why? Or Why Not? Again, why didn’t the organization know about this any earlier? Is the organization changing its procedures to avoid this again? And so on.

What are some of the questions with regard to your organization that might be raised about its financial information?

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10. Do Not Overwhelm Them with Statistics or Numbers

            Give them information. Do not bury them in it.

            Statisticians love statistics, and mathematicians love math. As a rule, the rest of the world doesn’t. In many cases, they often don’t really trust numbers, either.

            As anyone who remembers the dot-com crashes, the Enron bankruptcy, and all the other financial disasters like them knows, figures and statistics can and do lie, and are regularly used for just that purpose.

            Use enough numbers and statistics to make your point, but do not go overboard. Just because you have five pages of figures and formulas does not mean that you have to use all of them. Give those numbers that you have to give in order to make your point. You can explain how the figures were reached, but do so without going into the complex math or formulas. Use graphs to help people get a better picture of the numerical or statistical information.

            Numbers are really just arbitrary and abstract concepts. What, exactly, is 37? What is 6 7/8? What is –3.7 percent? If you use numbers, you have to explain what they represent, and do so with a perspective that your audience will understand and relate to. Instead of merely saying that widget production if up 11 percent, while production costs rose only 3 percent, explain that in terms of actual savings and the increased potential profit for each widget sold. Instead of saying that absenteeism was down three percent, say how many hours were actually worked than in the previous reporting period. Again, charts help people understand the concepts the numbers represent.

            If you use too many numbers or statistics, you will bore, confuse, and alienate your audience. Give your numbers meaning and relevance, otherwise your audience will stop reading and ignore what you have to say.

Assignments

 

Multiple-Choice (2)

 

1.         The most important financial information you produce is a(n) _________.

a.       Balance sheet.

b.      Annual report.

c.       Profit and loss statement.

d.      None of the above

 

2.         One of the best ways to learn how to produce an effective annual report is to ______.

a.       Hire someone who has experience producing it.

b.      Look at examples of other organization’s reports.

c.       Examine how people actually use these reports.

d.      All of the above

 

3.         The way people read an annual report depends on _________.

a.       What they do for a living.

b.      Why they are reading it.

c.       The way it is written.

d.      None of the above

 

4.         The one section of the report that is not filled with numbers is the __________.

a.       Sales and marketing section.

b.      CPA opinion letter.

c.       Chairman of the Board Letter.

d.      None of the above