Financial Reporting for Startups (Part One)

An appeal for less managing and more measuring

Financial reporting is, let’s face it, just about the most boring possible topic. So let me extend an olive branch to you, the person reading this even though you could be doing something else; this will not be an article about financial reports themselves. Rather, I’m hoping to address the reasons why we create those reports, why they’re so frustrating, and how they can be better.

Your business is animated by a central mission. If it’s a well-run business, that central mission will be clear to everybody on the team and will represent something that each team member identifies with. Generally speaking, this is something startups and small businesses do better than large corporations and represents a key advantage in maintaining morale.

So here’s our key thesis: we know people are happier and perform better the more closely their work aligns with the key mission they believe in. But most businesses do a terrible job at aligning their reporting with their mission, treating it like a chore rather than a critical element of success. Your reporting and reporters both suffer because of this lack of alignment.

What are Reports For?

Telling someone why they need financial reporting is a bit like telling a nine-year-old why they need to learn math. You’d better give concrete examples. So here’s a simple one: the first financial report many businesses create looks something like this:

I’ve showed this one before. It’s a chart that goes on an investor pitch deck somewhere, and alongside any number of qualitative descriptions of the opportunity, it forms the quantitative core of an investment proposal. This “report” usually winds up bearing little resemblance to future reporting, actual results, or sometimes reality in general, but it does everything our subsequent reports strive to do. It translates the subjective vision of the company into objective numbers, which can be analyzed.

Reporting then is the key link between vision and reality. Any financial report a company creates needs to be designed to take the company’s vision and put it through a lens of analysis. Just like those initial investor meetings, each time your team reviews its reporting, it can ask itself: is what we’re doing worth the time and money? Can we better invest elsewhere? Should we reconsider our approach? Management is just an internal stakeholder at the end of the day.

Now, dollars aren’t the only thing that matters, but how efficiently you use those dollars is going to influence things like how many people you can reach, and how quickly you can reach them. To anyone invested in your mission, ensuring that effective management can be practiced should be a central concern.

How Does Management Work?

Management can be described as a decision-making loop (a framework first used for fighter pilots called the OODA loop). Your team Observes performance and Orients itself, Decides on a strategy, then Acts on that strategy, before restarting the process. Most managers naturally place foremost importance on the decide part of that loop because that’s what they like doing best.

The relevance of this framework to financial reporting is obvious — reporting forms the core of the observation and orientation half of the loop. One can see how the typical quarterly board meeting theoretically represents this framework working perfectly. The team observes reports from the previous period, decides on strategic adjustments, then plans how to act on those decisions.

Of course reality is always more complex, management is usually a much more continuous process, and operational needs are ever evolving. A company isn’t a single decision loop, it’s a series of them applied to different objectives and endeavors. But there’s no hiding which part of our loop is given first-priority — it’s formalized directly into the relative seniority of key officers. And that priority can be a disruption if not understood.

Accountability to Data

You’ll rarely meet a manager who doesn’t believe they run a data-oriented organization, but I would argue that few truly do. They may use data to support their decisions, but they pick the decisions they want to make first, then find the data later to make sure that decision makes sense (call it DOODA?). It’s not totally gut-based, but it’s certainly oriented around decisions rather than data.

The point of the OODA loop concept is that whoever completes their loops the fastest has an edge in managing an evolving situation. It makes sense; the best businesses can constantly innovate and re-invent themselves. But critically, this is not a simple contest of who decides and acts fastest or most frequently. The point of orienting yourself first is deciding what to act upon in the first place.

Management itself needs to be accountable to the data their organization collects. Reporting becomes slapdash when it is completely subservient to management’s needs. Just as important, chasing ad-hoc reporting requests kind of sucks. In fact, long experience suggests that the most unpleasant parts of reporting are themselves symptoms of ineffective or imbalanced reporting practices.

Organizational Alignment

Financial reports aren’t generic. The exact datapoints you gather are going to be highly business specific. With that being said, balanced reporting processes should follow a similar shape. We’ll call it the food pyramid of good financial reporting.

Unlike the USDA, I have not consulted the Grain Lobby in the creation of these guidelines.

The foundation of your reporting should be the fundamental financial and operating performance of your business. How much revenue you have, how much cash is left, how many customers you acquired last month. Teams that don’t focus enough on these fundamentals aren’t effectively orienting themselves; they may be missing early signs of threats or opportunities in their eagerness to focus on details. This imbalance also undermines and de-prioritizes the core competency of the reporters, leaving them out of sync with the organization’s mission.

Part of making decisions is defining a framework for measuring the success of those decisions. The second tier of your reporting process should drive this accountability, measuring the effectiveness of specific teams and endeavors. This likely means integrating operating data from non-financial sources; so shared responsibility is key. The biggest frustration here, other teams not sharing info effectively or on time, is a symptomatic of poor accountability. In a data-driven organization, measurement should be a respected part of the management process, to which operators are held accountable.

Finally, ad-hoc reports are the skinniest part of your pyramid. You can never free yourself from unexpected situations, but like cake and ice cream, teams can become addicted to urgency. If you find yourself gathering last-minute ad-hoc reports on a consistent basis, it means that you haven’t defined those needs clearly enough or empowered the team to gather effective data. And if straightforward requests take lots of time to process, it means your foundation isn’t strong enough; any ordinary level of detail should be already available.

All that’s called for is a bit more structure. An organization that understands how decisions lead to execution and reevaluation, and where employees are judged not just on how they execute within their role, but in how they support the business. A real data-driven business.

A Better Way

A data-driven organization is one where those managing the data feel completely comfortable in their place in the mission, and where decision and execution aren’t given priority claim on the goals, esteem, or resources of your team. Data collection is a component of, not subordinate to, your core business.

This doesn’t mean we’re going easy on our reporters. Far from it. If anything, better resource balance should lead to a drive for faster, more nimble management.

Let’s look at our financial “close,” when we finalize our recordkeeping for the previous period. How long this close takes has a dramatic impact on both the speed with which your organization makes decisions, and the time it takes to understand the impact of those decisions.

The longer your close takes, the less of your next period remains, and the less your next close reflects the outcomes of your latest decisions.

Getting monthly close cycles down from 30 to 15 days often seems like a tall order when juggling a dozen competing urgent requests. For some businesses it is barely a priority, why move focus away from our core operations? But this reporting is their core operations, one where corner cutting is sadly the norm.

If you think of reporting as a chore and a necessary evil, then that’s why it is.

This article was written by Ben Coleman and can also be read here.