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How to create an effective performance reporting process

In this article, you will learn how to create an effective performance reporting process
Better performance reporting enables organisations to focus on those measures that are most relevant to their long-term prospects and value. Organisations face multiple challenges in trying to align the performance reporting process with potential priorities. Let’s consider a few of them now.
Problem: Most key performance indicators (KPI) do not address key drivers of business value.
Most KPIs used by organisations are developed merely on the back of the annual report. Most KPIs and ratios are derived using financial statements or mandatory disclosures rather than focussing on measures associated with the development of key business assets.
Problem: Limited range of KPI
Financial analysis would include a limited set of KPIs, focusing on one or two aspects of the business. Hence, users are left to question the other aspects of financial performance.
Problem: Strategies and aspects not directly tied to the financial statements
The implementation of key business strategies or risk management activities is seldom adequately addressed by performance reporting. They are often not followed up with performance reporting measures to demonstrate the level of progress being made to manage the matter.
Problem: Suboptimal level of performance reporting
Financial performance measures are often not provided at the level required by senior management to make strategic decisions.

Steps for better performance reporting

KPMG identified the following key steps to better financial reporting: [1]
  • Address key value drivers. Performance measures address the most important KPIs and drivers of value in a business. A step further, you should be able to justify how critical business resources have been sustained and developed over time.
  • Provide measures relevant to business prospects. Rather than providing merely lagging performance indicators focusing on past performance and historical, organisations should focus on leading performance indicators as well. Organisations should also focus on measures that address the progress of strategy implementation as well as risk management in addition to operational outcomes.
  • Align measures with investor decision making. KPIs address the specific parts of the business where opportunities and threats exist. Such KPIs should be focused rather than generic. They should guide as to what specific aspects of the business should be managed vs trying to solve every issue and shortfall.
Sufficient context should be provided to prioritise business issues and the potential impacts of such issues to the future performance of the organisation. For example, if a cash flow bottleneck is identified through a liquidity ratio, which would significantly impact the organisation to fulfil orders for its premium customers, then such business issue would take priority over a much less important risk identified through financial reporting.

Example processes

Different organisations enhance their financial reporting and analysis processes to suit their business needs. While certain organisations have a very basic process to manage their financial reporting, other organisations, in highly regulated industries, would use more advanced and comprehensive financial reporting and analysis processes which are subject to governance.
As an example, spend some time reviewing how SAP engages a business in the financial reporting process and creates a reporting process that works.
You can now attempt to use your understanding of the creation of a financial reporting process and outline a fit-for-purpose process for a company of your choosing.

References

  1. The KPMG survey of business reporting [Document]. KPMG. Available from: https://assets.kpmg/content/dam/kpmg/pdf/2014/06/kpmg-survey-business-reporting.pdf
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Financial Analysis for Business Performance: Reporting and Stakeholder Management

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