Efficient reporting systems

The availability of concise, correct and information-rich financial data is the backbone for high-quality decision-making and successful strategy implementation. One of the core instruments to communicate this data is a reporting system that satisfies the information requirements of the management, communicates important messages, and brings transparency to critical deviations. However, what we find in many companies is an overabundance of data that managers can hardly absorb, multiple reports that contradict each other and discussions that primarily focus on which data is correct rather than what messages the data communicates. In this article, we want to provide a short instruction on how to create an aligned and efficient reporting system.

An overabundance of reports leads to worse informed decision-makers

Gaps in financial reporting are bad, for obvious reasons. However, having too many reports and too much data at hand can be even worse. This is due to a couple of reasons.

First, having too much information in financial reports makes it hard for managers to digest all the provided information. Especially if they are on a tight schedule, a large number of different values can be overwhelming. The result – and the honest reality we observe way too often – is that many reports end up in some folder without ever receiving a second glance.

Second, with an increasing amount of content, the relevant information gets lost in the sheer amount of data. Report creators are focused on closing every potential gap in the data. In contrast, decision-makers usually want to see the few substantial deviations to which they must react.

Third, when reports come from many different creators or departments, we observe that these reports are oftentimes not harmonized. This can either lead to problems when trying to translate between the different reports or go as far as the reports actively contradict each other. The root causes of this problem oftentimes are different IT-systems or different databases the data is drawn from and that there is no common data-lake that acts as a single source of truth.

Finally, this leads to one of the most time-wasting activities between decision-makers: discussing which numbers are correct instead of discussing what the numbers imply for the business and which actions need to be taken. Besides wasting time, this can ultimately lead to either poor decision-making or an entire lack of decision-making – with the threat of significant danger for the business.

All of these problems were visible at one of our clients, which is a medium-sized company in the financial services industry and part of a larger corporation. When we conducted our analysis, we identified eight different reports that dealt with the company’s financial performance every month. They included a company-wide report with several KPIs, a Balanced-Scorecard-reporting, a report focused on contribution margins, a separate report sent to the holding company and several reports created by the business unit controllers. Corporate controlling and business unit controlling used three different IT-systems to extract the data. Report creation took place in Excel as well as a separate reporting-tool that had a direct interface only to one of the three core systems.

Further analysis revealed that of the numbers and KPIs provided, approximately 85% were not looked at all. Of this 85%, about one-third of the KPIs was not dealt with because the numbers always were within the predefined range of plausible deviation, meaning they had no managerial decision-making implications. The other two-thirds were not looked at because management did not view these numbers as relevant at all – they were only included because of historical reasons and nobody ever dared to “throw them out”.

Thus, our client’s management was not comfortable making decisions based on this provided information. They mainly had two concerns: First, to reduce the amount of data and make sure that relevant deviations are visible. Second, make sure that all reports can be matched with every other report, or in other words: create one “single source of truth”.

 

Dare to throw out unnecessary information

Distributing the right financial information to the right people at the right time is one of finance’s most essential functions. To transition from an ineffective reporting system to clear and concise information, we lay out a seven-step approach.

1. Report identification

First, you need to identify all financial reports that are created within the organization. This includes reports from corporate controlling, accounting, business unit controlling or any other department and function that deals with financial data. Often, there are reports unknown by central functions or corporate controlling. So, take enough time for this first step and talk to everyone who decides based on financial data.

2. Report analysis

Second, understand which information each identified report contains, who creates it, which data gets used to create it and who the receivers of the report are. This overview creates the transparency necessary to build an integrated reporting-system that has the ability to replace all current reports later on – even though it requires you to structure all of the collected information diligently.

3. Information requirements

Third, gain an understanding of the information needs of every report recipient by talking to them. Together, you can evaluate which information in the current reports gets used, which information does not get used and what the missing pieces are. If the existing reports seem to be too far from ideal, however, it might be more appropriate to start with a blank sheet of paper and jointly develop a draft of what the report could and should look like.

4. Hub-and-spoke information overview

Fourth, consolidate all information requirements collected in step three. The aim is to create an overview of the actual financial information needs across the entire company. Ideally, this should look like a “hub-and-spoke” system: The hub is a shared set of financial information (differenced across organizational levels, e.g. company-wide, for each business unit, …) and it should be aligned with the financial side of the strategy as well as the financial steering logic of the company. The spokes, on the other hand, are specific additional needs that a manager has for their area of responsibility and can differ greatly.

5. Definition of data basis

Fifth, based on this information set comes the most challenging task: define – for each piece of information (e.g. a KPI or a number) where the origin of this information should be (i.e. which system or database) and make sure that all the used data is congruent to each other. From our experience, this is usually the most challenging and lengthy step, as many companies do not have a central data lake from which they can draw all relevant information. Hence, this step usually requires the most effort to get right and needs strong support and IT commitment

6. The “tool question”

Sixth, only now ask the “tool question”: How should the data be prepared and distributed? Some guiding questions can be whether the data should be “pushed” to the recipient or “pulled” based on the individual needs, whether self-service reporting is relevant, whether management prefers a readily prepared and commented report or the plain data and how many different people and locations need access to the data. Based on the answer to these questions (and many more), the proper tool to prepare and communicate the data can be chosen – we will discuss the advantages and disadvantages of different reporting-tools in another post.

7. Report creation

Finally comes one of the most important steps: Visually prepare the reports so that all information can be portrayed as clearly and concisely as possible. Data needs to be communicated efficiently to extract all relevant messages from it. Therefore, these messages must be as visible as possible, i.e. it should be as simple for the receivers to spot deviations, anomalies and issues that need a response or decision. Our recommendation for this step is to work as iteratively as possible. Creating a report-layout that works for every recipient can be a lengthy task and whether something works or not can usually only be tested in the real world. Therefore, lots of different versions are required until all stakeholders are satisfied.

By following this rough outline of our approach should enable your company to create a more straightforward reporting system that increases satisfaction amongst management. However, it needs dedication and the courage to get rid of historical artefacts.

 

Create better reports for better decision-making

The distribution of clear, concise, and expressive data is one of the most important tasks of each finance department. It can also be a crucial lever to fulfil the finance’s corporate management function or – if not done correctly – lead to information-gaps and poor decisions. Therefore, finance should critically review their reporting stack regularly and create a habit of adapting it to the evolving environment.

 

If you want to get more information on how to optimize your reporting system, feel free to contact Fabian Winckler (fabian.winckler@www.draxingerlentz.de).