Both financial reporting and management reporting can reveal key insights about your business and help you make informed decisions. As a result, it’s important for businesses to take advantage of both reporting methods in order to boost company performance and profits.
What is financial reporting?
Financial reporting and analysis are mandatory for all businesses and are mainly used for external purposes. The reports include the following:
- Profit and loss statement
- Income statement
- Balance sheet
- Accounts payable
- Accounts receivable
- Statement of cash flows
These reports are important for banks, investors and regulators to approve loans, and credit and to ensure that you’re following accounting standards. Financial reporting reflects the financial position of a business at the time of reporting. However, they don’t predict the future or provide insight into specifics.
What is management reporting?
Management reporting is entirely optional and is for internal business purposes. Management reports aim to dive deeper into company financials and provide insight that enables more informed business decisions. These reports include:
- Profit and loss by category (team, job, department)
- Inventory reports
- Sales reports
- Utilisation reports
Management reporting focuses on individual areas of the business, allowing you to identify areas that are strong and any areas of potential improvement. For example, you might want to see how well the sales department is performing one month before making the decision to expand. Management reporting for performance management enables leaders to rely on their numbers.
Management reporting enables CEOs to have data-backed decision-making and gain a deeper understanding of their business. If profits are lower than expected, management reports can pinpoint where issues lie.
What are the main differences between financial reporting and management reporting?
Financial and management reporting are both hugely beneficial for businesses. However, they have very different purposes and methods:
- Who are they for? Financial reporting is for external use (banks, investors and regulators). Management reporting is for internal use (CEOs, owners and management).
- Are they a requirement? Financial reporting is required by law and must follow regulations. Management reporting is optional but can provide great insight for businesses.
- What do they focus on? Financial reporting focuses on a company’s overall financial performance. Management reporting looks at specific areas of the business in both operational and financial terms.
- Past or future? Financial reporting looks at how your company has performed financially in the past weeks, months and years. Management reporting aims to predict the future financial performance of a company and what operational decisions need to be made.
Why are financial reports and management reports important?
Financial reports are important for a business to track its past performance and keep all income and expenses recorded. They are also a necessity and help when looking for loans or lines of credit.
Management reports allow businesses to make informed operational and financial decisions based on real data. Being able to look into specific areas of the business helps managers to improve their financial visibility and predict future outcomes. Making decisions based on data often leads to much better business results.
Do businesses need financial and management reports?
All businesses need financial reports in order to remain compliant with regulations. However, one of the main objections of financial reporting is to ensure that financial numbers are adding up and any cash flow problems are prevented.
Many businesses may see management reports as an extra cost, but the information they can provide is invaluable. In fact, management reports often save businesses money, as any costly business decisions that don’t benefit the company can be avoided. Better business decisions can be made thanks to management reporting.
