5 questions about management reporting and why every business needs it
Question 1: Who cares? Can't you just trust your gut instinct?
In one of the great Dilbert cartoons, a director is questioning a report which he's just received. "According to your absurdly complicated financial model, we can double revenue by increasing absenteeism". The problem, it seems, may be an error in the spreadsheet.....but the director still wants to poison the employees, just to make sure.
Ridiculous though it seems, the cartoon highlights a common problem. How do we know the information we're getting is helping us to make the right business decisions? Step back a little, and you ask yourself, "what information is going to help me to make the right business decisions?" The answer, for around 45% of people running businesses, is to trust your gut instinct. The stories are certainly seductive. Fred Smith has an insight into the transport business and, despite widespread skepticism, goes on to create Federal Express. Michael Eisner hears a pitch for an offbeat game show and, knowing in his heart it’s going to be a blockbuster, immediately commits millions to developing Who Wants to Be a Millionaire? George Soros senses in his bones a big shift in currency markets and, acting on that hunch, makes a billion-dollar killing.
But gut instinct has several flaws, as one Harvard article reveals. The need to see and recognise patterns - even when they may not exist; me-too thinking which tends to dominate, so we're unconsciously doing what we see others doing. Just "going for it" can often lead to losing everything.
So what's the alternative? Informed decision making backed with appropriate insights into how the business is operating and might operate in the future. In other words, backed by management reporting.
Question 2: What's the difference between management reporting and financial reporting?
Although the purpose of both financial and management reports is to produce numbers alongside relevant commentary, the type of content included and the processes involved is drastically different. Financial reporting requires a structured approach, fixed by the requirements of Financial Reporting Standards, HMRC and Companies House. These standards specify the type of information to be included in the financial statements as well as how they should be measured and presented.
Management reporting aims to answer the question of what operational factors are driving the business’s performance. Unlike financial reporting, there are no prescribed rules and methods when it comes to management reporting. The goal is to identify useful measures, or key performance indicators, that will give management an accurate picture of how the business is doing. The measures that are appropriate will vary depending on the type of organisation and industry but they should help to explain the company’s financial performance.
Question 3: What tools work for management reporting?
We use bookkeeping and accounting packages such as Quickbooks Online, Xero and Sage to manage and maintain financial accounts. Each comes with a wide range of financial reports which are important in understanding who owes the business money, how the profits are moving over time, what the business is worth, and more.
But for management reports we need a more flexible, creative approach. And that means Microsoft Excel. With online links directly to Quickbooks Online, Sage or Xero, we can bring financial information into Excel directly and without laborious typing. Using macros and built-in Excel functions, we can manipulate financial data, combine it with non-financial key performance indicators, and present the whole in an easy-to-understand report which is tailored to the needs of each business. Each month we update and present tailored management reports to our clients, with meetings to discuss the implications if needed. And if something changes, or we want to introduce new data, we can combine this quickly and easily using Excel.
Question 4: How do I decide whether I need management reports?
Here's 5 questions you might want to consider. Answer "yes" to any one, and you need to improve your management reports.
- Do we have the right information at the right time to run the business?
- Is too much time spent producing the numbers rather than gaining real insight?
- Are we clear on how we measure performance? And who's responsible for delivering it?
- Have we aligned recruitment and pay with performance to drive the right actions?
- Do we have a "performance language" which everyone understands in the business?