Management reporting: from monthly figures to decisions

Every month, the managing director of a coffee roaster receives a fourteen-page management report: revenue by customer, costs by ledger account, stock levels, staff hours. Everything is correct to the last euro. Yet after reading it he still does not know what to do. Revenue is below budget, but is that serious? Is it down to price, to fewer customers or to something else? And who is going to do something about it?

A good management report answers those three questions in two pages. It shows where the business stands, why, and what happens next. What sets it apart from a printout of the accounts are those last two steps.

What is management reporting?

A management report is a periodic overview, usually monthly, in which the board or management team compares results with the budget, with last year and with the current forecast. It is the Check step of the PDCA cycle and the heart of the planning and control cycle. Strategy&, PwC's strategy consulting arm, advises choosing five to eight strategic objectives with a handful of measures each, and giving senior management concise reports by week, month and quarter (source: PwC, 2017). Less is more: report everything and you drown in data.

What goes into a management report?

Combine lagging indicators, which show what has happened, with leading indicators, which show what is coming. McKinsey sees companies relying too often on lagging indicators alone. Revenue and profit tell you how last month went; quotes, the order book and utilisation tell you how next month will go. There is more on this under KPI dashboard.

Variance analysis: price, volume and mix

A difference between actual and budget almost always has more than one cause. Variance analysis, a staple of management accounting, breaks the difference down so you can see where to intervene.

On the cost side, compare against a flexible budget: the budget recalculated for the actual volume. If you sell more, material usage is allowed to be higher too. Set actual costs against a fixed budget and you will see an overrun that is not really an overrun.

Worked example: the coffee roaster

The roaster supplies the hospitality trade and supermarkets. The budget for the month was 12,000 kilos: 8,000 kilos for hospitality at €14 per kilo and 4,000 kilos for supermarkets at €22. That makes €200,000 in revenue, an average of €16.67 per kilo. In reality 12,200 kilos went out of the door: 9,200 kilos to hospitality at €13.50 and 3,000 kilos to supermarkets at €22.50. Revenue came to €191,700, so €8,300 below budget.

Fictitious Firmfocus example. Amounts rounded to the nearest hundred euros.

The director could have seen the total without any analysis. The breakdown tells a different story: more coffee was sold than planned, but sales shifted towards the cheaper hospitality channel, where discounts were given on top. So the problem is not sales volume but the price agreements with hospitality customers, and a supermarket chain that is buying less. The actions follow directly: the commercial director reviews the discounts for each hospitality customer, and the retail account manager finds out why the supermarket is ordering less.

The monthly meeting: from figures to decisions

The report is the means; the meeting is where things happen. McKinsey describes a good performance dialogue as one that looks for the causes of variances, shares good practice and ends with agreed, prioritised actions. Collect only the data that feeds such a conversation, and at the end sum up who has committed to what. Robert Kaplan and David Norton recommend keeping that operational meeting separate from the strategy discussion, because otherwise the month's firefighting crowds out the conversation about direction.

1. Last month's actions: done, and did they work?
2. Key figures and summary: what stands out?
3. The two or three largest variances: cause and remedy.
4. Forecast and cash: what is coming?
5. Decisions and new actions, with owner and date.

Agree a threshold for which variances you discuss, for example a combination of a percentage and an amount, so the meeting does not get bogged down in small differences. And stick to the rhythm: according to McKinsey, the best-performing companies keep the frequency of meetings and reviews constant, and underperformance there consistently leads to action.

A two-page format

A few times a year, also compare your margins and cost lines with those of your sector using the profit and cost benchmark. A cost line that stays neatly within budget can still be well above the sector average. And when a variance is hard to explain, the Firmfocus Advisor can help you think through causes and measures, using your plan and the figures for your sector.

Pitfalls

• Too late: a report that only arrives halfway through the next month corrects course a month late. Work on a fast month-end close.
• Too much: fourteen pages without a summary. Management reads the first page and the last.
• Only the total: a variance without an explanation leads to vague instructions such as "cut costs".
• No follow-up: actions that do not come back next month do not get done.
• Judging people on the forecast: anyone assessed on the forecast will make cautious forecasts from then on. See rolling forecast.

SMEs and large organisations