There is a substantive difference between financial reports and management reports yet plenty of people confuse these unique reports for one another. Though most people are unaware of exactly how these two reports differ from one another, there is no excuse for a professional to not understand each report's respective content and purposes. Below, we eliminate the mystery, detailing exactly how management reports and financial reports are different.
The Basics of Management Reports
Truly informative management reports do not require guessing about the viability of the business. Rather, these reports make the financial health of the company quite clear. The purpose of management reports is to make it that much easier to make decisions based on actual data, ultimately setting the stage for the business to become more successful. Management reports provide the data necessary for the managers of the company to run the company and maximize profitability. Such reports present important information pertaining to results as well as risks the business faces along with other challenges.
Above all, management reports are important in the context of the overarching organizational strategy. These reports make it that much easier for the leader of the business to control the entity and make truly informed decisions based on facts as opposed to relying on guesswork. Much of the data presented in management reports is gathered with the use of key performance indicators (KPIs) that make it that much easier for management to understand the information presented and take the appropriate action. The best management reports provide information pertaining to the company’s finances and operations, facilitating management's quest to understand the true worth of the business in a specific period of time. These reports reveal the business’s performance, providing the information company leaders need to make important decisions and maximize efficiency. Armed with this information, business decision-makers can establish new benchmarks for success, determine the next steps, boost communication between employees, develop an action plan and ramp up company growth.
The best management reports provide information in an organized manner that helps identify strategic objectives and goals. In short, these reports should be created with the end goals squarely in mind. So take some time to think about exactly why your team needs such reports before actually creating them. Consider how the information presented in a management report can be used to drive your company’s revenue and maximize your organization’s chances of success, create the report with these overarching aims in mind and it will serve its intended purpose.
The Basics of Financial Reports
Every company keeps financial reports. These reports serve multiple purposes including enhancing external accounting. Such reports are typically provided following a specific event, adhering to nuanced guidelines commonly referred to with the acronym of GAAP. GAAP is short for Generally Accepted Accounting Principles. These financial reports are certainly useful in the context of adhering to the nuances of the law yet they also facilitate prudent decision-making.
Financial reports provide an overarching view of the company’s financial position and business operations. However, these reports do not contain actionable insights or other data that helps management make prudent decisions. In short, more information aside from financial reports will be necessary to make wise decisions in the context of business. Financial reports certainly make it easier to make such decisions. However, financial statements are not created to provide any sort of utility. Rather, they are meant to satisfy legal obligations, serving up numbers in an organized and objective manner.
Both Financial Reports and Management Reports are Necessary
Some businesses rely on financial reports to satisfy legal requirements and also to make it easier to make important decisions pertaining to the business. However, using such reports for decision-making doesn’t always work out as intended as these reports must be created at specific period of time, meaning they provide a narrow view of the company as opposed to the overarching view provided by management reports. This is precisely why the vast majority of businesses create separate financial and management reports rather than using financial reports for both purposes.
Though generating both financial reports certainly costs money and takes time, they are well worth it. Fail to generate both types of reports and you won’t have the information necessary to expedite your company’s growth, make prudent decisions and make changes that provide a significant return on investment. Keep in mind, financial reports are necessary for legal compliance, for the purposes of establishing financial clarity and also to reduce the chances of cash flow issues arising down the line.
Though management reports are not absolutely necessary for full legal compliance, they certainly help your team make prudent business decisions backed by actual data rather than guesswork. Management reports ameliorate the challenge of determining if your company’s projects are priced properly, pinpoint clients/products/services that are profitable, ensure you can make payroll and determine whether it is financially prudent to add more employees. Furthermore, if new employees are to be hired, the management report will help you determine their exact level of compensation. Management reports also make it that much easier to identify specific avenues for your marketing dollars.