When you think about it, what are financial statements but a way of keeping score? They are a consistent means of comparing the results within years and between businesses.
Measurements aren't always black and white. They can even be controversial -- which you might have noticed if you've been reading recent blog posts about wine scoring and the point system.
Some of the points on both sides of the wine scoring discussion are also relevant when you are talking about financial statements.
Here's what Paul Mabray at Vintank says about bucking the 100 point system and moving to a badge system "It seems like a small thing, create a category for a wine that you believe in and assign a badge to it, explain the criteria openly and transparently, and only give those wines that fit that category a badge."
Financial statement consumers are clamoring for transparency. As preparers of financial statements, we spend a lot of time trying to help people understand what goes into the numbers. Owners want more transparency about what is really going on with their business, while bankers want more transparency into the assumptions and decisions that impact the numbers.
Bankers want to know what it means when you use LIFO inventory to value your wine and another winery uses FIFO. What decisions did you make about recording revenues and shipping costs and how does that affect your real costs of the wine you sell? How do you treat research and development costs? How do you account for tasting room fees?
As accountants, we spend a lot of time improving the transparency of the information we provide and crafting footnotes that properly disclose the assumptions behind the numbers. But at our firm, we like to go further - by helping owners get more transparent with their teams by sharing critical business information, metrics, and scorecards so that everyone can work toward a common goal.
Josh Wade at DrinkNectar.com shares some interesting insights on using badges versus a 100 point system. "The 100 point system solidified its place by being a consistent product. While 93 points from Parker may be different than 93 points from Robert Dwyer (Wellesley Wine Press) there is still a consistency that the consumer can relate to."
Consistency is one of the main reasons people hire Certified Public Accountants to work on their financial statements. They want to know that revenue rules are applied in a similar fashion to every industry. Users of financial statements want assurances that the numbers on a financial statement can be trusted, that they are reviewed by an external independent party, and that someone other than internal management has verified the results. Consumers of financial information want the same kind of external assurance that wine consumers value.
Josh Wade further points out that , "Brands like Wine Enthusiast, Wine Spectator, and Wine & Spirits carry a lot of influence."
The standards that we provide as accountants have meaning because they are backed up by agencies that carry weight and have the right to enforce policies and procedures. Bodies like the IASB (International Accounting Standards Board), FASB (Financial Accounting Standards Board), AICPA, and the SEC provide the rules and regulations that dictate how accountants around the globe will treat the transactions that make up any given financial statement. These boards carry influence with public companies who are traded on Wall Street and regulate all accountants who prepare financial statements, but ultimately they are accountable to the investing public.
The biggest issue with any scoring system is relativity.
Basically a wine with a 96 score has relevance only when you compare it with wine that earns a 95 or a 97. If you could have a bottle of any of three wines (each with one of these scores) for the same price which one would you choose?
The same is true for financial statements and other key performance indicators. Is $100,000 of gross profit good or bad? It depends. If your operating expenses are $200,000 then you aren't generating enough profit to cover them. If you have no overhead and no fixed costs and are able to clear $100,000 of gross profit then you might get pretty excited. But it's a relative result.
Is revenue growth of 10% good this year? That's great if everyone else in your industry is growing by 5%, but it's not so good if all of your neighbors are experiencing 20% growth.
We have created financial scorecards for select winery customers who want to put their own "score" in perspective. These wineries want to really understand their business - that means better insight and consistent comparisons between their results and other similar wineries, all backed by someone they can trust.
For more on scorekeeping within a winery, read our whitepaper, What's the Score?