Question

Financial Reporting vs Managerial Reporting.   

The text mentions the differences between financial reporting and managerial reporting. What specific uses for financial reports and managerial reports have you seen? Identify any company that you know of that would be a ultra-user of managerial reporting.

Answer 1

Financial reporting is compliance oriented and is used for external purposes. It encompasses the standard weekly, monthly and quarterly reports that companies receive each month which include:

•      Profit and Loss Statement
•      Balance Sheet
•      Accounts Payable
•      Accounts Receivable
•      Statement of Cash Flows

These reports are mandatory for all businesses. Banks, investors and regulators use these reports to approve loans, lines of credits and to make sure you are following GAAP (Generally Accepted Accounting Principles).

These reports reflect the financial standing of your business at a specific point in time. They show the overall picture of how your company is performing but don’t give you real insight into the specifics of your operations. They look backward and don’t really inform you on how the business might perform next month or next quarter.

You will be able to dive deeper into the financial standing of your company through management reports which consist of:

•      Profit and Loss by Class - Department, Team, Job
• Realization Rate   
•      Utilization Rate

Unlike financial reports, management accounting is not mandatory and is for internal use only. Your company doesn’t have to follow GAAP guidelines when producing the reports.

Instead of an overall evaluation of the company, management reporting is focused on segments of the business. By segmenting, you can get into the details and analyze the drivers of your business.

An example would be analyzing how the Marketing Department is performing for a certain time period, or how much profit one Sales Employee had a certain month.

Management reports are great for CEOs to gain insight on specific areas of their business. However, you want to make sure you are getting the right reports that your business needs to drive strategic decision making. You don’t want to put the work into pulling reports that aren’t being acted upon.

Obviously, managers use management accounting to make day-to-day and longer-term strategic decisions. The information provided in managerial accounting reports takes extra work and expense to compile and review, but they save considerable time by providing managers with information that can be difficult to gather empirically.

In a business that practices open-book management, employees also use managerial accounting. By giving staff training in understanding financial statements and access to relevant reports, a business can get workers engaged and interested at the front lines. Employees can track ongoing information about everything from regional sales to materials waste and can monitor changes and improvements in areas where they contribute.

Bankers and investors can also be users of managerial accounting, especially when these reports are provided as background information in a business plan or loan package. Standard financial reports such as income statements and balance sheets are required for most financing applications, and other reports such as store-by-store sales figures and cost-accounting figures can add context, showing where there is the most potential for growth and profitability.