Reporting: A Catalyst for Improvement
Overview
Business owners today are stretched for time, and so are all the members of their team. The pace of business can seem unrelenting, and in that environment abstract goals can seem frivolous. The ever-present temptation, given this state of affairs, is to regard the past as a curiosity, and a topic as banal as reporting to be a matter of creating something that is good enough, in order to move on to the next thing. This view is almost invariably wrong and has often proven to be a fatal mistake for companies large and small. Rather, an investment in robust reporting should be considered a necessary step for every company seeking to utilize its own data to maximize value.
Reporting, whether on financial, operational, or business intelligence data, presents every company with an opportunity to develop insight into its own business as well as its broader market. Too often that opportunity is not seized. Opportunities to begin building an insight advantage are deferred, and eventually lost. Reporting that presents sufficient data to answer the question of what happened must be considered to be merely the starting point and must be enhanced first with comparative information and qualitative context in order to transmute the simple reporting of data into the creation of insight.
Successful companies understand that data-driven insights are the one universal value creation opportunity. Every company sits on immense data about both itself and its market, but few make use of that data in a thoughtful way. By investing constantly in data reporting and analysis, high-performing companies develop crucial insight into themselves and their markets and then seek to constantly push out the frontier of that insight. These companies are invested in knowing not only the “what” but the “why” behind it.
Giving Context to “What”
For entrepreneurs and business owners who do not possess an analytical background, many reports can seem daunting at first glance. The data is evident, but it often takes additional time and thought to see all that is missing. Consider a simple quarterly income statement (see Exhibit A):
Exhibit A: Quarterly Income Statement
The above income statement provides sufficient data to answer the question of what financial performance was for the first quarter and takes the next step by providing useful profitability measures. But how should this performance be assessed? Absolute measures of performance at most companies are meaningless. Context is necessary to better understand whether performance was superior to, in line with, or below expectations.
Consider the same income statement, with added context (see Exhibit B):
Exhibit B: Quarterly Income Statement (with context)
Amounts in ($000s)
The additional data included above (the Q1 budget) was limited, and likely already known to whoever would be viewing this report, but the value of the report has been substantially enhanced. With the benefit of additional data, a deeper understanding of performance is now possible.
It is now clear that the company under-performed on revenue expectations but outperformed on profitability (in both nominal and percentage terms).
The Power of “Why”
The strength of comparative analysis is that it provides useful insight for report audiences. But comparative analysis alone is not sufficient. High performing companies look to provide additional context that will further aide in understanding the drivers of performance.
Consider the additional utility of a further revision to the quarterly income statement (see Exhibit C):
Exhibit C: Quarterly Income Statement (with additional context)
Amounts in ($000s)
The above format now provides a level of context that allows for the development of a few key insights:
- Revenue. Adjusted for timing, revenue seems to be tracking to budget.
- Gross Margin. Improvement due to better pricing with a new supplier is higher than forecast. Why was this opportunity missed or under-represented in the budget? Has the market changed?
- Operating Expenses. Out-performance was temporary and directly tied to the delayed customer order.
The more robust report format has yielded superior insight of both the company’s own performance as well as offering tantalizing hints about the broader market. Additional follow-up in these areas would likely yield further insight.
Conclusion
In an era of rapid innovation, industry shaking disruption, and voracious competition, no company can afford to disregard opportunities to create and enhance competitive advantage. Unfortunately, mastery of data, through robust and thoughtful report design, is too often considered to be merely a use of time, rather than an investment in developing superior insight. Those companies that invest in the necessary mindset shift and seek to understand the “why” behind every key “what” are on the path to becoming the industry leaders of tomorrow.
About the Author
David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition. Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies. David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation. He can be contacted at: david@abraxasgp.com.
