Chapter 18
What do company managers look for?

Company managers see the financial statements monthly, and often are participants in profit-sharing or incentive plans. Their perspective is different from that of outside parties. The very layout and structure of internal monthly financial reports often are different from annual reports.

Internal reports are for management, and external reports are for people who tend to look at the company with a very top-down view. Managers tend to look at their own departments as the center of the universe. Internal and external users have different needs.

External annual reports, as we’ve seen in earlier chapters, are summaries designed to provide key information needed from a lending, investing or regulatory perspective. They are likely to be consolidated, or combined, presentations. All the various divisions or individual companies seem to disappear, and reports are presented as if one single company existed. There may be “segment reporting” provided to give a general idea of what divisions have what revenues and expenses, but this is presented somewhere in the supplementary information.

Internal monthly reports are designed to help management monitor operations and financial results against targets set at the start of the year. They are an integral part of the management control plan, so the level of detail is often much greater.

Internal monthly P&Ls may be structured along profit-center lines. These are segments — i.e., geographical locations or divisions that have slightly different service lines or customer groups — than other parts of the business. Segmented financial reports are intended to help the manager of a location or division review the units he controls.

Sometimes there may be several legally separate companies that have substantial common ownership and use the same accounting department and management systems. Internal reporting may display each company separately with a consolidated report on top.

Supplemental internal reporting systems are often tied to the internal monthly financial statements. It’s up to the imagination of the controller and company owners to decide how much detail the accounting system will report. You could, for example, report profit and loss by truck, by owner-operator, by traffic lanes or by customer or customer class.

Sometimes these reports are integrated or automatically produced by the accounting system. More often, the controller must consolidate information from several places into a spreadsheet to present the information he may want to review or to assemble reports requested by a particular manager.

This process is less complicated and less expensive than it sounds. Often, top management wants everything automated, but sometimes it’s easier just to build a spreadsheet than to get computer systems integrated and financial report-writers working properly.

Budgets and commentary are key management tools that rarely appear in annual reports. But it certainly makes sense that they appear in internal monthly reports. A good controller will prepare some written comments to accompany the reporting package, to help explain the numbers from a financial perspective.

It also helps to explain non-financial measurements and correlate them to the financial results. For example, total mileage driven, total tons transported, percentages of deadhead miles and other non-financial reporting helps everyone understand the monthly results better.

Monthly commentaries also commonly discuss overall economic trends, such as interest rates, fuel prices, leading public company rates and activity and anything else that helps a reader understand the profit or loss.

Management incentive plans are commonly used. You can bet if managers’ bonuses are tied to profits, they will review profits and eventually the revenues and costs that lead to them. “What gets measured gets managed, and what gets managed gets done,” goes an old saying.

If bonuses depend on the bottom line, managers often become upset over cost allocations from other areas, such as company headquarters. On the one hand, accountants want everyone to know what total costs are, so that there is little misunderstanding about total profit. On the other, there is no perfect cost allocation method, so everyone takes shots at how costs are allocated.

To help avoid sniping about cost allocation, perhaps the better thing to do is to measure effectiveness based on “controllable” costs alone. Many companies do just that.

In Summary
Internal monthly reports often look nothing like the annual reports that go to bankers, investors and other outside parties. Often they break results down by department, division or profit center and include commentary not found in the reports distributed more widely.