on his experience in preparing internal management reports over the last
20 years, Geoff is interested in discussing questions with other accountants
wishing to set up or improve internal management reporting services for
their clients or for their own firms. Examples follow.
Example Questions on Internal Management Reporting
information should be included in internal management reports?
believe the data to include varies with the organisation and situation.
Our approach is to consider the following:
1. 2. 3.
perceived needs of parties involved; and
of the organisation; and
conditions facing the organisation; and
costs of collection.
use spreadsheets, rather than a tested package, to develop reports?
to the following criticisms of spreadsheets are tabled:
1: "Spreadsheets may incur mechanical errors, particularly
in data entry, with severe consequential errors"; Countermeasures:
Data is routinely and automatically checked on entry, both as to
arithmetical accuracy and as to reasonableness in magnitude.
2: "Spreadsheets include logic errors due to inappropriate
algorithms being used"; Countermeasures: the spreadsheets used
follow a specific structure using standard formulae tested in previous
trials before release.
3: "Spreadsheets are subject to omission errors with some components
of a model omitted completely"; Countermeasures: the strong
internal control inherent in the structure of these spreadsheets
guards against omission of data.
4: "Spreadsheets often contain macros, requiring programmers
to interpret and amend them, and exposing the organisation to viruses";
Countermeasures: no macros are used in these spreadsheets, which
rely on a systematic structure and templates.
range of criticisms of packaged software could be levied: the packaged
software reports are often inadequate without specialised programming
support; they are often inflexible for the end-user to change to
allow for unique organisation features, or for changes in requirements
from one year to the next; the packaged reports are output from
a black box, with no means of checking the source of data included;
the packaged reports are subject to programming errors; the packaged
reports may omit some non-financial features of a model; etc. Who
wants to keep running back to a programmer every time a change in
reports is required? If packaged software was so good, spreadsheets
would not be so popular.
is the best response to executive(s) pressure for ambitious forecasts
in connection with a specific decision?
view is that the person providing management reports has a professional
responsibility to present a balanced view to organization executives,
and to present alternative scenarios on occasion.
An example is a manufacturing operation, where an executive asks for
approval to purchase new equipment that he believes will result in
greatly increased sales. The executive is very confident that use
of the new equipment will result in sales "really taking off".
He relies on his knowledge and experience of the customers and competitors,
and has no objective evidence. The executive believes that papers
to go to the Board of Directors, to support the decision to buy the
new equipment, should include forecasts based on purchase of the new
equipment, and a high growth rate in sales.
We believe that the Board needs to get a balanced view, and to have
alternatives, including a "do nothing" option. It is also
important that whatever forecasts are put to the Board have the key
assumptions clearly stated.
A preferable approach in this situation in our view is to provide
executives with a comparison of three scenarios, each of which is
possible, and clearly label the key assumptions for the forecasts
in each scenario:
1. 2. 3.
Steady State Scenario.
policy on ownership of data should be followed in routine internal
advice is that the person supplying internal management reports
has a professional responsibility to question the data in the reports,
and to be comfortable that the reports are realistic and complete
as far as can be reasonably assessed. This entails a need to ask
questions on the data supplied, to check the consistency of it with
other data available within and outside the organisation, and to
comment in writing to recipients on the sources of the data, on
significant assumptions, and on weaknesses in internal control.
The data in internal management reports cannot be guaranteed to
be accurate, but it can and should be questioned by the supplier
of the reports before that person(s) pass it on to executives who
will rely on it, and time needs to be allowed for this. As far as
forecasts to be included in routine management reports, it is important
that the supplier of the reports is comfortable that the forecasts
are realistic, understands how they are made if not prepared by
the supplier of the reports, and includes key assumptions of the
forecasts as a note on the reports.
do you appraise the accuracy of forecasting?
often used R-squared as a measure of goodness of fit. Geoff suggests
a measure called the Absolute Percentage Error (APE) be used,
defined as follows:
gives a result that is more meaningful than R-squared for the average
person in business. For example, most persons in business will readily
comprehend a statement that, on average for the year to 30 June 2002,
actual monthly profit was within 10% of monthly budgets. In this case
the denominator in the fraction above would be the sum of the absolute
values of monthly budget profits.
can the MAF approach improve forecasting accuracy?
important way that MAF may obtain improvement in accuracy in forecasting
will be from disaggregation of data. Spreadsheets are ideal in providing
the flexibility required for disaggregation.
An obvious example is forecasting cash at bank: forecasting accuracy
will usually be improved if separate trends in sales collections
and overhead expenses are analysed, and then forecast, rather than
trying to predict cash at bank direct from past cash at bank figures.
Another example is forecasting profit: forecasts based on both operational
and financial data are more accurate, rather than forecasting profit
as an extrapolation of past profit figures. Look at the numbers
of items sold, the numbers of people employed, and the year-end
financial journal entries in the closing and opening months of each
Another example is forecasting sales: forecasting accuracy may be
improved if the sales are related to general economic trends, company
pricing data, market growth data, and customer returns, rather than
trying to forecast sales as a simple regression on a single series.
accuracy in forecasting may be expected?
forecasting error as the absolute difference between the year-end
result and the forecast result, the following may be expected:
will vary with volatility of the series being studied. It is more
important to steadily reduce forecasting error, and to learn from
one's mistakes, than to judge forecasting success against arbitrary
annual results will hopefully converge to the final actual result,
as the year progresses. For example an 11% error in a forecast of
sales for the full year, made at the beginning of the year, reduced
to a 3% error when forecast half way through the year.
cannot expect to predict System Shocks, associated with unexpected
shake-ups to the economic or political system.
can best set up internal management reporting for an organization?
and Norton noted in their book "The Balanced Scorecard"
1996 on page 290, in discussing ownership of the strategic management
system: "Most organizations today have a leadership void for this
system. No executive in a traditional organization has the responsibility
or perspective to manage a strategic management process, and it is
unclear who should assume this responsibility."
Organizationally accountants are well placed, but will incur difficulties
in meeting the challenges of (i) strategic planning for the entire
organization; (ii) forecasting; (iii) finding the time, with increasing
the opportunity to obtain free advice. In return for completing
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free quotation may be obtained by completing the poll of 8 questions.
A summary of the basis of the internal management reports service
will be supplied to interested parties.
upon information supplied and a quotation, the report service may
be ordered. An initial term of 3 months (for monthly reports) may
be followed by agreement on a longer term if the client is satisfied
with the reports. Or a 12 months term can be agreed at the start.