Management reports aim to allow users to assess the company’s strategy, identify its strengths and concerns and empower management to make decisions. Management reports are not just about profit and loss. They provide details about the company’s operational information, keeping management, the CEO and the Board are kept informed of outcomes.
Key focuses of the strategic management report
The management report should focus on five key areas:
- Strategy: This is arguably the most important area, highlighting the company’s underlying goals and fundamental drivers to be presented to the management team. The strategy should drive all decision making in the business. The report needs to have updates and outcomes of any strategic projects that the business is undertaking.
- Financial: The financials demonstrate the results for the reporting period, including, comparison against budget, how much cash is in the bank, debtors, creditors and profitability.
- Employees: This should provide management with a sense of the pulse of the business. Generally, if employees are happy, the business is in a good position. The report needs to provide employee related data on attendance, resignations, accidents and utilisation of staff.
- Client/customer perspectives: This part of the report should focus on how the business is progressing with clients, as well as public perceptions of the business. Are existing customers satisfied? Is the company’s marketing department delivering results?
- Governance: This focuses on compliance and internal controls of the business and the directors’ obligations. It should include tax, superannuation, insurances and any specific regulations that the business needs to follow.
Each business has key drivers that should be reported on in the management reports. There are lead indicators (staff utilisation and productivity, website views and customer inquiries, pipeline volume indicating sales leads and target goals, machine downtime and training sessions attended) and lag indicators (annual sales, gross margin, sales revenue, machine output and number of accidents, to name a few).
Lead indicators might predict future success. It is important to note however that these are just predictive and do not guarantee success. The lag indicators on the other hand are a measure of past performance. They are an after-the-event measurement.
How is technology changing management reports?
Traditionally, the role of the finance team was to enter and verify data. Technology has changed this. Automation, AI and integration of systems through application programming interface (API’s) has changed the focus of the finance team from entry and verification of data to analysing data.
Technology is allowing critical information on lead indicators to be provided to management in real time through the use of dashboards. This is important because it gives management access to data prior to receiving month-end reports. The finance team can use software such as Power Bi and Tableau to pull information from multiple data points (i.e. the accounting ledger, point of sale (POS) system, manufacturing software).
Dashboards are a high-level reporting mechanism that display key performance indicators (KPIs) on a single page. They provide fast ‘big picture’ answers in real time to critical business questions. They assist decision-making by communicating how a business is performing according to defined targets and improve management’s informational awareness by organising operational data into a well-managed format. The dashboard is an effective way to demonstrate complex relationships in an easy-to-understand manner and in real time.
The dashboard makes management reporting a continuous task and is changing month-end reporting into a sense check of results using lag indicators
Common financial due diligence issues with management reports
As part of financial due diligence, management reports are reviewed and common issues are regularly found. Management reports are most effectively reviewed on a monthly basis and are analysed in order to:
- Gain an understanding of how the management accounts are prepared
- Review how accounting policies and procedures are being applied, and
- Determine the level of the quality of the information.
By analysing the management reports on a monthly basis, users can identify seasonality in the business, review the consistency or changes in margins and determine the working capital the business requires.
Some of the common issues identified in management reports include:
- Lack of consolidated reporting – By preparing management reports on a consolidated basis it is easier to gain an understanding of the business as a group. There can often be a mismatch between where the business thinks it stands and where the business actually stands once the consolidation is prepared.
- Inconsistent or inaccurate recognition of direct costs or operating expenses – Accurate reporting of direct costs or operating expenses makes it easier for the users of management reports to understand the gross profit margin and create comparable reports for benchmarking purposes.
- Month-end accruals – Month-end accruals is the most problematic issue with management reports which can lead to a misalignment in the profit and loss (i.e. the revenue shown is not related to the expenditure incurred and vice versa) as well as inaccurate fluctuations in margins.
What are the benefits of addressing these key issues for CFOs when reporting?
A disciplined approach to management reporting will benefit the business if and when shareholders prepare for an exit or are seeking to raise capital. As a CFO, accurate management reports will assist you with:
Understanding of cash flows, financing and bank reporting – Regular and accurate management reports prepared at month end allow businesses to understand their cash flow position with clarity. They also allow businesses to more effectively source debt funding and manage ongoing bank covenants, creating a better relationship with their banks and lenders.
Assists with budgeting and forecasts – Accurate management reports allow users to leverage historical information to assemble an accurate budget, which considers seasonality and margins throughout the course of the year. This assists businesses to better plan and execute their strategic plan. Management reports should also include a budget versus actual result, which provides businesses the ability to be ahead of any issues and understand if their plan or strategy is being executed correctly.
Understanding changes in margins and seasonality of the business – Accurate management reports allow the users to gain a true view of the cost of doing business and to quickly notice falling margins, a decline in sales or an increase in operating expenses. All of which could be symptomatic of seasonality or be an indicator of a larger structural issue.
Segmented business reporting – Segmented business reporting adds clarity to the management report and is essential if the business is operating in segments with different margins and costs. Segmented business reporting allows management to understand which area of the business is underperforming or growing, providing the information to direct investment or manage costs.
The importance of strategic management reporting
Strategic management reports provide a complete picture of a company’s strategy, its strengths, and major issues and can assist at critical times in a business’ lifecycle including an exit or capital raise. Strategic management reports should be about the entire business. The reports should incorporate lead indicators and provide the critical real time information with dashboard reports. Expenses should be recognised. There should be no surprises for management, which could occur should they rely on just an end-of-year report. It is important to keep adjustments up to date instead of simply relying on year-end figures which can have unexpected results. Without a monthly strategic report, there is a risk of leaving management with false insights into how the business is performing. Moreover, monthly reports enable business owners and CFOs to remain ahead of trends.
For more information on strategic management reports or assistance establishing your own business reporting, please contact your local William Buck adviser.