Improving Financial Reporting through Financial Planning

Improving Financial Reporting through Financial Planning

By Karl Kern, Founder/President, Kern Analytics LLC

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​Financial reportingFinancial Planning helps Financial Reporting

Financial reporting is the process of describing how businesses earn revenues, incur expenses, and generate cash flows.   An objective of financial reporting is to develop insights into profitability, liquidity, and solvency.  One way to improve the ability in achieving this objective is through financial planning.

Financial planning can help financial reporting develop insights into profitability, liquidity, and solvency through a chart of accounts.  A chart of accounts is a list of names used to record and communicate transactions.  Transactions can be recorded and communicated broadly through assets, liabilities, equity, revenues, and expenses.  Transactions can be recorded and communicated narrowly through cash, accounts payable, common stock, merchandise revenue, and cost of goods sold.  Recording and communicating transactions broadly are processes dictated by organizations like the Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), and Securities and Exchange Commission (SEC).  Recording and communicating transactions narrowly are processes influenced by the actions of people within businesses.  

Financial Planning guides actions 

The actions of people within businesses can be guided by the role of financial planning.

Financial planning can guide actions within businesses based on how revenues will be earned.  Financial planning can guide people to think about the types of products that will be delivered.  Financial planning can guide people to think about the types of services that will be provided.  Thinking about the types of products delivered and services provided can create flexibility within a chart of accounts.  A chart of accounts can be organized to communicate revenues broadly, e.g. product revenue and service revenue.  A chart of accounts can be organized to communicate revenues narrowly, e.g. food sales and tax services.  Creating flexibility within revenues can help people assess strengths and weaknesses within customer relationships.

Financial planning can guide actions within businesses based on how expenses will be incurred.  Financial planning can guide people to think about how products will be created, e.g. direct materials, direct labor, and manufacturing overhead.  Financial planning can guide people to think about how products or services will be promoted, e.g. public relations, social media, and trade shows.  Financial planning can guide people to think about how businesses will be supported, e.g. compliance, communication, and training.  A chart of accounts can be organized to communicate these thoughts broadly through production, selling, and administration.  A chart of accounts can be organized to communicate these thoughts narrowly through specific initiatives.  Creating flexibility within expenses can help people assess strengths and weaknesses within internal processes.

Financial reporting helps people inside and outside businesses to assess financial health.  The foundation in this effort is a chart of accounts.  The effectiveness of a chart of accounts can be achieved by the role of financial planning.