CFO Services: Management Reporting & KPIs

Standard financial reporting packages include balance sheet, income statement and statement of cashflows, which are all geared to external users of a company’s financial data (investors, creditors, regulators) and management often uses these reports in the financial management of their company.  These reports certainly have an important role in evaluating the company at an enterprise level, but they don’t provide insight into the financial working of the company.  More meaningful reporting comes in the form of Management Reporting, which takes an internal view of the company and its operations. 

Management Reporting:  Management Reporting should include the most important financial factors to a business such as profitability analysis by customer/product/division/department, resource utilization by headcount/square footage/billable hours, and any of these analyses benchmarked to competitors.  Management Reporting can also be isolated to specific initiatives such as a recent advertising campaign or a joint venture.  It’s important to limit the number of management reports to those which can by used in the decision-making process.

• Make a critical assessment of what drives the revenue of the business; long-term contracts, repeat business, or specialty sales. This may create the need for sales reporting by distribution channel and forward-looking pipeline reporting. 
• Identify external threats to the business; competitors or availability of skilled workforce. This may create the need for competitor benchmarking and market share reporting and marketplace salary survey data.
• Focus on significant variable and fixed cost items. Measure variable costs in relation to the cost driver such as average salary per employee or cost of generating sales per number of sales orders.  Measure fixed costs over time and in relation to sales volume to track the level of scale that should be occurring.

Key Performance Indicators: KPIs are data points that indicate whether an organization is on track to meet its financial goals.  For a KPI to be effective it should be specifically relevant to the organization’s business and should be objective with no built-in bias.  It also has to be a significant enough measurement that management would feel compelled to take action if the KPI showed an unfavorable trend.

An excessive number of KPIs to be evaluated by management can dilute to benefit of these measurements.  Providing management with numerous performance measurements without differentiation as to which are key to managing the business does not provide clarity to their analysis. The determination as to which measures are key is unique to each company and a function of its business objectives and should be reserved for those that are directly linked to the achievement of specific business objectives.