Most companies prepare financial statements on a monthly or quarterly basis. Unfortunately, it usually takes between two and six weeks for management to finalize reports that comply with U.S. Generally Accepted Accounting Principles (GAAP). The process takes even longer if an outside accountant reviews or audits your financial statements. Decision-making based solely on this stale information is reactive, not proactive. To help bridge the timing gap between daily operations and receipt of monthly or quarterly financial statements, consider using ‘flash reports.’
Reap the benefits
Flash reports typically provide a snapshot of key financial figures, such as cash balances, receivables aging, collections, and payroll. Some metrics might be tracked daily, including sales, shipments, and deposits. This is especially critical during seasonal peaks or among distressed borrowers.
Effective flash reports are simple and comparative. Those that take longer than an hour to prepare or use more than one sheet of paper are too complex to maintain. Comparative flash reports identify patterns from week to week or deviations from the budget that may need corrective action.
Beware of limitations
Flash reports can help management proactively identify and respond to problems and weaknesses, but they have limitations that management should recognize to avoid misuse.
Most important, flash reports provide a rough measure of performance and are seldom 100 percent accurate. It also is common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles.
Companies generally use flash reports only internally. They are rarely shared with creditors and franchisors, unless required in bankruptcy or by the franchise agreement. A lender also may ask for flash reports if a borrower fails to meet liquidity, profitability, and leverage covenants.
If shared flash reports deviate from what is subsequently reported on GAAP financial statements, stakeholders may wonder if management exaggerated results on the flash report or is simply untrained in financial reporting matters. If you need to share flash reports, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and have not been prepared in accordance with GAAP.
Customize your flash reports
Each company’s flash report should contain different information. For instance, billable hours might be more relevant to a law firm, and machine utilization rates more relevant to a manufacturer. We can help you figure out what items matter most in your industry and how to create an effective flash report for your business.