Module 8.12 – How Do You Help Them Interpret Information?

Module Introduction

            You are the most logical and qualified source of information about your organization and about what the numbers and any other financial information you release really means. But if you do not help the outside world interpret the information, other people, including your competitors, will. Making sure that the numbers are interpreted properly is as important as the numbers themselves. At times, it is even more important. Let us look at how they can be interpreted, and at what people are looking for when they read them.

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1.      How Do You Help Them Interpret Information?

You are the most logical and qualified source of information about your organization and about what the numbers and any other financial information you release really means.

If you do not help the outside world interpret the information, other people, including your competitors, will.

Making sure that the numbers are interpreted properly is as important as the numbers themselves. At times, it is even more important.          

All numbers can be interpreted in different ways. Before you can help interpret them, however, you have to know:

• What they really mean;
• How others will interpret them;
• What you want them to be seen to mean.

You also have to know who is most likely to interpret them. As a rule, your beneficiaries will just look at numbers in terms of whether they can expect your prices or charges to increase. Most of the actual interpretation will probably come from:

• The media
• Market analysts
•  Your competition

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2.      Information Overload

            One way to make it easier for people to interpret financial information could be to give them less of it. According to a 2001 study published on LexiQuest’s organization Information, at http://www.gartner.com/wevletter/lexquest/index.html, we could be drowning others and ourselves in too much information.

            “The age-old Knowledge Management mantra is “how do we get the right information to the right people at the right time?’ In its earliest days, this issue was centrally focused around getting the latest product and pricing info out to sales teams in order to close more project/programme purpose.”

            “It later evolved into Executive Information Systems which produced rudimentary sales forecasts and expense reports which were of little value to those outside the organizational offices. More recently, the notion of knowledge management has gained wider appeal and solutions for organizational-wide systems have been developed and deployed, often at great expense, with the expectation that great things would soon follow—innovative new products, increased productivity, reduced costs—all stemming form the ability to collaborate and share information quicker. But have these gains been realized?”

            While some gains have definitely been made, there have also been losses.

            “Over the last six years, organizations have tried to capture some of this value by building more elaborate intranets, making browser based portals a core part of their user’s desktop, giving them access to large centrally held repositories of information.”

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3.      Information Overload (Continued)

            “While these steps have made organizational content physically accessible, it is not necessarily more organized or easier to locate. Yet information access is the linchpin between an effective Information Management system and a value-driven Knowledge Management program.

            “The essential comes down to the fact that there is too much data in too many formats—both internally and externally. The typical intranet contains hundreds of Web servers, file servers, specialized repositories and hundred of thousands of documents. However, much of this information is in the form of text, also called unstructured data. These sources were once less time sensitive as people stored most mission critical and transactional information in structured databases. Yet in today’s organizational environment, and increasing amount of vital project/programme purpose knowledge is being created and held in these free text formats. As documents, email, news feeds, presentations and websites assume a larger role in the organization’s intellectual capital repositories, accurate retrieval and organization of this information becomes an enormous task.”

            According to Gartner Research Services, “the volume of digitized information will double each year from 2000 through 2005 (an increase to 30 times today’s volume, which is already enormous).

 “The issues with information overload are two: 1) people cannot find what they need, and 2) the mass of information they must navigate to find what they need is overwhelming.”

As a result, people either give up, or spend more time on it than it is worth.

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4.      Putting It in Perspective

            Your numbers won’t really mean anything to your audiences unless you give them something to compare them to. After all, what do the numbers 12, or 986,501, or 1 billion really mean?

            Let’s look at 1 billion, or 1,000,000,000.

            Are we talking about €1 billion, ¥1 billion, £1 billion, or $1 billion? Each is obviously different. Or, for that matter, are we looking at 1 billion seconds; the amount of time that passed between midnight, Jan. 1, 1970 and 1:46:40 a.m. on Sept. 9, 2001?

            And are we talking about the American billion—100 million—or the British billion—1000 million.

