Modern Management Reporting – “Manual to Automation” Demystifying the Buzzword REPORTING?
Let us start with defining the term “REPORTING”. Reporting is the Formal communication by narrating facts and specific information in standardized forms for a particular purpose at regular intervals to the management.
From the various compliances a company needs to fulfill, preparation of Financial Statement as per the Companies Act is probably the most intensive exercise the finance team has to accomplish.
When we look at the statute in detail, Section 129 of Companies Act 2013, provides for preparation of financial statements in compliance with the accounting standard and as per format provided in Schedule III of the Act. Further, under Section 2 clause 40 of the Companies Act 2013, Financial Statements should include balance sheet, profit and loss account, cash flow statement, statement of changes in equity and any explanatory note annexed to the above. Additional disclosures, which provide the right context to the financial statements, shall be made in the notes to accounts unless required to be disclosed on the face of the Financial Statements. Similarly, all other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to the requirements set out in Schedule III.
Read more on Financial Statement as per Schedule 3 in the Ministry of Corporate Affairs website: http://www.mca.gov.in/SearchableActs/Schedule3.htm
WHY MANAGEMENT REPORTING?
Companies need to look beyond financial statements made specifically to report results to the external stakeholders to improve their strategic and operational goals. This is mainly driven by the following reasons:
a. The intention of financial reporting was to provide information to the external stakeholders and not for internal decision making.
b. Financial statements are not providing sufficient and relevant information on the face of such reports.
c. These reports do not help the management in taking quick decisions as most of the details are scattered around notes to accounts which explain the factual nature of the transaction and not provide insight into the actual scenario.
d. Key Performance Indicators like working Capital requirement, customer performance, customer-channel performance, margin analysis, etc. are missing in the financial statements which are very relevant for decision making by Management.
e. Financial statements usually provide data for the current year and theprevious year only. For management to monitor and control costs, yearly data may be too broad to analyze. They require month on month movement of costs, maybe even day-wise costs to take effectivecontrol measures. They may even look at cost as a percentage of production or sales to understand cost drivers much better.
f. Financial reporting is perceiving only from the company’s point of view and not from the industry or from the external measures.
With the growth of competition in business environment and with change in trends, organizations need to improve their day-to-day decision-making in real time.
So, Management reporting is required for decision making. WHERE IS THE DATA?
Financial statements are a summary of daily transactions. By co-relating this data (i.e. used for financial reporting) and various other operational data, the company has a large potential to unravel its internal mysteries.
Some of the key Mysteries which the company can focus on include: How does my customer affiliation affect my working capital?
- How profitable are my products/ services across sales channels
- Which client proposition yields the largest margins?
- Which Inventory element is most un-favorable to the company?
- What are my cost-drivers?
- How are my actuals performing vis-à-vis the annual budgets?
- And many more.
So, relevant data exists internally to take better decisions. But, Why haven’t this data been used in Management Reporting Structure?
Medium companies focus on growth and compliance. There are no standards in reporting, only basic details are reported as there is lack of time and resources for reporting. Unlike large companies who have a lot of complex data, in medium size companies, there are a lot of different teams reporting, thus creating different versions of truth due to lack of coordination in their reporting aspects. Management reporting here helps save a lot of cost and time in forming a data driven decision. Often, businesses attempt to develop management reporting processes, but miss the mark in achieving desired results. Hence, Management Reporting is an ever-evolving story.
Latest trend is to look at predictive analytics – Over the years trades have realized the importance of predictive insights on finance to shape their business strategy rather than simply relying on the standard sets of reports and financial statements year in and year out. Now, more and more Decisionmakers are looking for partnership to embrace the decision-making opportunities. With increase in demand and instances to implement data analytics there also are big challenges.
For large companies, please refer to our next edition of Management reporting for large companies.
Few of the standard types of Management Reports that a medium sized enterprise could leverage in decision making are:
Sales reports can coach the company to get over any hurdles by identifying where they stand and what are the goals. It focuses on the structural areas by the organization based on the budgeted and actual sales figures. It briefs on the sales variance with reasons as to difference between budgeted and actual sales figures. This report clarifies which opportunities could be pulled forward and closed earlier.
Budgeted and actual profit report:
This report is prepared in accounts department and points out clearly the figures of budgeted and actual profit of the concern during a specified period. It also states the reasons which have accounted for any decrease or increase in the actual profit figure.
Analysis of Profit and Loss Statement
Income statement and balance sheet give financial information not only to shareholders but also to the government and other concerned parties. P&L reports tell about sources of sales and the components of cost of goods sold and expense factors such as salaries and wages, commissions paid, rent, depreciation, insurance, rates and taxes, advertising and office expenses can be looked into at a explicit level. You can Compare your current P&L statement with past statements, P&L statements can be monitored every month or quarter wise also.
Cash flow statement Analysis:
Cash flow gives figures of cash inflows and cash outflows during the period of operations. It also indicates the sources of funds utilized in case cash outflows are more than cash inflows. For example, cash flow can identify if a company is funding losses from operations or financing investments by raising money (debt or equity). Investors also get a clear picture on the overall performance of the company.
MIS can use many other reports and statements like inventory, production report, etc.
We can turn scarps of data into nuggets of insight –
Management Reporting Analytics
Data can be of any volume and expanses. It can easily be filtered and analyzed by combining internal and external data, which is a drawback in current reporting systems. Visually presenting data and results are easier torecognize and have more effect. As for Analytics, it doesn’t require an army of people as it is designed to be accurate with data and metrics to support core business strategies and initiatives. With the help of technology and custom made processes delivering analytics is quicker and effective as it can support both the long- and short-term vision of a medium company as the data is prioritized to your information and further encourages quick decision-making abilities.
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