Management and Financial Reporting

• Management reporting involves collecting, analyzing, and presenting data to help managers make informed decisions.
• It is part of the management control system, providing business information to various management levels through reports and statements.
• According to Eric Kohler, management reporting is information organized for presentation or communication to others, including interpretations, recommendations, and supporting evidence.
• Management reports are not mandatory and are for internal use, focusing on business segments rather than overall evaluation.

Differences Between Management and Financial Reports

• Financial reports are external, mandatory, and look at the overall performance following GAAP standards with a focus on the past.
• Management reports are internal, optional, segmented, do not follow GAAP, and are future-oriented

Financial Reporting

• Financial reporting is compliance-oriented for external purposes and includes standard weekly, monthly, and quarterly reports.
• These reports include Profit and Loss Statements, Statements of Financial Position, and Statements of Cash Flows.
• Financial reports are mandatory for all businesses and reflect their financial standing at a specific time.

Essentials of a Good Reporting System

• Proper Form: A comprehensive form with a suggestive title.
• Contents should be simple, logically sequenced, and visually represented with charts and diagrams.
• Promptness: The system should ensure timely preparation and submission to facilitate quick decisions.
• Accuracy: Information should be accurate, with the person responsible taking care in preparation.
• Comparability: Reports should provide information for comparison, actual vs. budgeted performance.
• Consistency: Uniform accounting principles and procedures should be followed consistently.
• Relevance: The report should include relevant data and exclude irrelevant data to avoid faulty decisions.
• Simplicity: The report should be simple, avoiding technical jargon and duplication.
• Flexibility: The system should be adjustable to user requirements.

Benefits of Effective Management Reporting

• Improved decision-making & management effectiveness
• More efficient use of resources in the delivery of organization services
• Increased confidence in quality management decisions by agency and staff
• Improved responsiveness to issues as they arise

The Need for Both Financial and Management Reporting

• Missing monthly management reporting can lead to missed growth opportunities or costly programs with no ROI.
• Financial reporting is needed for compliance and to prevent cash flow problems.
• Management reporting is needed to make better business decisions with solid data.

Checking Financial Statement Accuracy

• Balance Sheet: Look for negative balances, misapplied payments, and rising debt-to-credit ratios.
• Income Statement: Look for big profit/small cash flow and decreasing non-operating income.
• Also consider if a business uses Cash Basis Accounting or Accrual Basis Accounting

Budgeting

• Budgeting: A realistic plan expressed in quantitative terms for a specific period.
• Budgeting Report: Shows the total expenses spent by the company in a particular period.

Budgeting and Forecasting

• Forecasting predicts the revenue a business will achieve.
• Budgeting involves planning how and where to allocate resources according to business goals.
• Budgets/plans are expressed in monetary terms

Budgetary Control

• Budgetary control compares the actual state of affairs with the budget for appropriate action regarding any deviations.

Steps of Budgetary Control

• Set financial objectives
• Develop a budget
• Implement the budget
• Track performance
• Compare actual results to budget
• Take corrective action

Budget Center

• Budget Center: The lowest level in an organization with detailed budgeted costs.
• Budget Committee: Composed of executives in charge of major business functions.
• Key management persons are responsible for overall policy and coordinating budget preparation.

Advantages of Budgeting

• It compels and motivates management to make an early and timely study of its problems.
• Provides a plan for intelligent resource use and waste prevention.
• Develops an attitude of cost-consciousness.

Limitations of Budgeting

• It is used with approximations and judgements.
• Budgeting takes time.
• Employees may not support a budget deemed unrealistic or unattainable.

Types of Budget and Other Budgeting Concepts

• The Master Budget represents interrelated budgets for all organizational activities during the budget period.
• It is the central financial planning document, including how a company will spend and what it expects to earn in a fiscal year.

Three main categories of the Master Budget

• Operating Budgets
• Capital Expenditures Budgets
• Financial Budgets

Continuous (Rolling) Budget

• It is revised regularly from a continuous basis
• A company's 2023 annual budget becomes a rolling budget if replaced with the February 2024 budget.

Fixed Budget

• Budget based on only one level of activity (sales or production volume).
• If a company pays a 5% sales commission and projects $1 million in sales, the sales commission budget is fixed at $50,000.

Flexible Budget

• A series of budgets prepared for many levels of activity (a set of alternative budgets at different expected activity levels).
• A business with recurring rent but fluctuating inventory costs uses one to plan finances.

Incremental Budgeting

• With incremental budgeting, the current period's budget is adjusted for planned changes.
• A department with a prior budget of $1,000,000 would have a new budget of $1,050,000 with a 5% inflation increase.

Zero-Based Budget

• Activities are prioritized by relevance to a goal without regard to past experiences or conditions.

Life Cycle Budget

• Costing is done over the entire life span of a product from conception to maturity.
• For example, purchasing machinery considers not only the initial price but also energy efficiency, parts/maintenance costs, lifespan, and disposal expenses.