Image by Flickr.com, courtesy of Steve Jurvetson
Management reporting has evolved along with technology. What traditionally occurred as verbal reports to leadership within companies has grown into ever-more sophisticated analysis and statistical work product prepared to dig deeper into business operations. Typically, Excel and PowerPoint are the primary tools used to provide management reporting to a company’s leadership.
Good management reporting provides key leaders with information that often goes beyond accounting financial statements. It can outline detailed cost and margin information, productivity statistics, variances from budgets to actual performance, and returns on investment.
Management reporting serves the function of highlighting company performance against the goals and objectives that have been set for it. For example, cost-cutting objectives can be examined. Targets for growth, earnings or cash-flow that are set at the beginning of the year can be tracked as the year unfolds to determine how business units and divisions are performing. Sales objectives might be tracked this way as well.
The types and formats of management reporting are potentially unlimited, however, they can be broken out into three broad categories. The first and most common is variance analysis, in which detailed sales, pricing, volume, costs and margin data is compared to budget and forecast spreadsheets. Generally companies have a budget for a given year, and sometimes a forecast that can be adjusted as the year progresses. Actual results loaded into spreadsheets as they become available during the year are then used to determine variances that are favorable and unfavorable. Another type of management reporting involves competitor analysis, in which a company’s results are compared with key competitors. Metrics often include sales, gross margin, return on investment, return on capital employed and capitalization. A third primary category involves operational statistics. Formal financial statements as published in Securities and Exchange Commission 10-Q forms and annual reports often do not probe into details around production numbers, health and safety data, productivity by product line and margin analysis.
The most important considerations in management reporting are bias and relevance. Bias refers to a tendency of leadership to look only at data that impact its compensation, rather than data that speaks to the wellness of the whole enterprise. For example, if an executive’s bonus is based on hitting Earnings Before Interest and Tax (EBIT) targets, then he might ask only the finance team for reporting around EBIT targets and actual EBIT results. However, this might miss other key elements such as Returns on Capital Employed (ROCE) or cash flow. Relevance is another key consideration, as it can be tempting to get buried in numbers and data while losing sight of the information that is most important to assessing the performance of the organization.
Good management reporting has the benefit of allowing corporate leadership to speak clearly about how a business is performing in language that employees and investors can appreciate. It assists in providing the transparency that public scrutiny often demands.
- Best Practices in Planning and Management Reporting, From Data to Decisions, David A. J. Axson, 2007.
Tom McNulty is a consultant and a freelance writer based in Houston, Texas. He holds degrees from Yale and Northwestern, and has worked in banking, government, and in the energy industry. McNulty has published several articles for eHow on a variety of finance, accounting, and general business issues.