The first part of this was a question I saw in a local forum put by a business management accountant. It occurred to me that as professional business consultants, which internally in his company he is too, we answer this question frequently when designing reporting systems for our CFO and CEO clients.
It may sound ambiguous but I believe to find the answer we need both top down and bottom up perspectives. Modern reporting trend of corporate high flyers to motivate performance, and people like software vendors may make this sound hackneyed, but I say the profit and loss and the balance sheet reports (PBSL) critical They are are the most important reports you they ever need in a business.
Having said that, here is my thoughts on what else is important and why. I will also go further to say monthly is now too slow with many companies demanding weekly or even daily reports to be able to respond to more rapid market cycles that changes are much faster.
We all know the most important reports are the ones the CEO and the executive team use to drive the business and manage the investment risks. Typically, in the equation Victory = Velocity, + “Variability, + Visibility are all the watch words a CEO needs. Reports therefore, must give the business the power to manage these elements well.
In other words business momentum, market dynamics and management transparency are the common ingredients we all need to be able manage well. And to do that and keep the rhythm going we need good information routinely delivered in each business process. More importantly we need to be able have get the answers to the questions we ask that the information brings up with an easy ability to do deeper analysis without setting up a task force commission.
As to content and who reports what, to track what’s gone on and manage what’s being planned the performance management and planning and reporting process that the CFO team provides is vital. It is a must as well that it be timely, consistent and very reliable with well integrated and easy to understand reports that everyone involved can access and see.
Taking a high level view on that content can be good. This may typically be a ratio summary or dashboard with key performance measurement (KPI) of activity critical to success. Once that is well established the collaborative of use KPI reporting is very effective. But it can take some time to mature as the behavior we see in the detail is not always intuitive at first in KPI summary. For example in one businesses a late delivery signal on a KPI may indicate serious issues that have immediate loss of business consequences with sales retention and profit then at serious risk. Where-as in other businesses while it may still be important it is less of a risk and can be managed. This may even differ from product to product in the same business the underlying issues and impact to be addressed must understood well before a KPI view is set up.
To get that right if you are in CFO team and preparing reports you should go ask the CEO first what he or she needs and then ask the executive team and so on down to see if they are aligned on the key numbers and how they weight-out. They all will quickly tell you what is important. And when you related that to the PLBS at their level you will be able to see where it all fits. If you are the CEO and your team have KPIs that align with yours, that in turn can be their score card, If not you will have issues. To help on that the CFO team, using the PLBS as the base can tailor reports that everyone needs to show delivery performance and stay aligned with the business goals.
In the end all reports must be designed such that everyone who is involved in the business can see their part and see their current position compared to the plan and their contribution expected. And when it falls short it must show have options to make reforecast projections on recovery action.
For KPI or dashboard reports to be accepted they must also always be supported by more detail to dig down more and when things are not right and preferably down to the transaction level an updated on a real time basis in line with management responsiveness cycle at each level . For example if revenue is volatile due to market competitiveness each day, then there is no point reporting monthly as action taken on that is far too late to stop business erosion. And if you find pipeline stacking shows sales spikes at the end of the month if you change you reporting to be weekly it will flatten out and can increase the momentum.
And whether it is sales and product profitability by customer or delivery activity for supply or just compliance, the center piece for all this again is always the profit and loss statement and the balance sheet to build the performance focus around.
To understand this more the profit and loss statement has embedded in it all the trading activity that occurs.The balance sheet in turn shows the position and health of the business for all then financial resources invested, including such things as available cash and working capital and working assets and so on. The link of the trading activity to increasing net assets and in turn the shareholder value focuses attention on the investment growth and risk management and to maximizing the rate of return And just like the profit and loss, a must-have is the forecast update to show projections to correct erosion issues.
Finance people know traditional financials with just numbers are not enough with the performance ratios and variance reporting implicit on each. For example comparative performance to plan and last period are very key measures as is gross profit and return on investment. At the operational level, equally important are such things as the performance of accounts receivable which best measured in days overdue and inventory measured in the relative number sales days stock held.
These reports can all take differing forms and there are so many ways to visualize the key elements . They may also be called by different names and even split into parts to add more activity detail. But in the end they are fundamental. They have to disclose all revenue income and all business activity costs and relevant rations in controllable chunks to show the net trading result The venture investment in turn, as deployed must be disclosed and grouped by risk within each class or asset at current conservative carrying values and liability at all up and even potential exposure. In corporations for example that often span multiple geographies or regions and cover varied activities the consolidations, they must also cater for often complex various ownership interests, currency perspectives group eliminations and group level fair value provisioning and must handled very efficiently.within the reporting environment.
In addition International Financial Reporting Standards, (IFRS) now being more widely adopted across the globe and by regulators, is seeing additional disclosure. For some especially in Asia where it now coming into force, the a take up effort is quite significant as changes are being made. But the flipside is the opportunity this presents to many, who the need to refocus to upgrade their reporting, to use this as the catalyst to reduce their reporting cycles times by improving processes and systems. Better reporting aside, the cost to benefit of the improved production for a more efficient system quickly becomes very clear.
Hence these two reports which include KPI’s are the most vital as the center piece of all business management. They are not only vital for collaborative transparency of all accountable management to see where they fit but also to let them be seen to be doing their part. All other reports are then be built around these including cash flow reporting.
The technology we have now sees, typically web based drill down and analytics with security to filter accountable reporting at all levels. So even if it all sound so complex all this is now very possible to do from this single report base taking data from multiple transaction sources and system.
So once the KPI and key financials are fully set up the next question may be, what do the operational managers want? My answer is to find out what drives the activity and how the outcome measured impacts the financials KPIs the CEO sees. Then report as a sub-set and you cannot go wrong. For example, if you are in production, the key drivers are sales orders and inventory levels to tie them into in the financials. Likewise if sales are your aims, then sales lead conversions may be your critical drivers; as do overdue accounts that tie to the working capital as debtors show at risk conversion to cash.
Hence, when all that is in the reporting model, means at any level and any perspective performance tracking against plan and ongoing projections is now very simple. And be-it Operations, Sales or back-office or the CEO the CFO and even Corporate HQ they will know their value and can collaborate well to fix any roadblocks and marshal resources as needed in context of the overall picture. No less they can all see and discuss what is happening in the business with much more comfort in the answers they give and get to have control and more time to concentrate to grow the business.