The Flash Report or financial dashboard report is defined as a periodic snapshot of key financial and operational data. It's a one-page report that helps management assess the key performance indicators of the company. The flash report should cover the shortest time period that is feasible, usually a weekly basis. The whole process should be based on the KISS principle (Keep It Simple Stupid) and should not take any longer than 30 minutes to prepare and get ready. If it takes any longer than that, then the flash report is too detailed and will be too difficult to maintain. There are 3 sections to the flash report:
- Liquidity
- Productivity
- Profitability
Flash Reports are a rough measure of change. They are not meant to be 100% accurate. If the data is 80-90% accurate, it will be enough to manage the business. For complete accuracy, the firm can defer to its monthly financial statements, which come out 2-4 weeks after the month closes. For management purposes, it is timeliness and "mostly accurate" is good enough. If one were to wait for complete accuracy, the competitive landscape may have change so completely that the "accurate" financial statements may not be of any use.
Flash reports should be done on a weekly basis. However, some companies elect to do it every two weeks in order to more naturally capture the payroll cycle in terms of monitoring cash flow.
The CFO/Controller should get together with the Owner(s)/Management to arrive at a set of metrics for the Productivity Section. This is the hardest part to arrive at and will require the input of both operations as well as finance/accounting.
After the initial metrics have been determined, the CFO/Controller can have someone in the client's accounting staff to gather the data for the Liquidity, Productivity and Profitability sections.
Each section tells a different story about the firm.
1. The Liquidity Section tells management about the cash situation of the firm. Is the company generating cash? Does it have enough money to pay the bills?
2. The Productivity Section gives an indication of the key performance metrics of the business. These metrics are tied to operations and are a way to combine the operations of a company to its financial performance.
3. The Profitability Section gives a rough indication of how much money the company has made during the period of measure. It is important to emphasize again that complete accuracy is not necessary. Timeliness, however, is. Management can work off of 80-90% accuracy. What they need to focus on is the change in trends over a period of time.
Flash Reports: Liquidity Section
The purpose of the Liquidity Section is to measure the change in working capital of the company. In so doing, the company will have a rough estimate of whether or not they can pay the bills and how much money they will have left over.
Monitoring the company's working capital over time will allow the firm to see: how cash increases/decreases, any effects of seasonality and effects of management decisions. If a company is making a profit then the Working Capital should increase over time!
As part of the overall Flash Report, the Liquidity Section ought to be monitored and reported on a periodic basis. What is that period? It is recommended that the entire Flash Report at a minimum be reviewed on a weekly basis. The more management reviews the information, the faster they can respond to crises.
The frequency of monitoring depends on several factors: Availability and commitment of the management team to review the information, Frequency of certain cash inflows/outflows (i.e. payroll), Ease of access and/or generation of information and Timeliness of data entry of information pertaining to this section (i.e. are all A/R and Inventory entered into the system on a timely basis?).
Information for the Liquidity Section can be found in the Balance Sheet section of the company's financial statements (so long as it is updated). If the firm uses a software program (i.e. Peachtree, QuickBooks, Great Plains, etc) to manage its books, then the information can be easily retrieved.
NOTE: Make sure that the ending period on the Balance Sheet matches that of the Flash Report. Both are snapshots of the company in time. Make sure we are talking about the same time period!!!
Cash: Look in the check register to see how much cash is there. Do not use the bank balance because there may still be outstanding checks. Be leery of using the cash position off of the balance sheet. The information is good only if it is updated.
Accounts Receivable: Look at the Accounts Receivable detail report for total accounts receivable. Deduct any bad debts reserved.
Inventory: Look at the inventory detail report for total inventory on hand.
Accounts Payable: Look at the Accounts Payable detail report for total accounts payable.
Working Capital: Sum up the values for Cash, Accounts Receivable, and Inventory. Subtract the value of Accounts Payable. This will give you the value for working capital.
Review and monitor your results. Graphing the results may also be a very effective method to see what is going on in your company's process.
In the spirit of flexibility, the Flash Report can and ought to be customized to fit each company's needs. The basic format is just that….a basic platform to help get you started. For the Liquidity Section, some companies have also added the following items:
Cash Receipts - This gives a feel for the cash that has come in during the period of concern.
Cash Disbursements - This gives a feel for the cash that has gone out during the period of concern.
Taken together, The Cash Receipts and Cash Disbursements give an indication of whether the cash flow for the firm is positive or negative.
Days Sales Outstanding (DSO)
DSO= 365 x Average A/R / Total Credit Sales
This tells you how many days it takes on average to collect on A/P.
