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Why Financial Statements Are Not Enough?


Finance for non-financial staff programs are highly beneficial for entrepreneurs and managers who do not possess the sufficient financial background. They are briefer than MBA programs, as they do not dive deep in accounting and theories, and often effective in leveling up financial literacy. However, understanding the basics of financials is far from being sufficient in a competitive marketplace. Being able to differentiate between cash and profit or knowing the meaning of ROA is a requirement is not an edge. We, in Hal Praxis, believe that corporate finance especially reporting and decision making is still living in the 80s. May be there has been little development in this arena because the accounting domain is heavily regulated or because we think there is not much to be done there and the room for improvement lies only in operational excellence, product development, marketing ..etc.
Hence, we would like to point out some of the crucial financial aspects that are not reported in standard financial statements:

Waste 
Financial statements only report the direct expenditures, which is illustrative but does not compute the amount of wastage in these expenditures i.e. the spending that did not contribute to the business performance as intended or that were not optimally utilized. Waste analysis has been always in the realm of operational management since the introduction of the lean methodologies. By adding a dollar sign, the priority of eliminating a certain wastage can be defined. Furthermore, quantifying wastage illustrates the lost profitability and guides better budgeting.

Volatility
While some expenditures and revenue streams are highly predictable and often match with the set budget, others tend to be highly uncertain or volatile i.e. compensations and production overheads are often less volatile than currency losses or R&D spending. Therefore, analyzing the out of control elements and the underlying causes of volatility is necessary in order to apply the proper risk measures and tackle the root causes thus decrease the business vulnerability.

Talent Losses
As businesses invest in recruitment, training, team building, process improvements besides compensation packages, they should perceive their employees as precious assets that depreciate, just as tangible assets do, through employee turnover. But think about it, what if one of your key assets depreciates faster than it should be, is not this a painful loss? The same applies to the workforce. HR departments summarize talent losses in employee turnover ratios which are good but not as impactful as when the financial damage of losing these talents is estimated.

We are not saying here that the financial statements are not indicative but believe that we should be aspiring for the next level of financial diagnosis as the technology evolves and the business landscape gets more challenging. We will be glad to share with you how to go beyond financial statements if you decided to dig deeper.




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