How to Tell the Story of Financial Statements

We are surrounded by stories. Storytelling is a medium as old as communication itself. In many ways, all communication is storytelling, loaded with context and objectives. History, sales, marketing, art, they all tell stories. Storytelling is also at the core of business, including financial statements. Yes, balance sheets and income statements (the latter of which is also referred to as a P&L, Profit and Loss statement), among many other reports, are stories.

Balance sheet and incomes statements are two of the most common financial reports and every business owner, manager, founder should be comfortable reading and explaining these reports, i.e. telling their story. If you don’t know the stories behind these documents, you don’t know the story of your business. For many people, a trusted financial manager (CFO, controller, etc.) often translates the story for you, but knowing the basics of the original language will help you immensely. Below is a high-level view of three components of a story: time, audience, and medium(1).

Time

Whether it is the past, present, or future, one needs to know when each part of the story is taking place and for how long. Balance sheets and income statements are historic non-fiction, not fantasy or science fiction, no alternate realities are allowed. While both take place in the past, they cover different parts of the past.

For balance sheets, a single moment in time is being captured. Like a photograph. A balance sheet is the financial state of the company frozen at a single point in time. You’re looking at what the company owns, what the company owes, and equity, at the moment the photograph was taken (2). A balance sheet can be generated for any point in time, up to the present. Financial statements can inform but they do not predict the future, financial projections do that. A common way to use balance sheets is to compare two separate points in time, often quarterly or yearly, so that you can compare the company from one point in time to another point in time. Has the debt grown? Have cash assets grown?

If balance sheets are a photograph, income statements are video. Like a video, an income statement shows what happened over a duration of time. The two main categories are costs (aka expenses) and revenue (aka income) over time, added up together these two figures equal the company’s profit… or loss. It is also useful to compare income statements over different periods of time. Often you’ll see an income statement with equivalent periods of time next to each other: monthly, quarterly, or yearly. Using an income statement, and other inputs, it is possible to extrapolate and create financial projections that you can estimate the company’s runway. If balance sheets are photographs and income statements are videos, financial projections are CGI. Financial projections are estimates, hopefully well informed, about what could exist in the future.

Audience

A story needs an audience, and it should cater to that audience. Tax accountants, investors, bankers, or the company’s board won’t necessarily want to see the exact same set of financial documents. It is all the same story, but different parts of the story are highlighted and different terminology used. This is not done to obfuscate or deceive (at least it shouldn’t be), it is because different people and organizations have different objectives and need different information to meet those objectives. Knowing and understanding those objectives will set you up for success. An investor might want to know the actual cash burn of the last year, to do this you prepare a monthly income statement using the cash based accounting system (often a setting in accounting software). You could even help the story telling with a chart, showing the increase or decrease in expenditures and revenue. A banker or accountant will often want the straight numbers, frequently in accrual based accounting, no charts or analysis, just the numbers. And both board members and investors will likely want to see projections. There are any number of permutations of the story and who it is being told to, but it is important to understand your audience’s goals and how they using the financials presented to them.

Medium

Stories can be told in books, magazines, movies, over social media, or in person. A good story knows the medium and delivers in the correct format. The same is true with financial statements. Whether you are in the room to accompany your story is important. There are times when you can be physically present to go over the financial statements, an example might be a board meeting (though it is advisable to also share materials before the meeting). At other times you are sending the documents and the person reviews the files themselves. If you aren’t there, you can’t control the message or add context, so the financials will speak for themselves. This isn’t in itself a bad thing, but it is something that should be considered and, if you can, supplement the information. One way to do this is include a list of assumptions in an executive summary or on the first tab of a worksheet.

The format also matters. Sharing financial statements in a PDF vs Excel vs PowerPoint (or similar software systems) are all appropriate but often in different situations. If you’re internally sharing financial projections with other members of the executive team, doing so in Excel will allow them to test the sensitivity or scenarios you built into it. If a banker wants your balance sheet and income statement, a PDF is useful as it is a static document, but an accountant might want Excel, so they can copy/paste numbers or validate the report itself.

Putting it all together

When you are preparing financial statements, take a moment to ask yourself, and/or your financial team, a few questions: What story do I want to tell? When does it take place? Who am I ‘talking’ to? And how will they ‘read’ my story? And, finally, am I telling the right story to the right person? Will my reports tell the story I want to tell? (3)

Hopefully this quick overview of financial statements and storytelling will help you think through the story you are telling with your financial statements and perhaps give you an opportunity to hone your storytelling skills.

Notes

(1) I am very far from being a literary scholar, so make no claim that this is an accurate analysis of what the core components of a story should be. This is an extended analogy about financial statements, nothing more, perhaps less.

(2) What’s in each of these categories depends on the accounting system, for example, in accrual based accounting you include accounts receivable in the assets, if someone or something has promised to pay you, that IOU is worth something. The difference between cash and accrual based account is important, but I am not an accountant and we won’t get into the details of that right now — the internet is full of resources for understanding this. The important thing to remember is that in accrual based accounting you have to include all promises and (realistic) expectations of getting paid or making payments. The follow links is a little about how the IRS views these two methodologies https://www.irs.gov/newsroom/irs-issues-guidance-on-small-business-accounting-method-changes-under-tax-cuts-and-jobs-act

(3) Again, the goal isn’t to deceive or withhold information, but present the story in the most transparent and applicable way possible.