Days Payable Outstanding (DPO)
DPO= 365 x Average A/P / Total Annual Purchases
This tells you how many days it takes on average to pay your liabilities
Days Inventory Outstanding (DIO)
DIO= 365 x Average Inventory / Cost of Goods Sold
This tells you how many days it takes on average it takes to turnover your inventory Cash Conversion Cycle (CCC)
CCC= DSO + DIO - DPO
This tells you how many days it takes to convert raw material to cash.
Flash Reports: Productivity Section
A major issue that businesses of all sizes face is the inability for the Operations people to connect with the Finance/Accounting people and vice versa. The Productivity Section seeks to address this disconnect by measuring and tracking certain metrics that both Finance/Accounting and Operations can agree upon. By identifying and monitoring these non-accounting metrics, management can now manage the productivity of the company in a more meaningful way.
How do you get these metrics? An important by-product of this process is the communication process that both Finance/Accounting and Operations must have with one another. In essence, coming up with these metrics forces each party to “stand in the other person’s shoes.” In so many ways, this section is the most difficult to create, but it is by far the most powerful section.
For companies that have multiple profit centers, it may be worthwhile to have the key performance metrics grouped by profit centers.
The CFO/Controller sets it up. Then someone in the accounting department inputs the information into the template. The majority of the metrics should be formulas.
Since the goal is to tie operations to financial numbers, it is important to come up with operational metrics that will have significant impact on the financial performance of the company.
Step 1 - It is important for both the operations and financial departments to both grasp the general economics of the firm. Some key questions to ask are: What are the key drivers of the business? What/Where is the process bottleneck? How can we measure the bottleneck? What are the unit economics of the business? What is the breakeven point for the business? Note: Breakeven may be done on a dollar basis or unit volume basis.
Step 2 - Map out the business process. Ask yourself how does each part of your business contribute to the key performance indicators identified in step one?
Step 3 - Come up with business metrics that tie in the unit economics of the firm (Step 1) to the business process (Step 2).
Out of this process you will come up with several key performance metrics that will indicate how the business is doing. These metrics may not relate directly to dollars, but indirectly they will. Two great ways to approach this is to look at process bottlenecks and sales in terms of volume (i.e. # of feet, # of barrels, # of units).
Focus only on the most important metrics. Four to five will do. If you focus on too many, it will be hard to measure and difficult act upon. Step 4 - Also find some metrics that tie your business process down to the employee level. Relating this to the employee gives management a way to see how each employee contributes to business performance. Here are some examples for various businesses:
Business - Metric Construction Firm - # of Active Projects per Employee Construction Firm - Construction Cost per Employee Consulting Firm - Hours Billed per Employee
Step 5 - Review and monitor your results. Graphing the results may also be a very effective method to see what is going on in the business process. Flash reporting is an ongoing process until you have identified the key performance drivers for the business.
In the spirit of flexibility, the Flash Report can and ought to be customized to fit each company's needs. The basic format is just that….a basic platform to help get you started.
For the Productivity Section, some companies have also added the following items: Metrics for each Product Line or Business Unit, Separated out FTE employees versus Sales Employees (Example: Sales per Sales Person) and Sales per Full Time Employee.
Flash Reports: Profitability Section
This section gives you an estimate of how much money the company has made during the period. It is important to emphasize the word "estimate" for several reasons. First, the Flash Report itself was not meant for complete accuracy. This cannot be overstated. The Flash Report is used best when it is timely and mostly accurate- (80-90%) is good enough. Second, you will notice that profitability was derived from the estimate of the volume throughput for that period. This makes sense as sales and productivity are often a function of volume throughput (i.e. # of barrels, # of gallons, etc.). Another option is to obtain the values for Revenue, Cost of Goods Sold (COGS), Gross Profit, Overhead, and Net Income directly from your accounting system.
The second method is the simplest, but there is a hidden risk that you must account for. Not all the items associated with sales and cost/expenses may have been entered into your accounting system during that time period. Thus, there is a risk that the numbers you use may not even be "mostly accurate". It may or may not be. Thus, backing into your profitability estimate can help remove that risk. Now, you just need to make sure that you have a good grasp of how many units were sold as well as the associated costs.
Note, the metrics in the Productivity Section can be an excellent guide in helping you to start estimating the profitability of the firm.
The CFO/Controller sets it up. Then someone in the accounting department inputs the information into the template. Regular monitoring should be done by the Owner(s)/Management of the firm. Here are some ideas on how to get things started:
Option 1: Obtaining information directly from your accounting system. If you are obtaining revenue and cost information directly from your accounting system, then anyone with the proper authorization can obtain the numbers.
Option 2: Backing into the Profitability Numbers. The CFO/Controller, as well as, the key person(s) in charge of operations, initially it may be wise to have both parties involved. Operations will have the feel for units sold. Finance/Accounting may have a better grasp for costs.
