The Importance of Financial Communication in a Business

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You'll most often hear talk about financial communications in reference to Fortune 500 companies disclosing enough information about profit and cash flow so investors can make informed investing decisions. However, financial communications are important for small businesses as well. If your managers and employees understand your company's financial issues and opportunities, it will be easier to get them on board with changes and adjustments. They'll also feel more engaged because they'll have a better sense of the big picture.

TL;DR (Too Long; Didn't Read)

Financial communication is important to a business because it helps employees to understand company policies and make informed decisions.

Financial Communications and Open Books

Open-book management is the ultimate expression of financial communication in business. This approach to accounting emphasizes transparency, so employees have access to financial reports and documents that reflect the company's financial situation. This strategy also involves training employees to read and understand financial statements so they can make effective use of the information you share with them.

When your employees know how to read a profit and loss statement, they'll have a better understanding of why you have to cut costs in certain areas and why you may need to take your business in a different direction overall. Understanding a balance sheet can help with getting them on board with strategies that can improve cash flow, such as lean purchasing and lean inventory management.

Training your staff to read a budget will help them to see why you have more financial resources available for payroll and product development during some months as opposed to others.

Financial Communication and Employee Productivity

Any essay on productivity in the workplace will emphasize the importance of collecting and reviewing data about performance and efficiency. You can measure productivity using traditional measurements and metrics such as dividing output by input, or you can design your own ways to collect and assess information using data points specific to your organization and your industry. Whether your approach is standard or custom, you can help your staff understand the importance of employee efficiency by presenting the information you gather in ways that are transparent and meaningful.

You can communicate with employees about efficiency and productivity by using financial communication tools such as clear and accessible spreadsheets combined with training on how to read these documents.

It is also useful to provide follow-up support such as answering questions and encouraging conversations about what the numbers mean and how you can work together to improve performance. These discussions can help your employees to feel that they are making genuine contributions and have a real stake in ongoing learning and skill building.

External Financial Communication

In addition to communicating with your staff about your financial situation, your business will also be required to share this information with various outside institutions and agencies. Communicating honest and complete financial information to these outside entities isn't just good business practice. It is also your legal obligation as a business owner.

  • Tax reporting. Your tax forms are based on communicating financial information. Excise taxes are levied relative to your gross revenue, while income taxes are calculated relative to your net income after subtracting expenses from gross income.

  • Financing. When you approach a bank to lend your business money, you must present documents and figures that accurately communicate your company's financial situation. It is in the bank's interests to make sure you can meet your financial obligations before extending a loan, and it is in your best interests to not borrow more than you can repay.

  • Investors. Individuals and businesses exploring the possibility of investing in your company are entitled to see and review financial reports relevant to your overall financial situation as well as the details of specific projects that may particularly interest them. It also makes good business sense for you to bring in partners based on honest accounting rather than wishful thinking.

References

About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.

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