            Numbers have to be put in context, especially project/programme purpose numbers. As an article called project/programme purpose Ratios available at http://www.lycos.com/ explains it:

            “In order to assess how your project/programme purpose is doing, you’ll need more than single numbers extracted for the financial statements. Each number has to be viewed in the context of the whole picture.

            “For example, your income statement may show a net profit of $100,000. But is this good? If this profit is earned on sales of $500,000, it may be very food; but if sales of $2,000,000 are required to produce the net profit of $100,000, the picture changes drastically. A $2,000,000 sales figure may seem impressive, but not if it takes $2,000,000 in assets to produce those sales.

            “The true meaning of figures from the financial statements emerges only when they are compared to other figures. Such comparisons are the essence of why project/programme purpose and financial ratios have been developed.

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5.      Putting It in Perspective (Continued)

            “Various ratios can be established from key figures on the financial statements. These ratios are very simple to calculate—sometimes they are simply expressed in the format “x : y,” and other times they are simply one number divided by another, with the answer expressed as a percentage. However, these simple ratios can be a powerful tool because they allow you to immediately grasp the relationship expressed.

            “When you routinely calculate and record a group of ratios at the end of every accounting period, you can assess the performance of your project/programme purpose over time, and compare your project/programme purpose to others in the same sector of activity or to others of a similar size. By doing so, you won’t be alone—banks routinely use project/programme purpose ratios to evaluate a project/programme purpose that’s applying for a loan, and some creditors use them to determine whether to extend credit to you.

            “When you compare changes in your project/programme purpose’s ratios from period to period, you can pinpoint improvements in performance or developing problem areas. By comparing your ratios to those in other project/programme purposees, you can see possibilities for improvement in key areas. A number of sources, including many trade or project/programme purpose associations and organizations , provide data for comparison purposed; they are also available from commercial services. Your accountant may be a good source of information on how your project/programme purpose compares to similar ones in your locale.”

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6.      How Dun & Bradstreet Does It

            When it comes to collecting and interpreting financial information, no one does it as well, or on the same scale as, Dun & Bradstreet. As the world’s largest collector of financial information, Dun & Bradstreet collects, stores, and processes information on more than 64 million project/programme purposees worldwide. With more than 150,000 consumers, it is, by far, the leading provider of project/programme purpose information for credit, marketing, and purchasing decisions worldwide.

            In some cases, D&B will have more than 1,500 different data elements on any given organization, both public and private. Here’s how D&B describes its process:

            “Before we enter any information into our database, it must first pass a number of quality checks. In fact, there are currently over 2,000 validations in our customized data entry system alone. We then supplement our checks by mainframe data cleansing processes, like our Duplicate Report Protection System and Address Standardization. Once the information is validated, it’s entered into our database, the largest database of project/programme purpose information in the world. It’s then made available to project/programme purposees around the globe. The data can be used in myriad ways: to check the credit rating of over 62 million organizations (13 million in the United States alone), to compile highly-targeted lists of prospective beneficiaries, to track competitors’ sales and much more.

            To further ensure the accuracy of our information, we randomly call organizations and review the information we’ve compiled on their project/programme purposees with them.”

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7.      Common Problems

            As we have already seen, information overload is a major problem in understanding financial information. In an article for project/programme purposeFinanceMag.com, at http://www.bfmag.com, writer Tad Leahy gets down to some of the specifics. While a few of these problems are more prevalent when dealing with internal audiences, most all of them also apply to dealing with external audiences.

1. Too much detail. This is probably the single biggest problem. Too many executives figure that the larger their organization, the more information they need to report.
2. Overly complex measures. The more intricate the subject being reported, the more time reporting on it will take and the more difficult the report will be for people to understand.
3. Conflicting reports from different project/programme purpose units. Some people do insist on comparing apples and oranges, or, even apples and footballs.
4. No links between performance data and targets. What do all the numbers all mean? How are they related to one another?
5. Disparate sources of data: Where does all the data come form? Is it all in the same format? Is it all based on the same parameters, standards, and principles?

