Overview of Management Reporting Systems
As the phrase suggests, management reporting systems capture the sorts of data needed by a company's managers to run the business. The sorts of financial data that are presented in annual reports typically are at their core. However, robust management reporting systems will house data at much more detailed levels than is presented to the investing public. For example, a financial services firm’s overall financial results might be recast into profit and loss statements arrayed by:
- Organization (such as division, business unit or department)
- Geographic region
- Client segment
- Specific clients (both retail and institutional)
- Financial advisor
Meanwhile, financial metrics, such as revenues, expenses, and profits, are hardly the sole concern of management reporting systems. In the best-run companies, they also are used to track a variety of nonfinancial variables that are of concern to management, such as:
- Employee headcount
- Clients, households, and/or accounts
- Client assets in custody
- Net new money deposited or withdrawn by clients
- Investment performance of client assets under management
Designers and Users of These Systems
Controllers and chief financial officers (CFOs) tend to dedicate a significant amount of their time to designing, implementing, maintaining and adjusting management reporting systems, as well as to monitoring and analyzing their output, and recommending courses of action to management based on such analysis.
Desktop Versus Mainframe
In many cases, however, management reporting systems are constructed and maintained strictly using desktop computing, built in Excel spreadsheets and running on personal computers, rather than programmed in mainframe environments.
In large and small companies alike, the reasons for utilizing desktop computing (often requiring ample amounts of manual data input) generally are twofold.
First, the costs of development and maintenance tend to be much lower than with mainframe applications.
Second, a desktop computing environment allows for much greater flexibility in changing computational algorithms and reporting formats than does a typical mainframe-based application. This is a vital consideration in dynamic business environments where corporate structure, product offerings, business processes, analytical methods and/or reporting requirements are in constant flux, or where management is prone to ask frequent non-standard or customized questions of its financial analysts.
Automation Versus Manual Processes
What are called management reporting systems are, in many firms, often heavily dependent on manual processes, and far from being fully (or even primarily) automated? For example, many of the reports that wind up on executives' desks actually may be spreadsheets manually populated with data and formatted by staff. In this sense, management reporting systems often are, in a stricter sense, processes more than information systems as that phrase is generally understood.
Applications of Management Reporting
Management reporting systems frequently are critical tools for evaluating the performance of organizations and managers, and sometimes that of lower level employees as well. The results can be key determinants of compensation, such as the setting of bonus pools. For example, the head and staff of a business unit might have their bonuses driven off the profit that a management reporting system ascribes to that unit. Likewise for a product manager, if the firm has a well-developed product profitability measurement system. Also for a marketing manager for the development and profitability of a given client segment, if the performance of that segment is measured.
Obstacles to Developing Management Reporting Systems
A common problem with developing management reporting schemes is that the data necessary to complete the firm’s annual report, Form 10-K, Form 10-Q, corporate tax returns and reports to regulatory agencies (among other outside constituencies), may not be detailed enough or in a proper format to conduct the sorts of analyses (some of them mentioned above) that management may need to evaluate the firm and its constituent lines of business, and to adjust its strategic direction.
Management reporting is a blanket term for these sorts of analyses that are used internally by management, rather than reported to outside entities (such as the investing public, the tax authorities, and regulatory bodies).
Key Analytical Issues
The development of management reporting systems often faces hurdles related to key analytical issues, such as:
- Internal transfer pricing methodologies
- The attribution of corporate overheads to individual products or clients
- Disaggregating changes in client assets into the separate impacts of changes in market prices (i.e., investment performance) and of net deposits and withdrawals
In most cases, these analytical challenges are amenable to multiple methods, each of which has drawbacks of its own, and is not demonstrably superior in all situations.