Do you ever have difficulty understanding how a company really makes its money? If so it’s worth noting that the Financial Reporting Council (FRC) have recently published a report on the work of their “Lab” into Business Model Reporting which may be of interest. ShareSoc participated in the work of this Lab where various stakeholders discussed what improvements were necessary.
To quote from the FRC’s press release, the Lab found:
- Business model information is fundamental to investors’ analysis and understanding of a company and a lack of good disclosure on business model raises concerns over the quality of management;
- As business model information provides context to the other information in the annual report most investors want it positioned towards the front of the Strategic Report;
- Where a company operates a number of business models, disclosures of each significant business model is desired;
- Investors are looking for better natural linkage of business model information to other sections of the Strategic Report, and consistency with disclosure in the annual report; and
- Investors are looking for more detail than is currently provided by most companies. In particular investors find disclosures are often lacking information that answers questions such as:
- What are the key revenue and profit drivers and how do profits convert to cash?
- Are there any key asset and liability items that support the business model?
- What is the company’s competitive advantage?
See https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2016/October/FRC-Lab-report-confirms-the-importance-of-business.aspx for the full press release.
In essence investors are looking for improved disclosure on business models so they can better understand a business and its strategy.