Compliance or Management Reporting?

A struggle in many companies is the investment in resources to meet accounting compliance reporting requirements and the amount of resources left over to provide management with information to manage the company.  When companies are small it is difficult to afford staff and time to do both so you know which one – compliance – gets accomplished.

Consequently good information on how the company is performing is not effectively used to manage the business.  You would think that over time this would be corrected.  However, as the business grows resources to provide management reporting are often sacrificed in favor of more immediate needs – sales, engineering, capital equipment, facilities – to meet growth objectives.

Compliance Reporting comes from the basic accounting practices that record the core operations of the company which are then used to produce the monthly, quarterly, and annual reports along with tax reporting as well.  While useful to officially report the company’s top-level performance it does not provide owners and executives with sufficient detail with which to effectively manage the company. 

Management Reporting provides much more granularity and detail in accounting information that not only provides greater historical information but also forward-looking information on how the company would perform under different business scenarios.  This type of information is model based and supports better decision-making at many levels in the organization.

The data used in compliance reports is defined by general accounting standards whereas data used in management reporting is based upon the needs of the managers and is often collected and provided by a management information system.

Which one is better?
For businesses that operate in dynamic markets where price, product performance, and quality are competitive factors then you are going to want your business to be very proficient using management reporting.  You can argue that less dynamic businesses that have a captive position in the market are less dependant upon a sophisticated management information system and management reporting.  Therefore, they might get by with just compliance reporting, but that is arguable.

Strategy
In today’s market it would be well advised to have an effective management reporting system.  Things can change quickly and what was satisfactory yesterday may fail you tomorrow.  The challenge is having an organization that can identify what they need, successfully implement processes to collect the right information and then to institute it into the daily management process.

Many companies have some “management reporting” but it is often short of what their company really needs.  Why?

  • Not enough foresight by company leadership?
  • Lack of analytical ability on the part of the managers involved?
  • Traditional conflict between accounting and the rest of the departments?
  • Poor vision on how to collect and report necessary information within the budget constraints of the company?

One or all of these might be at work and the end result is that the company is at a disadvantage in a market where its competitors have mastered the effective implementation of management reporting.

What is an effective answer to this problem?
A smart business leader will engage outside consulting services with proven expertise in assisting companies in the transition to a management-reporting platform.  This does not necessarily mean the implementation of an expensive management information system when the current system may be adequate for initial management reporting requirements.

The first step toward management reporting can often be accomplished using the features of the existing accounting system.  This often requires a change in the accounting processes to organize data to meet management needs.  A full-featured accounting firm is useful in assisting the internal accounting organization in this transition and setting up a restructuring of their accounts and reporting systems to meet the new reporting requirements.

Example
A firm that I would recommend for this type of engagement is Contract Controllers in Renton, WA.  Contract Controllers is led by senior managers who have deep experience in not only core compliance accounting practices but also in tailoring accounting information for management decision-making.  Mike Hamblin, Contract Controllers’ President, describes an example of the limitations of compliance reporting over management reporting:

“Typically where a business system is set up for management reporting, compliance reporting is usually a mater of consolidating into a compliance reporting format.  

Whereas if the system is set up for compliance reporting then the management reporting is much more difficult and you have to recreate the information to allow you to focus on the management issues you are trying to address.

A simple example of this would be trying to determine a “landed cost” of inventory if your system did not provide for it and you only had one freight general ledger account.  As you can guess there are several steps to get to basic numbers with a compliance system before you can even start the analysis.”

This is just one example of identifying a business cost component, which can then be assigned to line management, tracked and monitored to improve cost performance.

A senior business consultant working with the management team can then guide them on how to apply the management reporting process to make better decisions.  As data is recognized as being useful the accuracy of the information improves. Data collection processes are tightened and decisions are made on a timelier basis.

The real benefit of this process is the delegation of data down to operating levels where they can see how what they do influences the financial performance of the company. Consequently accountability increases, better decisions and actions are made and the reports reflect improved performance.

Summary
There should not be a question now as whether you should have compliance or management reporting.  You need one for basic reporting and the other to be competitive in today’s challenging marketplace.

Yes, there are obstacles on the way to successfully implementing and adopting this important management process but the benefit is substantial and the payoff significant.

Comments

  1. William (Bill) Crawford says:

    I try to integrate compliance reporting into management reporting. I can’t count the number of times I’ve seen companies with multiple reports showing different figures for the same thing. My focus has been to reduce costs, redundancy and produce more accurate and useful management reporting by combining regulatory compliance with a Lean approach to improve the overall risk-profile while reducing overhead.

    I would enjoy discussing our respective concepts over a cup of coffee sometime.

  2. There is definitely a slippery slope if the management reporting is not designed to accurately collect and report data to the right groups without it appearing multiple times with no clear line of repsonibility. The old rule less is more” particulary in the begining until the organization and collection/reporting system matures.

  3. I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

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