Nonfinancial Vs. Financial Information

Running a business isn't just about the Benjamins. When you make plans or decisions for your company, you need financial information, but nonfinancial information is often important as well. Examples of nonfinancial information include your company's environmental impact, the effect on housing and roads and cases of discrimination or sexual harassment.

Potentially everything your business does has a financial impact. Lawyers' fees for fighting a sexual harassment lawsuit will affect your bottom line, for example. If you have to settle or pay damages, the effect will be greater.

Even so, looking at examples of financial data and nonfinancial data show that there's a difference. Financial data examples include advertising costs, sales revenue, employee compensation and the value of assets. Examples of nonfinancial information include environmental impact, your relationship with your vendors, diversity in the workplace and social responsibility. They may have financial impacts, but it's impossible to quantify them purely by assigning them a dollar figure.

The focus of any business decisions is usually profit and loss. How much will it cost us? What are the potential rewards? What's the risk of loss? However, there are also times when nonfinancial information is required for an investment decision.

• Does the company meet the requirements of current legislation on, say, handling harassment or workplace bullying? If new legislation is in the wings, will you still be in compliance?
  
  
• Does the company follow industry standards and best practices?
  
  
• Is staff morale high? Is the business one that can attract talented recruits?
  
  
• Does the local community see it as a friend or a despoiler?
  
  
• Are relationships with clients and suppliers good?

Nonfinancial data is also important for internal decision making. Cutting employee benefits and bonuses might improve your bottom line in the short term, but if it damages employee morale and loyalty, it'll hurt in the long run.

Measuring whether sales revenue rises or falls between this quarter and the last is simple. Measuring customer loyalty, employee commitment or environmental impact takes more work, but it offers rewards:

• Improved management decisions.
  
  
• Better stakeholder confidence.
  
  
• Increased credibility within the community.
  
  
• A lower risk of problems.
  
  
• Improved operations.
  
  
• Greater access to capital, as you're seen as a safe, reliable investment.
  

Nonfinancial reporting isn't new. Companies who have made it a priority have experienced examples of nonfinancial reporting roadblocks – obstacles for which you need to be ready:

• There is lack of a good baseline with which to compare your data.
  
  
• You don't have a good method for making nonfinancial estimates.
  
  
• Your reports underplay how much of the data is estimated and how big the margin of error might be.
  
  
• Your reports use too much jargon.
  
  
• Your processes and controls haven't been documented.
  
  
• You make commitments about your nonfinancial performance without defining the measurements or benchmarks.
  
  
• Nonfinancial reporting relies too much on one individual.
  

In the U.S., nonfinancial reporting is valuable, but it isn't required. If you do business in the European Union and you have more than 500 people on staff there, reporting nonfinancial information became mandatory in 2018.

All members of the EU have adopted the Non-Financial Reporting Directive, but they've adopted it to different degrees. Your responsibilities vary nation to nation. The directive requires reporting in several categories:

• The environment.
  
  
• Human rights issues.
  
  
• Anti-corruption and bribery.
  
  
• Diversity on your board of directors.
  
  
• Issues involving employees, such as pay and employee rights.

The specific requirements and the reporting details in each of these categories are shaped by individual national policies. France, for example, has adopted reporting requirements that are much tougher than the baseline directive.