I’m not sure if this is typical for other consultants, but I spend a lot of time reading through corporate annual and quarterly reports (called 10K’s and 10Q’s, respectively, after the SEC form names). These reports give lots of information, including a description of the business (useful for technology and biotech/pharma companies which can be difficult for the layperson to understand), snapshot of performance for the period that is reported, the relevant historical comparisons for current performance (e.g. the year before, the same quarter from the year before, etc.), and a list of risk factors for the business.
These reports are produced by public companies (and by some private companies, no doubt) for the benefit of investors who no doubt want to know exactly what they are investing in. But, I do also believe that the very process of making these reports is good for management as it forces them to think very hard about their strategy, their competitive environment, and their ability to execute.
This is why, despite scoffing when I first heard about a consultant at my firm who compiles an annual report for himself (complete with a letter to the shareholder — himself), I have recently started compiling these reports. Yes, I know this is incredibly nerdy, but hear me out. Four reasons why everyone should think about making personal annual and quarterly financial reports:
- It forces you to track your finances regularly. The practice of having to make annual or quarterly or semiannual reports is impossible unless there is some effort made to regularly check your finances. This is good as it alerts you to irregularities (e.g. credit card fraud) and helps to make sure that you are sticking to your financial goals (e.g. save 10% of my income every month).
- It lets you quickly see mistakes in your judgement. Hindsight is 20/20, but only if you look. By thinking about your past year, or quarter, or whatever period you decide to make these reports on, you are forced to think about what you could have done better. Only by routinely thinking about and being honest with yourself can you make better decisions in the future.
- Have an idea of where your finances are going. This has been very helpful for me as I plan out big purchases (e.g. vacations, electronics, etc.) and think about how much of my savings to put into investments month-after-month.
- It helps you plan for the future. This, in my mind, is the best and most important reason to do these financial reports. I made one for the 6 months since I graduated from college, and by tallying up my purchases and my income and my investments, I found that I was better off than I had thought I was. As a result, I am planning to increase the amount of money I invest in equities for this coming year. I also looked at my purchases and realized that, by making a few changes in what I buy for lunch, I could easily cut down my expenses by several percentage points.
It’s not necessary to copy the form that corporate annual reports come in, and it’s not necessary to do monthly reports or to make them especially pretty. What is important is to pick a schedule which sounds reasonable (I suggest every 3 months as a good balance between having to do it too often, and having to do it not often enough) and to pick a form which is reasonably easy to do but still forces you to write down your past track record and future plans (could even be scribbles on a notepad if that works for you).
But that’s just for extra credit…