Later on, you may decide to create a system where such numbers are automatically reported by someone as part of that person's responsibilities.
For those choosing to obtain numbers directly from the company's accounting system, it will be relatively simple to obtain. Just go to the Income Statement section to retrieve information regarding Revenue, Cost and Expense. However, please understand the risks as described above in the Goals section. You may be taking on some hidden risks by going directly to the Income Statement for the profitability information. Not all the information pertaining to sales and costs/expenses for that period may have been entered.
For those of you electing to indirectly arrive at profitability using sales volume and unit costs and unit price, please refer to the following steps:
Step 1 - Obtain data on the # of units sold, cost per unit, and estimate of monthly expenses. Having a good understanding of the unit economics of the firm will be to making this step easier. Initially, this may be somewhat challenging to be able to collect. However, over time it will become easier. Here are some helpful tips:
Number of Units Sold: The operations department will need to keep records to in order to record how many units have been sold. There is no short cut here. However, if you can know 80-90% of the # of units sold, then that is enough.
Unit Sales Price: Sales and Accounting will need to keep good records on prices. Please note that sometimes, prices may have changed in the middle of the period.
Unit Sales Cost: Sometimes you can easily determine the cost using vendor invoices. If it becomes difficult, a helpful way is to look at historical P&L Statements. You can estimate the COGS amount for this period by seeing what historically they were as a percentage of revenue. For instance, if COGS was 60% of sales last year, then you can estimate COGS for this year as 60% of current revenue.
Step 2 - Plug in the data for Revenue, COGS, and Overhead Expense. Sum up as per the example in the Basic Format section.
Step 3 - Review and monitor your results. Graphing the results may also be a very effective method to see what is going on in the business process.
In the spirit of flexibility, the Flash Report can and ought to be customized to fit each company's needs. The basic format is just that….a basic platform to help get you started.
For the Profitability Section, some companies have also done the following: Report just the Gross Margin and/or Net Income. You can do this, but this does not excuse you from understanding the underlying unit economics. You still have to do your homework. Include profitability on a per employee basis.
Flash Reports: Monitor & Review
Now that you have assembled all the parts of the Flash Report, it is time to review your results. Again, it deserves mention that the purpose of the Flash Report is to provide management with a timely, "mostly accurate" tool to assess the current state of affairs. Thus, any changes that need to be made can be made quickly. Emergencies can be proactively addressed at the problem stage, rather than reactively in the crisis stage. If you want complete accuracy, wait until the financial statements for the period are complete 2-4 weeks after the month has ended. In the meanwhile, 80-90% accurate is fine for managing a business.
The Owner(s)/Management of the firm should review the results of the Flash Report after it has been completed. If possible, review on a weekly basis in order to expedite the decision making process. This way, the company can react to trends faster.
Any person or parties involved in the active management of the firm should certainly be included in the performance review of the firm. It is especially important that representatives from Operations, Finance, and Accounting be there as well.
In and of themselves, the numbers do not tell you a whole lot. They serve as a point of reference for discussion. It is recommended that you start off with the review of the firm's cash position. The cash position may provide questions as to why cash is short, which in turn will generate questions regarding A/R or sales.
Steps 1 - Review the Liquidity Section This section will provide management an idea of whether or not they can pay the bills. Deficiencies will usually spring from a collections issue, sales issue or cost/expense issue. It will be up to management to explore each of these areas to see where potential problems lie.
Step 2 - Review the Productivity Metrics Section Ultimately, if done right, this section gets to the heart of the business process. It is important that the Finance/Accounting people are in accord with Operations people that these metrics are meaningful. If they are not, keep working at them until they are. This may be several iterations later.
Review of this area can tell management in a very simple way, how the business process is doing. These metrics should provide a simple read as to the how the heart of the business is beating. Should there be problems, these metrics should capture them in some way. In turn, revenue should be affected as well. For instance, revenue may be down, because a certain machine was down for repairs. Thus, % utilization could tell you indirectly why revenue was down for the period.
Step 3 - Review the Profitability Section because the firm's productivity affects its profitability, so too will the results from the Productivity Section be seen in the Profitability Section. It is important for management to confirm this.
Continue to monitor results from period to period. If changes to Productivity Metrics need to be made, please feel free to do so. The key to successful implementation and use of the Flash Report is the commitment to its use and the commitment to communication and discussion.
Some companies may choose to graph the results in addition to having the flash report in a tabular format. A graph may at times be easier to understand than numbers, especially for analyzing trends.
For the purposes of the flash report, it may be useful to include 3 historical periods in addition to the current period. This will aid in the analysis of trends.
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