Format Matters.

Financial statements come in different formats and it’s important the format suits your needs.

For example, Income Statements in annual reports show revenues, costs and profit and a note shows those numbers at a high level by business and geographic segment. However, for running the business that’s not much use.

Managers need to know the profit made on the products sold (gross profit), the cash the business has generated (EBITDA) and the profit of the operating business (EBIT) – all by business unit. Managers can then manage better (and be held accountable) and all it requires is that the numbers in the Income Statement are reordered a little.

Balance Sheets can be formatted better for managers than in annual reports too. Instead of showing Assets – Liabilities = Equity, it’s much more useful to show Capital Raised (both debt and equity) and how that capital has been used by managers in each business unit on working capital and other assets and liabilities.

Rather than showing Operating, Investing and Financing cash flows, Cash Flow Statements can be usefully rejigged to show Free Cash Flow – the cash the operating business has generated after paying to replace worn out assets and dividends – and then how that cash has been used. Knowing this information is fundamental to understanding a business’s finances.

In financial statements, format matters. Whatever your precise needs, ensure the format of your financial statements is as useful to you as possible.

#financialstatements #EBITDA #EBIT

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