Currently, there are three primary financial reporting statements; Income Statement, Balance Sheet, and Statement of Cash Flows. These three statements are familiar territory for accountants. You live and breathe these numbers. You are proud to be able to produce these numbers for your clients, as you should be. However, because of the historical nature of these statements, they serve a limited purpose when it comes to making day-to-day management decisions. This is where the need for another kind of statement becomes critical.Earlier this year, I had the chance to interview several entrepreneurs about their motivation for starting their business and what keeps them motivated day-to-day. Their answers were very interesting. Here are just a few of their motivations: to be a master of their own destiny, solve complex problems, design new solutions, growing their personal skills, hiring and developing people, finding new and better ways to serve their customers, financial independence, and strengthening the local economy. When the interview pressed further, the thread that united all the motivations was the art of making quality (precision) decisions. These interviews highlighted how much business owners thrive on coming up with a vision and then having the confidence to execute that vision. They all agreed that making decisions was one of the most fulfilling aspects of running their own business.
When asked about the role their accountant plays in supporting those decisions, their responses came in the form of frustrations. They expressed frustrations that their accountant wasn't more proactive or involved in the big picture and planning aspects of their business. When asked what tools or resources they utilize to make day-to-day decisions, almost all of them referred to a self-designed spreadsheet populated with data points across all areas of business performance. Some called it a management report, while others referred to it as their dashboard. When asked how their DIY management report was different/better than the financial statements provided by their accountant, the words more relevant, real-time, and strategic went a long way in describing the gap between what they are getting from their accountant and what is needed for day-to-day precision-decision making.
The table below highlights the contrasting characteristics between traditional financial reporting and The Fourth Statement perspective. The Fourth Statement measures critical activities across all areas of business performance and serves as a predictor of financial outcomes. It also provides real-time feedback for owners/managers and employees about the efficacy of their decisions.
Firms looking for growth opportunities don't have to look much further than their own backyard. Odds are your clients are already operating with their own version of a fourth statement. Here are some options for making The Fourth Statement your path to value-added services:
1) Review your client's DIY version of a fourth statement. Look for ways to directly link the critical numbers your client is already focused on to the financial statements you are providing. You should never deliver a set of financial statements without tying that conversation to the information in their 4th statement. The Fourth Statement is what keeps the discussion and services your provide more relevant.
2) If a client doesn't currently have a fourth statement of their own design, roll up your sleeves and help them identify three to five critical numbers that tie directly to their goals and strategy. Help them organize those metrics into a dashboard-like statement and then refer to option No. 1 to ensure the connection between historical and forward focused reporting efforts.
When prospecting for new business (with new or existing clients) you will be able to provide a clear delineation between your firm and competitors by focusing less on your ability to provide traditional financial reporting services (an assumed competency) and focusing more on how your firm adds value to client relationships with precision-decision support via The 4th Statement.
