Management Reporting - From the top down

Could accountants become obsolete? Unfortunately, yes. Finance professionals need to keep at the forefront of management accounting and information systems development if they are to remain valued members of the management team. What should departments be doing to keep at the forefront of business life?

A KPMG report, ‘Finance of the Future’, warns that the traditional accountant’s role is being revolutionised by IT.

It stresses that organisations want their finance staff to act as allies in delivering value to shareholders, challenging business managers to generate value, and managing financial risks while maintaining financial control. According to a KPMG finance function benchmarking study, however, only 10% of finance effort is spent on decision support and analysis. In future, this will certainly not be enough.

Emphasis on value is one of the key issues in current management accounting – identifying it, measuring it, communicating it, and trying to encourage more value creation in future. ‘Organisations are struggling with how they take value further down the organisation, out of the executive forum and into the management information forum,’ says Jane Bardell, executive consultant at KPMG.

How do you create the links between different levels of management reporting? ‘There are different information requirements in an organisation, for example, between the chief executive level and the manager level,’ she explains.

Take shareholder value, which will be a measure of key importance at the highest levels of the business, but which may not appear to relate back to operational managers. The organisation needs to find a way to link the two, finding operational measures which do bear some relation to ultimate shareholder value – units pulled off a production line in a certain period, for example. ‘You need to be exploring how these links should be maintained through the organisation,’ says Bardell.

Tools for measuring organisational performance keep evolving. A pioneering front-runner, Activity-Based Costing, remains a useful tool for assessing cost drivers in a business, but it only tells part of the story. ‘It doesn’t take into account how revenues are focused and where they are generated,’ says Bardell.

‘It doesn’t give the whole picture. Activity-Based Management, the second-generation ABC, can do that more effectively. ABM focuses an organisation on managing a business through key measures.’ Similarly, the balanced scorecard approach, once hailed as the breakthrough method of assessing all aspects of corporate performance, has its shortcomings. ‘The Balanced Scorecard is a very valid management tool, but historically it’s not been used particularly well by executives,’ says Bardell, who believes inadequate understanding of the measures within the scorecard has caused confusion over its relative importance.

‘If people use it as it was intended, then they can get benefit from it. The balanced scorecard was developed over time to put a focus on shareholder value and it’s important that focus remains.’

Nick Lawrie, international marketing manager at software supplier JBA, believes there are two key aspects involved in making financial reporting relevant to a business. The first is philosophical, the second technological.

‘You have to move away from quantity and think of quality,’ he says.

‘Move away from the “data-dump” approach. Ask the receiver of the information – the user – what he or she needs. That is something any finance department can start to make progress on, regardless of the systems they use.

‘It’s about coming out of the back room and meeting with business managers, adopting a customer-oriented approach, asking them what information could help them make decisions.’ On the technical front, the finance team then needs to be able to produce that information. ‘That is often a stumbling block,’ says Lawrie.

A former finance director, Lawrie has experienced at first hand the cost of inefficient systems. ‘We used to spend 8% to 10% of our time on re-keying activities, taking information from the main systems and re-keying them into a spreadsheet,’ he says.

The good news is new tools can make it possible to transfer data directly from main systems, such as the general ledger, to the spreadsheets that finance teams like to use for their analysis. ‘Existing legacy systems can be enhanced to create better access to information,’ says Lawrie.

‘This shouldn’t represent a major investment.’

Forward-thinking finance departments are putting more effort into providing information in a form that makes sense to other business departments.

Andrew Waters, worldwide head of finance at SmithKline Beecham Consumer Healthcare R&D, is involved in just such a project tailored to meet the needs of a business heavily dependent on research and development. SB Consumer Healthcare produces a wide range of products, from toothbrushes to smoking cessation aids, to drinks such as Ribena. Its sales growth is substantially driven by R&D, with the rest due to intrinsic growth, marketing and brand maintenance.

A few years ago, the company conducted a management exercise that established two keys to success: faster product development; and better prioritisation procedures to ensure the company backed winning products. The financial and management reporting systems, however, were not sufficiently developed to support the new management objectives, but continued reporting in a traditional accounting manner, for example, looking at budgeted and actual travel costs or laboratory costs.

