Business model reporting
Kay Kayachith discusses the importance of business model reporting and how companies can use it to differentiate themselves.
More than just an infographic, the business model should explain what the company does, how it creates value and how it has a competitive advantage.
Business model reporting: simplify, explain, connect
Ever since it became mandatory for UK quoted companies to include business models in their financial reports, businesses have struggled to do what the legislation set out to achieve. Understanding what a company does and how it creates value is critical for investors in making investment decisions, but few companies seem to be able to do this concisely and clearly through their business model.
More than just an infographic, the business model should explain what the company does, how it creates value and how it has a competitive advantage. It should also explain how the company’s purpose underpins the business and drives positive outcomes.
A good business model will explain how the company generates value for shareholders beyond the financials. A great business model will focus on value creation for multiple stakeholders – such as employees, customers and society – as well as for shareholders.
Many business models do neither.
In fact, according to a recent PwC report, less than a third of FTSE 350 companies used their business model to show how the outputs of their business go beyond financial profits and the impact that their business model has on wider stakeholders.
So how can companies better report on what they do, how they do it and what they do better than others?
Let’s talk about SEC
First things first. The business model needs to be kept clear and simple. It should be in plain-speak, devoid of business jargon and exclude generic phrases such as ‘we aim to generate shareholder value’. If you can’t talk about what you do in a way that makes sense to a 10-year old, then you don’t know what you do, and you don’t have a business model.
Infographics should complement and enhance the narrative and not detract from it. Nor should they repeat what has already been written – or worse, just fill up space!
Be clear about what the company does, how it makes its money, how it reinvests it and the role stakeholders play in the business. Include points on and what makes the company unique. What are the company’s key tangible and intangible assets? And more so now than ever, explain which aspects of the company’s culture are critical to the business model.
The business model should focus on the company’s inputs and outcomes and should link to other sections of the report such as strategy, governance and risk management. This ensures consistent messaging and emphasises the relationships between the business model and the company’s strategic framework. Demonstrate how the business model helps to deliver strategy. Highlight how the board, by embedding the right culture, delivers positive outcomes that contribute to the company’s competitive advantage. There’s a lot to cover in the annual report, so simplifying and connecting the different elements will help tell a more cohesive story.
A simple and clear business model
As complex documents, annual reports ask a lot of their audiences, no matter how effective the design and how compelling the story. Within that complexity readers seek and deserve a simple and clear business model to put everything else into context.
According to a recent Financial Reporting Lab report, investors are unanimous that business model information is fundamental to their analysis. Companies have a great opportunity with their business model to differentiate themselves, what they do better than their peers and how they generate value for their key stakeholders – all critical components for anyone making an investment decision.
For more information, please contact Kay Kayachith, Investor Communications Adviser, MerchantCantos.