Cutting financial reports down to size.

Information that really tells the story.

Have you ever attended a meeting of corporate brass where the CFO read the income statement line by line and every so often someone asked for an explanation? Although the information conveyed is important, such meetings can be interminable. If you tallied the total per-hour compensation of the attendees, you might wonder whether there's a better--and much cheaper--way to communicate this information.

The good news: There is.

The better news: The solution is simple and fast and adds no cost to finance department operations.

Even better news: Each person at the meeting will come away with information he or she really needs--no more, no less.

LESS DATA, MORE INFORMATION

If you're the CFO or the staff person who prepares the financial report for that meeting, ask yourself: What kinds of information do the meeting's attendees really need? In my experience, most managers need only summarized financial data. Details can be provided separately for those who need them.

However--and this is critical--just because the information is summarized, don't assume you can take shortcuts in preparing the statements. In fact, you also should prepare a thorough comparison of monthly expenses. That data should be compared with forecasts and then distilled into a brief, informative presentation focused on significant indicators: pretax net income, key operating information (each company has its own set of key data), sales, costs and variances from budget. Determining which indicators to break out is the art of designing a key indicator report.

A typical financial summary report would contain balance sheet and income statement summaries, a break-even analysis, charts of key ratios and the following key financial information:

Pretax net income: current month                $--
Pretax net income: year to date                 $--
Cash                                            $--
Line of credit: balance                         $--
Line of credit: available                       $--
Retained earnings                               $--

In addition, the report would include variances from
budget such as
                           Amount              Comments
Bonus accrual              $--
Trade show                 $--
Depreciation               $--                 Year-to-date
                                               adjustment due
                                               to purchase of

And it would include data on trends and comments--for example

* Packaging supplies are trending up.

* Gross profit is down by -- % for two months--need to evaluate.

* Monthly net sales level is $ -- over (under).

* Monthly gross profit is up (down) -- %.

* Resulting gross profit is $ -- over (under).

* Expenditures that are over budget:

Travel and entertainment are over by $ --.

The summarized income statement and balance sheet each should take no more than one sheet of paper. The break-even calculation is especially helpful to growing companies because they have a tendency to pick up overhead easily. Use graphs and ratios to highlight significant information.

Taken together, these data provide a clear financial picture that's easy to understand without being overly technical. But more important, the report keeps everyone focused on the big picture without being distracted by the details. Any significant variances or trends can be addressed separately.

THE GAAP GAP

GAAP financial statements are uniform and therefore provide a level playing field for the users of financial information such as bankers or investors. Because of our training, we accountants may feel strange preparing statements that aren't strictly in accordance with GAAP. Corporate managers, however, find such reports useful because they focus primarily on trends.

Take employee compensation in a manufacturing company as an example. Such expenses are spread throughout the income statement, generally in each of the cost areas: direct and indirect, selling and marketing, indirect labor and general and administrative. Compensation may be broken down further into officer, supervisory and staff compensation. In a typical report, such costs get buried within the overall costs for the respective departments. Likewise for rent expense, which typically is coded to the respective profit center or location and allocated among various departments. In both cases, the big picture is hidden. From management's point of view, the more departments, the more complex the statements and the more key information is buried.

FLUCTUATING COSTS

Suppose some marketing expenses are subject to large year-to-year fluctuations while most of them stay the same. Instead of analyzing these fluctuations each period, why not just make them line items on a summary income statement? The expenses that don't fluctuate significantly can be grouped together. Using that strategy provides an income statement that highlights larger categories of expense--those that fluctuate greatly--and manageable expenses.

Of course, a summarized report doesn't replace a GAAP income statement, but it provides additional information that's very useful to managers of the business.

Below is a sample of such a report. Cost of goods sold, the general and administrative figures and selling and marketing categories are shown net of compensation, payroll taxes, fringe benefits and rent. Assume that compensation is the largest expense other than materials and that overtime and incentive compensation triggers large fluctuations. Also, assume that travel and entertainment and trade show expenses vary greatly from month to month--causing the income statement to fluctuate greatly. These expenses can be broken out into line items.

In sum, business entities--especially growing companies--need cost-effective operational and financial data that focus less on details and more on key indicators and exception reporting. This approach is advantageous for CFOs in two ways:

* It takes very little extra effort to prepare the summarized reports.

* It reinforces what only the finance department can provide corporate leaders: a sure-fire tool to help them fulfill their main responsibility--keeping their eyes trained on the big picture.

EXECUTIVE SUMMARY

* MOST MANAGERS get inundated at meetings (and elsewhere) with so much financial data that they lose sight of the big picture. It would be better to provide them with financial data in summary or highlighted form. If managers need details, that data can be provided separately.

* PRESENTING INFORMATION in summary form doesn't mean you can take shortcuts when preparing financial statements.

* SUMMARY PRESENTATIONS should focus on significant indicators such as: pretax net income, key operating information, sales, costs and variances from budget.

* DETERMINING WHICH IMPORTANT expenses to break out is the art of designing an effective key indicator report. Analyze variances in the P&L by comparing several periods and then decide on the items to segregate on the report.

* SUCH SUMMARIES are especially helpful for growing companies, which need to focus on key indicators and exception reporting.

* THIS KIND OF financial information and the commentary on notable items, trends and variances from the forecast provide a clear financial picture that's easy to understand. And it keeps everyone focused on the big picture. Significant variances or trends can be addressed separately.

