How to Reduce Operational Costs, Boost Efficiencies, and Align Your Business Using Financial Report
Is it possible to have too much data?
Of course, the answer is yes—especially when the data is of poor quality or isn't contributing to your broader objectives. However, meaningful data is a valuable tool for any company. And the data you gather from your financial reporting will join those ranks when properly utilized and shared, helping to fuel your business decisions and organizational alignment in the months and years ahead.
Whether you're informing investors, updating shareholders, or filing taxes, you'll undoubtedly rely on data from your financial reporting for external usage. But you'll also utilize it internally to uncover crucial operational insights that can help your entire organization discover inefficiencies and collaborate to achieve your business objectives.
To obtain that level of insight, however, you must understand how to use financial reporting to identify when resource reallocation or the introduction of new investments are required—and when they are vital to the success of your organization. You'll also need to connect the rest of your company to the data and insights your financial reporting exposes so that everyone knows where your firm is financially and what activities you need to take to reach your objectives.
You can begin to take a holistic approach to operational change by doing so, both at the organizational level and across departments. Consider the following as a starting point.
Building Operational Insights for Organizational Success
Your financial reporting provides critical information that will assist you in identifying and informing operational changes—but only if you use it. You'll start to uncover crucial insights by using financial ratios, scenario modeling, and other techniques to discover potential inefficiencies or red flags that could lead to difficulties if not handled. As you drive your company ahead, those insights will be essential.
Consider the following four ways financial reporting can help power your operations and put you on the road to organizational success.
1. Understand Your Baseline
How much profit are you making per unit sold? How reliant is your business on debt? What’s your operating margin? Details like these will help you establish a baseline of knowledge about your company's overall health, which will serve as the foundation for your future business strategy.
By comparing your operational income to sales and analyzing it over time, for example, your operating margin—how much your organization makes from its core business—will help you identify profitability patterns over time. As a result, you may be able to see where you need to dive deeper and assess your cash position. You'll be able to evaluate if your pricing strategy is functioning as well as your company's general operational efficiency. All of this will alert you when you need to adjust your strategy or make operational changes to preserve profitability and continue expanding.
2. Assess your ability to manage growth and decline
By monitoring your revenue over time, you can determine if you're in a position of growth or decline. By comparing your gross profit to sales over time, you can see whether cost increases surpass revenue increases. This type of information will aid in developing your growth strategy or determining whether or not your current growth strategy is viable.
Comparing your financial data over time will also help you identify variable and fixed expenses in your business, providing you with information that will help you make smarter spending and debt decisions. When demand exceeds capacity, there may be a scale of efficiency (or inefficiency)—gaining a deeper knowledge of this may also help you manage your growth plans.
3. Reveal How Much Cash You’re Generating Through Operations
Your financial reporting gives clarity to the sustainability of your organization and the rate at which you can self-fund expansion by showing you how much cash flow is coming into your business through activities. (This is where the direct cash flow method shines, providing information not available through the indirect method.)
There may be a solid reason to have a negative cash flow for a while, but it's not something your company can do indefinitely. Rather, make the most of your cash flow to keep your receivables in good shape and your cash position strong. If you have a lot of cash, on the other hand, you can utilize it to figure out where you have extra cash so you can put it to good use—funding internal growth or initiatives, or even looking for external investment opportunities.
4. Improved Future Planning
Finally, you may utilize the data in your financial reporting to draw comparisons with planned scenarios, such as budgets, forecasts, and what-ifs, to ensure that your company's full potential is realized. You'll be able to remain on top of future scenarios and better grasp the levers you may pull to modify your course for increased operational efficiency and maximized business growth thanks to the abundance of data you've accumulated.
Forecasting and scenario modeling can help your business stay on track and aligned as it works toward its strategic goals. They'll ensure you're ready for future change by assisting you in seeing ahead, allowing you to make better business decisions every step of the way.
When you're doing all of this to make meaningful operational changes, though, it helps to work as a team. And sharing that information with the rest of your organization is a must.
Align Your Overall Organization Around the Data You Reveal
Drilling down into the data provided by your financial reporting is only the first step. The second step is to put what you've learned into practice. For many organizations, this entails sharing information. According to research, 87% of CFOs share financial data with at least some of their staff.
Sharing your financial insights can help your business achieve greater organizational alignment and accountability, while also allowing individual departments to plan for any necessary operational changes. However, there are a few things to keep in mind when you involve your entire organization in your financial numbers:
Be cautious about what you disclose. You shouldn't — and can't — just distribute your financial statements to the entire organization and call it a day. To begin with, not everyone in your firm will be able to understand financial statements or the data included inside them. However, insider trading restrictions may limit what you can publish in your financial reporting, and privacy issues will make financial teams think twice about what they share (many choose to keep salary information under wraps, for example). Before you go wide, consider both.
Provide context. Putting the figures in context can assist your employees and department leaders appreciate the value of the data and see the bigger picture. That's where the hard effort you've previously put in pays off. Profit per unit sold, for example, may be more relevant and actionable for your organization than overall profit, while profitability trends can help departments determine where and how to focus their attention and resources.
Fill in the details. Additional reporting, such as Department/Cost Center Reports, Customer Profitability Reports, Product Line or Location Profitability Reports, and Inventory or Receivables Health Analyses, will allow you to apply the data from your financial reporting in a way that reveals even more tangible insights at the department and team level. This form of reporting goes a long way toward providing departments with their own budgeting and expenditure baselines.
By providing your team with a reliable source of data as well as the context they need to put it into action, you will enable everyone in your company to better drive their part of the business. This aligns them all on the same page in terms of improving company performance, whether that means cutting costs, shifting investments, or better preparing for future growth.
As a result, the information given in your financial reporting can act as a lens, assisting you in identifying operational inefficiencies, lowering expenses, and aligning your entire company. All of these will help your company achieve more success in the future.