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How can you communicate external factors' impact on your organization's financial performance?

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As a corporate accountant, you are responsible for preparing and presenting the financial statements of your organization to various stakeholders, such as investors, creditors, regulators, and the public. However, these statements do not always reflect the full picture of your organization's performance, as there may be external factors that affect your revenues, expenses, assets, liabilities, and equity. How can you communicate these factors effectively and transparently to your stakeholders, and why is it important to do so? In this article, we will discuss some tips and best practices for communicating external factors' impact on your organization's financial performance.

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Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Financial Reporting | Deloitte | Writer
Tayyab Saeed

Ex PwC | Retail | FMCG | FP&A | Business Partnering | Power BI | SAP | Oracle | Financial Reporting | IFRS |Corporate…

1 Identify the relevant external factors

Identifying the external factors that have a significant impact on an organization's financial performance is the first step. These factors can vary depending on the industry, market, location, and strategy, but may include economic conditions such as inflation and interest rates, political and legal factors such as tax policies, social and environmental factors such as demographic trends and consumer preferences, and technological factors such as innovation and cybersecurity. It's important to analyze how these factors affect an organization's revenues, expenses, assets, liabilities, and equity. For example, you can calculate how a shift in exchange rates affects foreign currency transactions and translations or how a change in consumer demand affects sales volume and price.

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Nauman ul Haq

Finance Director | Group Reporting and Financial Control | Digital Transformation | FCA, CFA
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Financial statements show what a company has done over the year and where it stands because of that. But there’s more to it than just numbers. When telling this story, whether in the Management Discussion and Analysis (MD&A) section or the notes to the financial statements, it’s important to include how outside events like changes in interest rates, wars, and big global happenings (like a pandemic) have affected the market and the company itself.

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Tayyab Saeed

Ex PwC | Retail | FMCG | FP&A | Business Partnering | Power BI | SAP | Oracle | Financial Reporting | IFRS |Corporate Finance | Business Strategy | Data Visualization | Financial Modelling
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Don't simply blame everything on "the market." Be specific about which external factors played a role and how they impacted your financials. This could include things like economic fluctuations, political changes, industry disruptions, supply chain issues, or natural disasters.

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2 Explain the impact in the notes and disclosures

Explaining the impact of external factors in the notes and disclosures that accompany financial statements is the second step. These notes and disclosures provide additional information and context to stakeholders, as well as the assumptions, methods, estimates, and judgments used to prepare the statements. To do this, you should describe the nature and sources of external factors that affect financial performance, explain how you accounted for them in your financial statements, and provide relevant financial data and calculations that show the impact of the external factors on performance. Additionally, any significant uncertainties, risks, or contingencies that arise from external factors should be disclosed and how you plan to manage them should be included. The notes and disclosures should be clear, concise, consistent, accurate, and follow the relevant reporting framework and guidelines.

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Tayyab Saeed

Ex PwC | Retail | FMCG | FP&A | Business Partnering | Power BI | SAP | Oracle | Financial Reporting | IFRS |Corporate Finance | Business Strategy | Data Visualization | Financial Modelling
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Combine quantitative and qualitative data to depict a clear and concise picture. Use financial metrics like revenue, profit, and expense changes to quantify the impact, but also provide context with narratives and examples that illustrate the specific ways external factors influenced these numbers.

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3 Highlight the impact in the management discussion and analysis

The third step is to highlight the impact of external factors in the management discussion and analysis (MD&A) that accompanies your financial statements. This narrative report should provide stakeholders with a deeper insight into your organization's performance, strategy, goals, opportunities, and challenges. The MD&A should summarize the main external factors that affect your financial performance, analyze trends and patterns that show the impact of these factors on your financial performance, evaluate strengths and weaknesses that result from the external factors, and communicate actions taken to address their impact. It should also be honest, balanced, forward-looking, and engaging in order to reflect your organization's unique story and voice.

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Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Financial Reporting | Deloitte | Writer
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Don't just analyze absolute numbers: Instead, calculate and compare profitability, liquidity, efficiency, and other relevant ratios over time and against industry benchmarks. This reveals trends and identifies areas for improvement.

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4 Use visual aids and storytelling techniques

The fourth step is to use visual aids and storytelling techniques to communicate the impact of the external factors on your organization's financial performance. Visual aids and storytelling can be effective tools to capture your stakeholders' attention, simplify complex information, and effectively convey your message. Illustrate the impact with charts, graphs, tables, diagrams, or infographics. Organize the impact with headings, subheadings, bullet points, or summaries. Emphasize the impact with colors, fonts, symbols, or highlights. Narrate the impact with stories, anecdotes, examples, or testimonials. When using visual aids and storytelling techniques, make sure they are relevant, accurate, consistent, and appealing; and that they support your main points and arguments.

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5 Tailor your communication to your audience

When tailoring your communication to your audience, it's important to consider their needs, expectations, and interests. Your audience may include different stakeholders, such as investors, creditors, regulators, and the public. You should adjust your communication to the appropriate level of detail, complexity, and technicality. Additionally, use language that is suitable for the audience and highlight the benefits of your communication. Furthermore, address any questions or concerns your audience may have. Doing so can help you build trust and credibility with stakeholders and improve your reputation.

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Tayyab Saeed

Ex PwC | Retail | FMCG | FP&A | Business Partnering | Power BI | SAP | Oracle | Financial Reporting | IFRS |Corporate Finance | Business Strategy | Data Visualization | Financial Modelling
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Consider who you're communicating with and adjust your messaging accordingly. Investors might require a more detailed financial analysis, while employees might benefit from a broader overview with a focus on how the organization is addressing the challenges.

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6 Review and revise your communication

The sixth and final step is to review and revise your communication, and ensure that it is accurate, complete, consistent, and clear. You should thoroughly check your facts, figures, and sources; verify your calculations, assumptions, and estimates; compare your communication with financial statements and other reports; proofread for grammar, spelling, and punctuation errors; and edit for clarity, coherence, and conciseness. This will help you avoid errors, misstatements, or misunderstandings while also improving the quality and reliability of your communication.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Corporate Accounting

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How can you communicate external factors' impact on your organization's financial performance?

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1 Identify the relevant external factors

2 Explain the impact in the notes and disclosures

3 Highlight the impact in the management discussion and analysis

4 Use visual aids and storytelling techniques

5 Tailor your communication to your audience

6 Review and revise your communication

7 Here’s what else to consider

Corporate Accounting

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