Standard Income Statement Format

                                      1/31/98

Net sales                       $445,000    100.00%
Cost of goods sold               284,900     64.02%
Gross profit                     160,100     35.98%
Selling and marketing
expenses                         103,200     23.19%
General and administrative
expenses                          57,464     12.91%
Net income from operations          (564)    -0.13%
Other income and expenses              0      0.00%
Net income before taxes             (564)    -0.13%
State income taxes                   (40)    -0.01%
Federal income taxes                (178)    -0.04%
Net income                         ($346)    -0.08%

                                      2/28/98

Net sales                       $418,500   100.00%
Cost of goods sold               238,220    56.92%
Gross profit                     180,280    43.08%
Selling and marketing
expenses                          70,000    16.73%
General and administrative
expenses                          59,228    14.15%
Net income from operations        51,052    12.20%
Other income and expenses              0     0.00%
Net income before taxes           51,052    12.20%
State income taxes                 3,574     0.85%
Federal income taxes              16,143     3.86%
Net income                       $31,336     7.49%

                                      3/31/98

Net sales                       $565,500   100.00%
Cost of goods sold               327,400    57.90%
Gross profit                     238,100    42.10%
Selling and marketing
expenses                         105,600    18.67%
General and administrative
expenses                          66,464    11.75%
Net income from operations        66,036    11.68%
Other income and expenses              0     0.00%
Net income before taxes           66,036    11.68%
State income taxes                 4,622     0.82%
Federal income taxes              20,880     3.69%
Net income                       $40,533     7.17%

                                 Three-month total

Net sales                       $1,429,000   100.00%
Cost of goods sold                 850,520    59.52%
Gross profit                       578,480    40.48%
Selling and marketing
expenses                           278,800    19.51%
General and administrative
expenses                           183,157    12.82%
Net income from operations         116,523     8.15%
Other income and expenses                0     0.00%
Net income before taxes            116,523     8.15%
State income taxes                   8,157     0.57%
Federal income taxes                36,845     2.58%
Net income                         $71,522     5.01%

Key Indicator Income Statement Format(*)

                                      1/31/98

Sales                           $500,000    100.00%
Sales returns                     25,000      5.00%
Sales incentives                  30,000      6.00%
Cost of goods sold--
materials                        270,300     54.06%
Cost of goods sold--
indirect                           1,200      0.24%
Selling and marketing
expenses                          13,300      2.66%
General and administrative
expenses                          15,041      3.01%
Other income and expenses              0      0.00%
Key expenses broken out:
    Compensation                  82,500     16.50%
    Payroll taxes and fringes      8,223      1.64%
    Rent                           7,000      1.40%
    Trade shows                   30,000      6.00%
    Travel and entertainment      18,000      3.60%
Net income before taxes            ($564)    -0.11%

                                      2/28/98

Sales                           $450,000   100.00%
Sales returns                     18,000     4.00%
Sales incentives                  13,500     3.00%
Cost of goods sold--
materials                        219,300    48.73%
Cost of goods sold--
indirect                           3,240     0.72%
Selling and marketing
expenses                          13,400     2.98%
General and administrative
expenses                          15,074     3.35%
Other income and expenses              0     0.00%
Key expenses broken out:
    Compensation                  91,000    20.22%
    Payroll taxes and fringes      9,434     2.10%
    Rent                           7,000     1.56%
    Trade shows                    5,000     1.11%
    Travel and entertainment       4,000     0.89%
Net income before taxes          $51,052    11.34%

                                      3/31/98

Sales                           $650,000   100.00%
Sales returns                     39,000     6.00%
Sales incentives                  45,500     7.00%
Cost of goods sold--
materials                        306,000    47.08%
Cost of goods sold--
indirect                           2,300     0.35%
Selling and marketing
expenses                          13,600     2.09%
General and administrative
expenses                          19,041     2.93%
Other income and expenses              0     0.00%
Key expenses broken out:
    Compensation                 107,500    16.54%
    Payroll taxes and fringes     11,023     1.70%
    Rent                           7,000     1.08%
    Trade shows                   22,000     3.38%
    Travel and entertainment      11,000     1.69%
Net income before taxes          $66,036    10.16%

                                 Three-month total

Sales                           $16,00,002   100.00%
Sales returns                       82,000     5.12%
Sales incentives                    89,000     5.56%
Cost of goods sold--
materials                          795,601    49.73%
Cost of goods sold--
indirect                             6,740     0.42%
Selling and marketing
expenses                            40,300     2.52%
General and administrative
expenses                            49,157     3.07%
Other income and expenses                0     0.00%
Key expenses broken out:
    Compensation                   281,000    17.56%
    Payroll taxes and fringes       28,680     1.79%
    Rent                            21,000     1.31%
    Trade shows                     57,000     3.56%
    Travel and entertainment        33,000     2.06%
Net income before taxes           $116,523     7.28%

(*) Percentages may not total 100% due to rounding.

Which income statement tells you more about the company--the top report or the bottom one? The bottom report focuses on the key indicators that affect the operation of the business.

[ILLUSTRATION OMITTED]

JACK L. OTTENHEIMER, CPA, is vice-president--finance and CFO of ABL Electronics Corp., Hunt Valley, Maryland. He is a past chairman of the management of an accounting practice committee of the Maryland Association of CPAs. His e-mail address is [e-mail].