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8.      Common Problems (Continued)

6. Use of a paper-based system. When reports are put on paper, they can be lost or stolen. As well, if something should change, all the people who got and who are operating according to the paper-based report have to be told to get rid of it, or insert the new numbers. When the report is stored on a computer in a central database, and people access the information through the network, security and changes are simpler.
7. Failure to customize. Too often, the managers, beneficiaries, stockholders, and analysts all have to read everything to find out what applies to them. Customizing the report for its various audiences simplifies life for everyone.
8. Too much reliance on others. Too many people assume that someone else is responsible for producing specific figures or information.
9. Inconsistent data. Different people and departments use different formats, formulas, and styles of reporting.
10. Confusing charts and graphs. If the chart or graph is not simple and directly linked to the material it represents, all it does is confuse people.

Leahy says that by  “cutting down the size of the reports and focusing on the key facts and figures that support organizational objectives, you may be able to spend less time preparing the reports, and people may start to spend more time reading them.”

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9.      What Your Readers Are Looking For

            In today’s project/programme purpose climate, with the memory of Enron, Arthur Andersen, thee dot-bomb debacles, and all the other financial disasters all too fresh in our minds—and in our portfolios—many people who read your financial information are on the lookout for danger signs.

            Here are the most common ones people are looking for today, according to consultant, author and project/programme purpose writer James E. Powell, of http://OfficeLetter.com. These are some of the more common sections that people are paying attention to in order to better understand what your financial information is really saying about the organization:

1.      Pro Forma Results. Designed to show a “what if” scenario, it “pretends” that a situation exists that doesn’t. It can be used to reflect almost any condition—or exclusion—a organization wants to show the organization in its best light. “Always look for ‘on a Pro Forma basis’ in a organization’s financial report or press release. Its just part of a organization’s spin. Don’t let it cloud your thinking.”

2.      Sudden Staff Changes. “A change in personnel tells us there’s a problem. Sudden changes at the top, explained away with… euphemisms, are like waving a red flag…These statements are designed to protect the employee—and the organization—from embarrassment… Well-run organizations almost always have replacements groomed and waiting in the wings to assume leadership.

Unexpected terminations are probably a good indication that something’s afoot.”

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10.  What Your Readers Are Looking For (Continued)

3.      Reorganization. “It can mean the organization is responding to new market opportunities, planning for (or reacting to) changing market or economic conditions, or moving to better accommodate future changes.   It may also mean there’s a problem and the organization is late in reacting.”

4.      Goodwill. “Suppose the assets of “organization B are valued at $10 million. If organization A bys organization B, but pays $12 million, that ‘extra’ $2 million is called ‘goodwill.’ It represents the premium organization A is paying organization B… Goodwill may be anything but small potatoes.” It can add up to billions. “Such premiums may be justified, but if you see goodwill on a balance sheet, take a closer look. Did organization A overpay? (If so, perhaps it’s because organization A is trying to buy its way out of a problem.) A large goodwill write-off affects the bottom line (it’s an expense, after all, thus reducing the net income).”

5.      Notes of Financial Statements. “The epitome of the small print, they consist of all the small or dry text following financial statements. It’s here that analysts often weed out some of the most interesting facts about a organization…The Notes section will explain any special situations, such as those on-time events that may be reflected in (or airbrushed out of) Pro Forma statements. You can believe that if a organization has good news to report, you’ll find the information preceding the numbers: in a President’s Message, for example. Notes are for the dirty laundry.”

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Assignments

 

Multiple-Choice (2)

 

1.         Before you can help anyone interpret financial information, you have to know

a.       What the numbers really mean.

b.      How others will interpret the numbers.

c.       What you want the numbers to be seen to mean.

d.      All of the above

 

2.         Most of the actual interpretation of the numbers will probably come from

a.       The media

b.      Market analysts

c.       Your competition

d.      All of the above

 

3.         One way to make it easier for people to interpret financial information could be to

a.       Give them more information.

b.      Give them less information.

c.       Only give it to financial experts.

d.      None of the above

 

4.         One issue of information overload is

a.       People cannot find what they need.

b.      The mass of information people must navigate to find what they need is overwhelming.

c.       Both of the above

d.      None of the above