Familiarizing With Limits of External Financial Statements

The external financial statements of a company are insufficient for their managers to prepare and have a control over the financial dealings of the company. Managers who don’t look beyond the external financial statements are surely being shortsighted since they don’t get all the necessary information required for doing their job.

The accounts disclosed in external financial statements can be compared to condensed list of contents of a book wherein every account is akin to the title given to every chapter. Managers are required to do a lot more than a mere quick reading of titles of chapters. Paul Harvey, renowned radio personality aptly commented, “managers need to look at the rest of the story.”

Managers are there for solving problems and every company has some problems, some of which could be serious. The design of external financial statements fails to expose such problems. It is only on rare occasions, when the company is in terrible financial state, that you come to identify the problem through companies’ external financial statements.

On the lookout out for problems and openings

Primarily, there are two reasons for business managers to have additional accounting information than what is provided in the external financial statements:

  • For being watchful of the problems that are already present or may appear to seriously affect profit, cash flow and overall performance of business.
  • For making suggestions that can improve financial health of company.

Mining of data is a popular idiom these days. The present day account system comprises of layers of information and one needs to dig out those layers to retrieve the required information from accounting database. Managers have to work with financial controller to get any additional information than what is provided in the external financial statements of the company.

Avoiding excessive information

Business managers are busy professionals. It is quite frustrating for them to get tons of information which is of no use to them. That makes it imperative for the financial controller that mangers are not overloaded with information. Certain pieces of information they should get regularly, while the rest may be offered periodically or as and when needed.

It’s desirable for the controller to be aware of the kind of information required by each manager and provide the same. However, it’s generally not possible. At the same time, a manger wouldn’t be sure of the kind of information he/she needs. In due course of time, the course of information could be designed.

Moreover, the way of conveying the needed information is often a matter of individual preferences:

  • Part of the supplementary management information could be incorporated in the major accounting report and is best conveyed via graphs, commentary and supplementary schedules.
  • The information could be conveyed through the computers of mangers; else they could have the choice of getting the needed information from company’s database.

It is imperative for the financial controller and manger to communicate frequently, enabling the mangers to get what they require exactly. It doesn’t help accumulating reports which never get examined.  So, the controller should ensure that the respective mangers receive the right kind of information which proves helpful to them.

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