Publicly traded companies are required by law to publish financial reports – the Income Statement, Balance Sheet and Cash Flow Statement. They must be provided to the public on a quarterly and annual basis. This requirement enables shareholders and prospective investors to monitor companies and assess their investment-worthiness. While the information provided in publicly available financial reports contains details that might intimidate a novice reader, they are, in fact, a summary of a company’s performance. To truly monitor financial performance, a company will maintain a second set of reports – with much greater detail – that are used internally to truly understand how it’s doing.
A company will maintain internal financial reports for a couple of reasons:
- They provide important details on both revenue and expenses that publicly available reports do not. This allows management to focus on specific line items that need to be measured and monitored. Here’s an example: A publicly available Income Statement includes a single line item for Sales, General and Administrative expenses, also known as SG&A. But SG&A includes many types of expenses, such as marketing costs, sales personnel salaries, management compensation, depreciation and other items. An internal income statement will provide granularity by each line item or expense category. For example, an internal income statement is likely to provide a single line item on health care costs, allowing management to track and assess spending and trending over time. This degree of detail is bundled into the aforementioned SG&A on publicly available reports.
- A company can include several operating businesses. It might include multiple business units, divisions, branches, stores, or departments. These business entities are likely to have different business models and financial structures. It’s not uncommon for a company to have a manufacturing and a services division. These businesses have very different revenue sources and cost structures. The income statements for each will differ from one another. The manufacturing division will report cost of goods sold, while the service division will reflect cost of services. Operating managers for each division need to fully understand the revenue and expenses unique to their businesses to run them effectively.
Insight Experience recently developed a customized business simulation for one of the world’s largest heavy equipment dealers. Our client wanted to improve its operating leaders’ understanding of profitability and how they impacted it. Insight Experience created a business simulation that included five unique lines of business for its client and how each contributed to the company’s overall financial performance. The simulation modeled all five of the company’s internal income statements, which helped participants understand how they directly impacted the financial results of the line of business they supported. The simulation experience deepened the participants’ understanding of business acumen and financial literacy and supported the client’s leadership competency model.