What are the potential sources of error that exist in reporting and how can management accounting sort these out effectively? This three-part article series about the 10 biggest mistakes in reporting as well as possible solution strategies closes with the following part.
Read Part 1 first:
How to Avoid the 10 Biggest Mistakes in Reporting (Part 1)
- Mistake #1: Reporting does not focus on a target group
- Mistake #2: Report layout: Variety instead of standardization
- Mistake #3: Bloated reporting structures
Read Part 2 first:
How to Avoid the 10 Biggest Mistakes in Reporting (Part 2)
- Mistake #4: Excess of gobbledygook or technical jargon
- Mistake #5: Missing the courage to change, and a lack of flexibility
- Mistake #6: Self-reporting: Everyone does his own thing
Mistake #7: Not commenting on operating figures
(Nearly) no report goes without operating figures. In most cases, those are the central elements within a report, framed by running text and graphical illustrations. Especially since those business ratios draw so much attention, it is important to enlighten the report recipients about the ratios’ details.
The person who has perhaps “invented” that figure or at least calculates it regularly—very often the management accountant—obviously knows best about its informative value and meaning. Nevertheless, report readers who come into contact with the figures (possibly for the first time) often won’t share that state of knowledge and understanding. A variance in a ratio of, say, 10% might have very dramatic consequences for the department or even the entire organization. However, seen in a particular context, it might also be absolutely harmless.
To simplify both reading and understanding of the report for its recipients, an explanation of the figures, as well as the correlations and dependencies, carries great weight. Report creators only succeed if the report’s data and statements are understood and correctly classified by every reader, and further conclusions are drawn based on this.
By commenting on central business ratios and by putting those down in relation to appropriate benchmarks while generating the reports, you can actively influence subsequent decisions. That’s because those clearly stick out; for example, what are the immediate needs for action? Which steps of the presented developments or changes have already been anticipated, and thus, do not require further counteractive measures in the short run?
Mistake #8: Much does not always help much: Information overload
The more the information transmitted via reports the better? No, less is more! As already described in “Mistake #1” (“Reporting does not focus on a target group”) and “Mistake #3” (“Bloated reporting structures”), the focus of reporting should be on concentration, weighting as well as individuality. The data relevant for the company in a particular stage (period of growth, crisis situation, etc.) has to be reported to suit the recipient and also be limited to what is most essential.
“Do not overstrain a report’s readers with an excess of information (information overload) and put their receptiveness to an acid test”—this rule does not solely refer to the page numbers of the report. All too often, diverse report items like single tables are completely crowded out by detail, displaying an excessive multiplicity of rows and columns.
By “overloading” reports, you can reflect data and information in a very substantial and detailed pattern. But who among the recipients can really benefit from such a data cemetery? As a rule, overloaded tables, graphical charts, diagrams or rather reports, in general, will only achieve quite the opposite of what’s intended (providing beneficial information to one among many). Because of a confusing wealth of detail, the report recipient will quickly resign and turn away from the report’s contents.
Instead of using tables or embedding figures into running text, presenting the gist via clearly structured and condensed graphical charts and diagrams assigned with an appropriate measuring scale is often the more convenient way. Besides, you should not underestimate the signaling effect of colors. Applying a uniform color scheme to all reports to illustrate, for instance, variances or other information supports a recognition value.
In the end, such streamlining and highlighting measures help readers to capture core contexts, proportions, temporal developments and trends much faster—quite without facing an information overload.
Mistake #9: Reporting is only looking into the past
Generally in management accounting, processes of planning and forecasting play a decisive role. The company’s budget planning, usually done at the end of a year, will be revised via several forecasts during the following year. Medium-term planning—paying strategic attention to planning periods of three to five years or even longer—has a big impact as well.
“Can we achieve our planned performance and goals in the short to medium term? How is the organization prepared for the (near) future? What has to be done differently, or rather better, in the future?” Such questions should also be reflected in corporate reporting.
However, the majority of reports are still quite restricted to a numerical look into the past—for instance, by presenting detailed analyses of the differences between the planned and actual figures (budget/actual variance). Not to be misunderstood, you should not question “looking back” to draw your conclusions, especially because historical data can often be measured relatively simply and is substantiated as well. Nevertheless, weal and woe of any organization lie in the future. Important decisions cannot be made solely based on historical and actual indicators—a somehow outdated basis for valuation.
Therefore, relevant control information looking more closely into the future needs adequate scope within the generated reports. So, based on the available historical data, you should also create corresponding forecasts and make assumptions about the future right there.
Mistake #10: Reporting is not making recommendations for action
Management accountants increasingly interpret their role in the company as “business partners” for the management, which means they have a consultative status as well as a duty to offer proactive internal service to both the executive staff and the operating departments.
While strategy-making leadership remains solely the management’s responsibility, management accountants do act as a kind of critical counterpart to them by providing them with advice on economic matters, and giving them direct optimizing impetus as well as proposals on how to set the strategy course. This helps in avoiding a one-dimensional point of view of decision-makers and in offsetting their potential lack of economic knowledge.
Such an approach of “business partnering” needs to be reflected in the reporting system as well. Therefore, reports must not be limited to a pure description of the things that are happening or end right after the variances have been reported. Much more crucial are questions with the “why?”—about the essential variant results as well as the measures that should be adopted to correct negative developments and prospects. The reporting contributes centrally by communicating practical, convincing recommendations for action, and thereby leads the decision-makers to initiate prospective steps.
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Must-read blog posts about management accounting and financial control—classical topics, as well as modern subjects, latest trends, and current challenges in the management accounting discipline. Aimed to inform, inspire, and entertain management accountants and anyone with a deeper interest in management accounting.