Management Reports are portfolio records that allude towards the progressive measurement of the operating activities of a respective company. A guide to Enterprise Reporting by Gregory Hill defines management report as “Enterprise reporting (or management reporting) highlight the regular provision of information to decision-makers within an organization to support them in their work. These reports can take the form of graphs, text and tables and, typically, are disseminated through an intranet as a set of regularly updated web pages.”
Management reports take aid of two types of tools that can be categorized as financial and nonfinancial tools. The process of making management reports, keeping in view the framework of day to day transactions allows executives detailed insights of accounting and statistical information. Non-financial tools overcome complicated arenas of financial tools by presenting the evaluation process with a facile approach.
Let’s discuss the implications of both these propitious tools in professional settings.
Part of Management Reports
Main part of management reports are Financial and non-Financial (also called Business) Reports. Main Financial Reports are structured and presented in Financial Statements and Financial Ratios. Business Reports - Performance reports without financial counterparts are presented with Key Performance Indicators and applied business value methods. Each sub report in main Management report needs to present historical figures (actuals) and projections (budget, mid term plan, forecast), and comparison between them. Actuals, projections and mutual comparisons provide very effective way of tracking company business performance.
A. FINANCIAL STATEMENTS
Financial statements are written records of business finances they give an insight on the business’s performance during the last period which is usually the last year. They stand as one of the most essential components of business information, and as the principal method of communicating financial information about an entity to outside parties. Their importance cannot be underestimated and thus it can be easily said that for a company to exist the formation of financial statements is highly imperative. Financial statements are in fact a summation of the financial position of an entity at a given point in time. General purpose financial statements are designed to meet the needs of many diverse users, particularly present and potential owners and creditors. Financial statements result from simplifying, condensing, and aggregating masses of data obtained primarily from a company’s or an individual’s accounts. The three most basic and important financial statements are as follows:
1. Income statement
The Income Statement which is also known as the Profit and Loss Statement answers a very essential question when evaluating a business’ performance – does the business make any profit? The income statement states all the sales made and the costs incurred in making these sales. In addition to this the income statement also sums up other expenses incurred in the running of the business and the amount of tax the company pays during a specific period of time. To sum it up an income statement covers five main areas: i) Sales ii) Cost of Goods Sold. iii) Gross Profit. iv) Operating expenses. v) Net Income (or loss)
2. Balance Sheet
A balance sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. It is also termed as a “snapshot” of the company’s financial position at a point. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet provides information that is useful when assessing the financial stability of a company.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders’ Equity
This implies that a company has to pay for all the things it has (assets) by either borrowing money from other sources (liabilities) or getting it from shareholders (shareholders’ equity).
3. Cash Flow Statement
The cash flow statement records the actual movements of cash which take place in an accounting period. This includes the cash received (inflows) and the cash spent (outflows) by the company. The Cash Flow Statement informs the investors how a company’s operations are running, also where its money is coming from and how it is spent. The cash flow statement lists down the cash entering into an organization through sales, income from investments and from the sale of assets. It also states the cash which goes out of the company when suppliers are paid, expenses are covered or an investment is made. It also includes the payments of returns of capital which comprise of interest and dividends. One final component of a Cash Flow Statement is the how a company raises its capital this is done by borrowing money or raising money through shareholders.
B. KEY PERFORMANCE INDICATORS
In the ferocious race of competing with rivals in business arena, top managers need abetting tools to sternly review their company’s annual performance. The preeminent aim of every organization is to accomplish its strategic goals in a smooth, timely fashion. Hindrances in the path of goal attainment are precarious matters and gravely impact the progress of a project. Financial tools are unable to bridge the gap in identification of deeper underlying root causes of situation. It is here that key performance indicator come into picture.
Let’s answer a cardinal query now. What is a key performance indicator (KPI)? These can be labelled as deft helping hands, assessing the success of an individual activity or a project as a whole. By highlighting the main KPI, the complex nature of organizational performance is presented in a mild, uncomplicated format. KPI are measureable in nature, aiding in comprehensive evaluation and analysis of a firm’s resourceful yield-generating spheres.
Why measure KPI?
KPI helps us in three elementary realms as illustrated in the figure:
- Learn and improve performance: KPIs helps in diagnosing the paramount factors that have a direct relationship with goal attainment. It carves a pathway that needs to be followed to achieve success. If a KPI fails to lives up to its promised expectation organization can learn from its mistake and refrain making it in eminent future.
- External reporting and compliance: By providing information for the purpose of outside circulation to shareholders and public, KPI offers these masses a compiled report inculcated with the art of measuring performance with meaningful insights. They become aware as to which areas are being neglected and which will win them more revenue.
- Control and Monitor people: The focus of KPI measurement is to eliminate discrepancies and improve conformity. By taking into view the example discussed earlier of customer satisfaction or less employee turn over as the vital performance impacting indicator lets discuss this point. Knowing that department of customer relationship is excelling with flying remarks top management needs to maintain this standard. Along with this it needs to locate which departments are performing poorly and have rooms left for improvements.
