Do you save your shopping lists? My dining room table is littered with old lists written on the back of envelopes or scraps of paper, which have been pulled out of my handbag when I’m looking for something. Occasionally, I’ll bundle them up and dump them in the recycling. They are no longer useful.

Now imagine if I kept all the lists and each week compared what I bought with the last week? Over time I’d be able to draw some insights from the information, such as how often we bought toilet paper, how much we spent on average over a month, or how much the hot chocolate quantity increased over winter. Now the lists are useful, have value and can help our family make decisions around our spending. This is Financial Reporting and it works the same for your business.

The key element necessary for reporting to be useful is there has to be a comparison of some kind:

– Compare this week to last week to establish trends;

– Compare the reality to the plan (the budget); or

– Compare the income to the expenses to see if the activity is viable.

For comparison to be valuable, the items you are comparing need to be for the same period and for the same thing. If I want to know if the price of oranges has increased since last week, I need to compare oranges with oranges and not oranges with apples. Also, it isn’t helpful to compare what I spent on ink or paper this week with the whole of last month, it is better to compare this month with last month, to gain any useful insights.

We must not forget that the whole purpose of putting together financial reports is to provide useful information to make decisions. If the type of information or the format it’s presented in, does not give insights into the reality of the business situation, it is a waste of time. Choose wisely what you report on, as too much information can also detract from the value of the reports and confuse the decision-making process.

Next week we wrap up this series by discussing how we can reduce our financial risks.