Calibrate quarterly earnings results carefully

When examining their quarterly earnings reports, executives should be focused on how the business is tracking against expected results and if these are in line with the organisation’s broader goals and objectives. 

In reviewing these reports, they should consider how useful the information is when it comes to helping them make decisions. CEOs should be looking at trends by comparing earlier quarterly results with current quarter information, as well as results for the same period of previous years.

Many businesses are still facing fluctuating periods of economic instability, and the possibility of hasty, ill-considered decisions is strong. It is important for CEOs to calibrate their quarterly earnings results by considering the year-to-date as well.

The key to examining quarterly earnings reports is to pre-empt the content of the report. If a quarterly earnings report contains new, never-before-seen results and figures, it is impossible to correct the deviations in the following quarter. The problem will also adversely affect the organisation’s performance for the following quarter. 

Because high-level management should be receiving continuous reporting throughout the quarter, a CEO should already have a good idea of what the reported results are. In fact, the quarterly report should only be a validation of the CEO’s expectations.

With the technology available today, all levels of management should be receiving continuous information on the key performance indicators (KPIs) that are within their area of management. 

Corrective action to arrest deviations from expected results should have already been implemented on a weekly or monthly basis within the quarter being reported. Top level  management should already be aware of what effect the deviation will have on the bottom line.

Executives should be examining every detail in the quarterly report to ensure it adequately provides enough information on the progress of the business and whether it is achieving all of its stated goals and objectives.

For management purposes, a quarterly earnings report should not be just a statement of the bottom-line results. It should also include all the KPIs implemented to help achieve the reported results.

In a well-managed business, the key financial drivers of profit and cash flow such as sales price, sales volume, margins, fixed and variable costs, stock turnover and debtors’ days, should be well known. The extent to which these factors affect quarterly results should also be understood.

Any earnings or cashflow number is of little value without an explanation and understanding of how it was achieved.

So, what are the tips for gaining a real insight from the quarterly earnings report?

One interesting exercise to test the business’s overall reporting system is to have the key executives complete from their own knowledge a blank earnings report with their estimated results before revealing the actual result. 

In a business with financially literate top management and with a sound reporting system, the deviation of results between estimate and actual should be minimal.

Where there is a deviation between expected and actual results, the continuous reporting system is not effective and the financial literacy of the team may need assessing. 

If nothing else, this exercise helps key management focus on why the deviations exist and deepens their understanding of the business and the impact each KPI has on the bottom line.

Executives can also obtain a reliable measurement of company performance by comparing the KPI results of an organisation with industry KPIs of businesses in the same sector.

Discussions with other CEOs about trends, market changes, margins, and staff costs also provide insight into market performance and are approachable topics, provided specific company information remains confidential.

There are several ways in which executives can craft new strategies and solutions to rectify existing problems and avoid future issues.

High-level management should receive continual reports of the company’s KPI results and have adequate opportunity to take corrective action and arrest deviations from expected results within the same reporting period.

Corrective action should be implemented on the basis of weekly or monthly reports and top-level management should already have a feel for what effect the deviation will have on the bottom line.

Quarterly reports should not drive corrective action, but should verify expectations.

If on examining quarterly reports, management discovers there is considerable variation in results from those expected, there are a number of actions that can be implemented. 

Firstly, an executive must identify why the reporting system did not flag the problem earlier to allow corrective action to take place and prevent adverse effects on the following period’s results. 

Secondly, finding, fixing or countering the cause of the reported problem should be a priority. If the quarterly report gives a complete picture of the business operations, key management will be in a position to identify which of the KPIs have been affected, and therefore narrow down the possible causes. 

These actions should be supported by clear and consistent communication with employees and shareholders. 

Ideally, a quarterly earnings report is merely proof that the business is on course to achieve the stated objectives for the financial year, in line with the longer-term goals of the organisation. 

A well-crafted earnings report gives the complete story and increases the likelihood of staff working in the best interests of the business. If executives clearly explain the vision and direction of the organisation on a weekly, monthly, or quarterly basis, employees will understand the significance of the reporting process and the results.

Good results should be celebrated and bad results well explained, along with the correction plan to maintain morale and productivity among staff. Any changes in business operations and all communication with employees should be conveyed clearly and be supported by results. 

Future quarterly earnings reports must capture the information that is necessary to monitor performance and provide KPI feedback. Reports are too often prepared that contain an abundance of unnecessary detail and are too short on information that really matters.

Future reports are the litmus test of the business’s continuous reporting system, and can also be used to ensure key management is aware of stated business goals and objectives. If surprises are rife, the reporting system needs review.

Paul Lenton, Business Advisory Partner