Perks offered by KPI
Only critical KPIs need to be addressed and organization should focus on limiting their numerical strength scanning out only the fundamental indicators. Having few but influential KPI helps to keep professional business players on the same page resulting in a lucid perspective characterized with goal-oriented approach.
KPI overcomes the glitches present in financial measurement tools. These performance indicators takes into consideration not only the facet factors but digs deep into underlying aspects that leave significant imprints on a corporation’s achievement cycle. For example by interpreting the financial statements at the end of the year an individual can conclude that a surplus of a specific amount has been generated. Can you judge the cause of this profit? Certainly not if evaluating performance in the sole reflection of a financial statement. However by identifying the KPI, an organization can highlight their strong points for example customer satisfaction or less employee turn over can be assigned as having a direct relation with increment in profit margin this year. KPI gives top managers acumen skills helping them focusing on relevant goals resulting in obstacles-surmounting performances.
Let’s go on to application of a common method for choosing KPI known as the Balance Scorecard.
B.2. BALANCE SCORECARD
Balance Scorecard (BSC) is a strategic performance management system that helps the top management to review the ongoing progress of various project-concerning activities and implementing control and leadership skills in relevant niches. Its main essence can described as measuring and managing the degree of strategic goal attainment. Its implications are seen governing diverse spectrum of fields stretching there way into business, government, industry and nonprofit organizations.
Kaplan and Norton describe the innovation of the balanced scorecard in the following words:
“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.” (Source http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx)
Two inquisitive minds, Robert Kaplan and David Norton laid the founding pillars of this ingenious study by publishing a Harvard Business Review Article in 1992 discussing at length the main concepts of this performance management framework. Kaplan and Norton pinpointed four main perspectives reflecting the importance of strategic planning. The key idea was to bloom objectives in the light of the four comprehensive pivotal perspectives and are listed as below:
1. Financial Perspective: This discusses the financial aspect of an organization by observing trends in financial objectives and shareholder’s equity.
2. Customer Perspective: Here customers are the prime focus and topics such as customer satisfaction, product attributes and customer relationship are conferred. The main question to be addressed is “what image to we give to our potential customers?”
3. Internal Process Perspective: This outlook considers the internal operational objectives and converging attention on principles that help to excel a firm in creating value for its valuable customers.
4. Learning and Growth Perspective: This addresses three aspects being human capital, information capital and organization capital. By combining three diverse intangible asset of an organization – humans, technology and organizational culture – these measures act as commanding indicators for developments in financial, customer and internal process perspectives. These headings can be further explained by dividing them into sub headings illustrated in the figure below:
C. BUDGETS AND PROJECTIONS
Financial projection refers to a company making an estimate of the future financial performance of a business. This includes the revenues and the expenses which a business might incur. A financial projection will take into consideration both internal information such as historical income and cost data. It will also consist of the external market factor such as the estimates of development, giving predicted figures in addition to projections of the general financial condition of the company in the future. To just another person these might appear as any useless exercise however it serves to be beneficial to the company in the following ways:
The financial plan a company makes translates the company’s goals into specific targets. Companies strive to commit themselves to the plan building it into reality and do their best to maintain it. This helps a company in maintaining it efficiency.
There is always a chance that things might not go just as planned such deviations can be caused by many reasons. However, a financial projection will give the company an idea how their variance from the plan might impact their financial status. This gives the company to perhaps try to counter the impending obscurities.
Financial projections are also important in analyzing the affect of one factor over the other. Thus if rapid growth results in a cash shortage due to heavy investments in inventory, this will be shown in the projections.
Companies thus set aside a budget; which is a list of planned expenses and revenues. The budget which you prepare helps you to follow the progress of your business by providing you with a clear image of how much you are spending in a certain department and whether that exceeds your planned spending. Budgets can be set aside for particular areas in a company such as promotion or on a special project. In order for the company to formulate a budget plan it’s important to accurately predict the level of sales of a company which is the main source of income, in addition to this the company should also add income obtained through other methods mainly including money obtained through the issuance of shares and other stocks. Once the company has a realistic figure of the amount of money which is available to it, it can then list down the areas which need spending and divide the money spent keeping in mind the priority of that department and also the proportion of the budget which should be spent on it.
Next a company has to through an analysis distribute the budget to every sector and also decide the maximum amount it will spend on it which cannot be exceeded. For instance when focusing on marketing and promotion a company much first device what kind of advertisements will benefit it and then figure out realistic costs which can both satisfy your needs and also respect your budget. This will vary from company to company a multi-national for instance will have to set aside a broader proportion of its budget on marketing to get the message across the globe, a small organization on the other head wouldn’t have to spend large amounts.
Its also highly essential to include all expenses mainly those relating to tax, rent and insurance, this will give you a better picture of how much exactly you have to spend, these expenses mainly that of rent is fixed and have to be paid no matter what the company thus needs to keep them in mind before making spending which are in excess of the money the company possesses.