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What companies get wrong about management reporting and analysis

May 13, 2019

Why is management reporting and analysis so deficient in many companies? Peter Gillespie explores why companies are getting this wrong and what they can do to correct it.

Companies rarely talk about how they produce their management reporting and analysis (MRA). Just as budgets, monthly accounts and trends in indicators are competitively sensitive and kept strictly confidential (and rightly so), details of how businesses produce the MRA are locked down, too – as if even describing the approach could give an advantage to others.

However, I contend that the reason for this silence is that many companies don’t have a structured approach to MRA. It would be embarrassing if outsiders were to find out that a company could not track those numbers reported in the annual accounts throughout the year, or that the information pool is not much deeper or richer than the so-called “minimum requirements” of external reporting; not to mention the real risk of mismanagement.

Why aren’t deficiencies in MRA addressed?

Boards and auditors often don’t spot deficiencies in MRA. Focusing instead on external reporting, they don’t sufficiently challenge finance on the methodology being used to produce MRA. Furthermore, boards often exhibit arrogance and complacency that they ‘know the business by heart’ and so, see no need in having any more detail or structure.

When boards and auditors consider internal controls, they evaluate the existing MRA rather than think about how it could and should change. They overlook the fact that integrating non-financial indicators into segmental reporting and variance analyses is vital to excellent MRA. They may assume that having disparate sales order processing, logistics and payroll systems is good enough. But these cannot of themselves produce the MRA.

There are other reasons for the problems with a company’s MRA:

  • accountancy qualifications and training in auditing firms may be weak in this area;
  • little regulatory guidance; or
  • finance departments might not be taking responsibility for cleaning and guaranteeing the quality of information (notably non-financial indicators) coming from other functions.

A structured approach to MRA

The structured approach to MRA should include:

  • a database approach to storing information once and once only;
  • strategies and procedures for:
    • controlling master data;
    • collecting financial and non-financial data at the same frequency and level of granularity (e.g. by cost centre or product family) across all versions (actuals, budget, plan, etc.); and
    • managing change – to integrate new subsidiaries, change products or services, etc., and to keep the MRA relevant over the long-term.
  • procedures for monthly accounts, budgets, forecasts, etc., synchronised to ensure consistency and relevance in variance analyses;
  • clear documentation of all definitions, processes and calculations of the MRA;
  • staff training; and
  • a project, sponsor, budget and some time for finance to make it happen.

The starting point will be the company’s own SWOT analysis. The MRA should reflect the issues underpinning these and comprise of a full set of accounts that is understood by non-accountants for each period, reconciled to statutory accounts where necessary, with variances and trends.

This would mean including an income statement with a ‘management’ breakdown of the elements, a balance sheet with friendly headings like ‘working capital’ and ‘net debt’, and a full cash flow statement explaining the change in cash and cash equivalents. It would also need breakdowns of performance by product, service, customer or project, and a detailed profit variance analysis against budget, forecast and prior year. These numbers should be supported by insightful commentaries and trends in key indicators over time.

The benefits of MRA

A structured MRA should produce a significant reduction in re-keying and reconciling data, increased accuracy and reliability and if the board can manage it, better decision making. If that’s not worth the effort for every organisation, I don’t know what is.

Peter Gillespie FCA is the Director of Meaningful Metrics.