Relevant information needed

The problem with the traditional financial reporting approach was that the information produced was of limited relevance to project managers.

It didn’t tell them much about actual projects. ‘Now we are implementing project-based reporting,’ says Waters. ‘All the financial accounting is project-based. We are trying to report a total project statement on one sheet of paper.’

This statement, which has 16 columns and 23 rows, is called project Dashboard. ‘It shows every type of spend you can think of, but in understandable terms,’ says Waters. For example, it talks of ‘discovery-scientist days and external costs’ and ‘development-scientist days and external costs’ and ‘clinical-trial costs’, all elements that make sense to a project manager.

Telling a manager he has #2.8m available for a project is not particularly helpful, Waters explains. ‘If you tell him you have 300 person days to get a formulation developed, and then tell the marketing department it has an external advertising spend of #3m over a three-month period, you are telling them something that makes sense. On paper, it gives a financial and resourcing picture of what the objectives are.’ The report has two dimensions – time and resources. ‘It shows what’s happened from the past to the future, and it shows all the different costs and revenues expressed in terms of resource,’ explains Waters.

Peripheral benefits

The Dashboard not only improves the relevance of the information supplied, it also helps with product prioritisation. The underlying spreadsheet includes a calculation for Net Present Value and Return on Capital Employed which appears in the Dashboard’s bottom right-hand corner. ‘The schedule is updated monthly and automatically recalculates those figures,’ says Waters.

‘If we get told by the manufacturing scale-up department that it will take six months to do the scale-up for a product, not four, the spreadsheet recalculates the “bangs for bucks”. It could mean the project will be cancelled because another now delivers better value. So the Dashboard is a real-time prioritisation tool.’

Another key aim of the approach is to show the forecasts and plans of all the other operating units, including how they impact on each project.

This can improve communication between departments.

For example, marketing will always know what projects are underway that will need a share of the marketing spend. Similarly, project managers gain reassurance that marketing funds will be available. If a share of the marketing budget is shown on project Dashboard, then the production manager knows the funds are there. ‘This is about providing information to management that they didn’t know they needed,’ says Waters. ‘The left arm of a company may not realise it doesn’t understand what the right arm is doing.’

The final challenge is to enable access to this data from around the organisation.

‘We are looking at shared servers and intranets,’ says Waters. He foresees that, in perhaps two to three years, the contents of the Dashboard could be shown on a PC screen which all areas of the business can access. By clicking on a given entry, the user can be taken down an information level to see more detail.

The approach that SmithKline Beecham is taking – developing its reporting systems to support decision taking and project development – offers an example to businesses of all types. It is only by turning financial data into a readily understandable, relevant and succinct form that financial experts will keep at the leading edge of business life.

EVOLUTION OF THE FINANCE FUNCTION

IT is the engine driving the finance function’s evolution into a business partner, providing relevant information that supports business decisions.

‘ERP (Enterprise Resource Planning) systems are becoming more sophisticated,’ says KPMG consultant John Fanning.

There has been a proliferation of software suppliers offering accounting and budgeting packages that can pull in data from across the organisation. KPMG encourages clients to use such packages rather than develop their own spreadsheets which are prone to error. ‘In addition, some tasks that are difficult to perform on a spreadsheet are simple to do on these packages, such as the phasing in of income over time,’ says Fanning.

There are also advances being made with online analytical programming, a tool to facilitate what Fanning calls ‘the cutting and dicing of information’.

OLAP sits on top of an existing database and pulls out material according to set criteria, for example, retrieving data relating to an operating unit out of the mass of information relating to a consolidated company.

Access to such data from around the organisation can be facilitated by the use of intranets.

Even more of the traditional financial processing work will be unnecessary in future. As Fanning says: ‘A lot of the number-crunching stuff will go out the window.’

BEST PRACTICE

John Fanning, Jane Bardell and Andrew Waters are speakers at Softworld’s Best Practice Management Reporting conference on 1-2 December which is sponsored by Accountancy Age. To register, call 0181 541 5040.