Interpreting financial statements: how one firm uses the language of graphics.

Jerry Atkinson may prepare financial statements for his clients, but more often than not it is the graphs they want to see first. Atkinson, managing director of Atkinson and Company, a 62-employee CPA firm in Albuquerque, New Mexico, has used graphics and other presentation methods to enhance financial reports since the late 1980s. "I first realized this was a great way to add more value to the numbers seven or eight years ago when I used overhead projections to explain figures in the financial reports to boards of directors or management groups," Atkinson said. "I noticed my clients were tuning in to what I was saying and focusing on the numbers." Now, Atkinson's firm uses graphics with every financial report to help managers better understand their company's performance.

Atkinson believes financial information should be used to help clients be more profitable. "To help clients you have to give them management tools, which are more than just the current-year information, they are trends and changes," Atkinson said. He feels simple graphics are the best way to help clients recognize these trends and changes. "Management also uses our graphics to discuss company performance with their employees," he said.

True Colors

"Some of my clients just don't understand the information in the financial statements, yet they need to know the big picture," Atkinson said. "Our firm will give them a colored chart of their 10-year history of gross profits as a percentage of earned revenues or profits against expenses and they understand the relationship." (See exhibit 1, at right.) His firm will create a graphic for any information in the financial statements. "We ask our clients what they want to see and we plot it for them," Atkinson said. His firm also will personalize the graphics by using the colors of the company being profiled. "Anything to add more value to the services we give our clients--they love it when we use their company colors."

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Atkinson's clients also receive a ratio analysis, or a series of numbers that explains capital structure, efficiency, liquidity and profitability ratios over a certain number of years (see exhibit 2, page 43). The firm will interpret the important trends and list conclusions adjacent to each category. The last page of the ratio analysis compares the results with a survey of 100 similar U.S. companies. (The survey information is courtesy of Annual Statement Studies, a report by Robert Morris and Associates -- something Atkinson said should be on every CPA's desk.) Atkinson said the client's accounting department, the comptroller or the financial officer can use this information for strategic planning.

Exhibit 2: Ratio Comparison

                                                            RMA
                                     1992    1993    1994  1994(*)
Efficiency
Number of accounts receivable
turnovers                             7.6     7.3     6.4    6.3
Accounts receivable collection
period
(days)                                 47      49      56     57
Number of asset turnovers             3.2     3.1     3.3    2.9
Number of net revenue to
working capital turnovers            15.7    19.7   19.44   23.5
Net fixed assets to stockholders'
equity                             124.4%  113.7%  102.6%    20%
Capital structure
Debt to equity                       3.27    4.55    4.19      3
Current debt equity                  2.06    3.45    3.18   2.29
Long-term debt to equity           121.4%  110.6%  101.3%  22.9%

This ratio comparison is a summary of the entire ratio analysis. It compares yearly results against national averages of similar U.S. companies.

(*)The national averages are compiled by Robert Morris and Associates and published in a report titled Annual Statement Studies.

Atkinson also prepares a monthly report card for his clients. "I ask what they really want to know on a monthly basis," Atkinson said. "We present this information on one page so the client can identify trends, and in 15 minutes can have a good understanding of what the company did in recent months." (See exhibit 3, page 43.) On a separate page, Atkinson's firm prepares brief comments that highlight trends or adjustments on the report card. "These are the clients' critical success factors," Atkinson said. "We want to know financial results--income earned, expenses and profit or loss. I use the same system for my own firm."

Exhibit 3: ABC Company Report Card

Five Months Ended April 30

                            1995         1994       Change
Financial results
Earned revenues       $2,306,000   $2,212,000      $94,000
Expenses               1,745,000    1,675,000       70,000
Profit                   561,000      537,000       24,000
Hours
Chargeable                32,990       33,631        <641>
Percent                      59%          59%           0%
Billed                    30,456       32,699      <2,243>
Rate per hour
Chargeable                $78.18       $75.89        $2.29
Billed net                 71.09        65.81         5.28
Fee production
Billed                $2,165,000   $2,152,000      $13,000
Write down             (330,000)    (404,000)       74,000
Realization                86.7%        84.2%         2.5%
Other information
Gross profit          $1,340,000   $1,514,000   <$174,000>
Work in progress         437,000      468,000     <31,000>
Accounts receivable    1,211,000    1,280,000     <69,000>
Director bonus paid       90,000       26,000     <64,000>

Getting Started

Atkinson does not use a specialist to prepare or design his charts and graphics. When he first decided to offer graphics, he simply approached the staff member with the best computer skills to get his program running. Now, the senior staff member on each project prepares the graphics and prints them using a color ink-jet printer that cost the firm less than $1,000. "Our firm has used Lotus Freelance and Harvard Graphics to get the job done," Atkinson said. "We are planning to do more work with Microsoft PowerPoint to really jazz up the presentations." How did Jerry Atkinson learn to use graphics software? "I just loaded Harvard Graphics and experimented," Atkinson said.

Atkinson recommends that firms interested in preparing graphic material for their clients should

* Make up samples for their own financial statements first as practice.

* Pick a client they are very comfortable with and choose the most important data to illustrate.

* Personalize the graphic material for each client.

* Keep it simple. Too much information on one graphic will defeat its purpose.

No Separate Bill

The firm does not include a separate line item on its bills for this service. Atkinson said converting the information to graphs rarely takes more than one billable hour, and he adds another billable hour for printing. "For a $25,000 audit, I don't add two hours of a senior's time on the bill," Atkinson said. "If a client tells me he or she does not want this service and doesn't want to be charged for it I will subtract two hours from the bill, but this happens with fewer than 1 in 20 clients," Atkinson said. "The time to do this is really immaterial, but the impact on the client is dramatic. This coincides with our firmwide goal to enhance the services we give our clients. I'll guarantee that 90% of those clients who didn't want the graphic presentations at first will request graphics or a ratio analysis in the future."