It’s been said that the only constant is change. Businesses are being told that having the strength and agility to meet those changes is what makes the difference between success and failure. But in order to address change, to understand the possible outcomes in various “what-if” scenarios, a business has to understand how it is performing today, and then must capture and compare measurements over time to be able to identify trends and similarities. Only then, when the business has the information necessary to view performance over time, is it then possible to introduce changes and forecast potential outcomes. When the analysis includes many businesses rather than just one, even more may be revealed in terms of comparative performance levels under varying circumstances.
It doesn’t sound all that difficult, really. Not on the surface, anyway. There are a lot of tools and resources available now which make this type of analysis a walk in the park. With accounting moving “online” and into connected web service, and with accounting professionals working closer than ever before with their online clientele, the data available is astounding and analytics providers are eating it up. It’s actually possible for a small business to subscribe to a solution, upload or sync up their QuickBooks or similar financial information, and magically have a really cool dashboard to look at that makes financial statement reading obsolete. More often than not, there’s also a feature that lets the owner compare or benchmark their performance against others in the same industry. And that’s the problem.
Stepping back a bit, let’s now talk about XBRL (eXtensible Business Reporting Language). In its simplest form, XBRL can be described as an application of XML (eXtensible Markup Language) intended for use in business reporting. The idea is that all financial reporting should be “marked” in certain standard ways, so that it is easier to compare and monitor. XBRL is considered by many, including the AICPA, to be a “language for the electronic communication of business and financial data which is set to revolutionize business reporting around the world.” Even though it sounds logical enough, it hasn’t taken off as quickly as everyone thought.
So what does XBRL have to do with data dashboards and industry performance benchmark comparisons for those small businesses we discussed earlier? They both suffer from the same dilemma, and that’s lack of consistency in definitions and taxonomy (categorization).
Because businesses have a lot of, um, flexibility when it comes to financial reporting, it is not unusual for the application of a single term to mean one thing to one company, and a very different thing to another. As an example, what one company calls “operating revenues” may be what another business calls “net revenues”. Does “inventory value” mean the same thing to a business using a FIFO costing method versus LIFO?
When you try to perform an analysis of the financial data of two companies who report or label their information differently, it makes it really difficult to trust the comparison because you may very well not be comparing the right things – apples to apples. It may be more like apples to aardvarks. I can’t tell you that the solution is out there, because at this point I don’t think it is. I say this because the problem starts where the data is created and initially “categorized”. There are few standards, and even fewer that are actually implemented on any sort of broad basis. The problem exists in the trial balance software, in the accounting products, and in those Excel spreadsheets everyone carries around with them.
The best, first step any accounting professional can take with their clients is to make every attempt to address the financial reporting in a standardized manner, and capture and categorize the data appropriately from the get-go. It’s the only way you’ll avoid spending days with Excel spreadsheets and working papers, attempting to normalize client data into a framework that is available for a useful and trusted comparative analysis.
Interested in learning more about tools which can help your professional practice get more opportunity from every client? Contact me @JoanieMann on Twitter, or connect with me on LinkedIn or Facebook.