Controlling

What is controlling?

Controlling is the support of company management through planning, steering, monitoring and information. It translates objectives into planned values, continuously measures actual development against them and prepares deviations so that management can decide in good time and on a sound basis. The term derives from the English verb “to control” in the sense of steering and directing; it is not primarily about checking. In the English-speaking world, the function corresponds most closely to management accounting or financial planning and analysis (FP&A); in business administration, controlling is a field of its own.

Put simply, the task is like that of a navigator on board: the navigator continuously determines position and course, compares both with the planned route and reports when a correction is needed. The helm is held by the ship's command, in a company the management.

In a growth company, controlling connects accounting with management. It supplies the figures for the budget (the binding annual plan), for the monthly report, for the advisory board meetings and for the financing process. Due diligence, the detailed review by investors or buyers before the contract is concluded, also relies on it.

Tasks of controlling

The tasks form a cycle: planning sets the benchmark, actual values are measured against it, and the deviations lead to measures and a new expectation.

• Planning and budget: derivation of the annual targets from multi-year planning and their allocation to months, cost centres (areas of responsibility such as sales or development) and responsible persons (budgeting).
• Budget-versus-actual comparison: monthly comparison of plan and actual with analysis of the material deviations (budget vs actual).
• Forecast: projection of annual result and liquidity on the basis of the course so far and the current expectation (forecast).
• Cost accounting: assignment of costs to cost types (such as personnel or rent), cost centres and products. This allows prices, margins and contribution margins to be assessed. The contribution margin shows what a product contributes to covering the remaining costs after deduction of its directly attributable costs.
• Metrics system: selection and binding definition of a few steering metrics, such as recurring revenue, gross margin, customer churn and liquidity runway.
• Reporting: regular reports to management, advisory board and shareholders (management reporting).
• Investment appraisal: assessment of larger projects by net present value (the present value of all future payments of the project), payback period (the time until the money invested has flowed back) and liquidity requirement.

Operational and strategic controlling

Operational controlling works with a horizon of one financial year and thinks in months. Its instruments are budget, budget-versus-actual comparison, forecast and cost accounting. It shows whether the current year is running as resolved.

Strategic controlling looks three to five years ahead and deals with the foundations of future earnings: market position, business model, product strategy and financing requirement. Instruments are multi-year planning, scenario calculations with a base case, a cautious case and an optimistic case, and investment appraisal. In growth companies, the financial model, the multi-year calculation for the funding round, is the most important strategic plan. The annual budget translates its first plan year into steerable monthly values.

Controlling and accounting

Accounting with bookkeeping and annual financial statements is backward-looking and regulated by law. The GmbH (German limited liability company) is a merchant by virtue of its legal form (Formkaufmann) and is therefore obliged to keep books (Section 238 of the German Commercial Code, Handelsgesetzbuch, HGB). It must draw up annual financial statements each year (Sections 242 and 264 HGB). The addressees also include the tax authorities, creditors and, through the mandatory publication of the statements, the public.

Controlling, by contrast, is forward-looking and voluntary. It is aimed at internal addressees, is free in structure and level of detail and may work with estimates and imputed values. These are calculation variables that appear in no accounts, such as a market-standard salary for a shareholder who works without pay. Its quality nevertheless depends directly on accounting. If accounting is kept mainly according to tax requirements, monthly accruals are often missing, that is, the allocation of costs and income to the month to which they economically belong. Monthly results then fluctuate without anything having changed in the business. A reliable monthly closing is therefore a precondition of any meaningful controlling.

Legal framework for controlling in Germany

There is no general statutory obligation for a GmbH to set up controlling. The managing directors must, however, apply the care of a prudent businessperson in the affairs of the company (Section 43(1) of the German Limited Liability Companies Act, GmbHG). This includes being sufficiently informed about the economic situation of the company. If they breach this duty, they are liable to the company for the damage caused (Section 43(2) GmbHG).

Two further rules presuppose a minimum of monitoring. Under Section 1 of the German Corporate Stabilisation and Restructuring Act (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG), managers continuously monitor developments that may endanger the company's continued existence (early crisis detection). The second is the business judgment rule of Section 93(1) sentence 2 of the German Stock Corporation Act (AktG), a protective rule for entrepreneurial decisions that is also applied to managing directors of a GmbH. Under it, there is no breach of duty if the manager, in making an entrepreneurial decision, could reasonably assume, on the basis of adequate information, that the decision served the interests of the company. Without planning and ongoing analysis, this basis can hardly be demonstrated.

Organisation of controlling: controller, CFO and Fractional CFO

In young companies, management usually carries out controlling itself, supported by the analyses of the tax adviser. With a growing cost base, several products or the first professional investor to whom reporting obligations are owed, this is generally no longer enough. A finance function of its own then emerges. Controllers there prepare planning, variance analyses and reports and report to a commercial managing director or head of finance (Chief Financial Officer, CFO).

A common intermediate stage is the Fractional CFO, who is responsible for the finance function part-time. The Fractional CFO builds planning, metric definitions, monthly report and steering rhythm and later hands the ongoing work over to an internal team.

Controlling from the viewpoint of investors and buyers

Participation agreements regularly contain information rights for investors: monthly or quarterly reports with budget-versus-actual comparison, the annual budget before the start of the financial year and the annual financial statements within an agreed period. The budget is often subject to an approval reservation: it becomes binding only once the investors or the advisory board have approved it. These obligations can be fulfilled only with controlling that delivers on time and in a consistent structure.

In due diligence, the quality of controlling is itself a subject of review. Investors and buyers compare earlier plans with the later actual figures in order to assess planning accuracy, that is, how reliably earlier plans have materialised. They check whether the metrics from the monthly report can be reconciled to the annual financial statements and whether margins and customer values are traceably derived from cost accounting. Weak figures rarely lead directly to a break-off, but they do lead to longer reviews, more cautious planning assumptions on the other side and additional warranties in the contract.

Practical example: building controlling before the Series A

A software company with annual revenue of EUR 6 million and 45 employees is preparing its Series A, the first larger funding round with professional investors. Accounting lies with the tax adviser. Its business management evaluation (BWA), the monthly short report from accounting, arrives about four weeks after month-end and contains no accruals. Planning exists only as a financial model for the investor presentation (pitch deck); there are no monthly budgets. Recurring revenue is kept in three spreadsheets with different definitions.

Within one quarter, a basic framework of controlling is created:

1. Cost centres for development, sales, marketing and administration are introduced and agreed with the tax adviser.
2. The monthly closing contains accruals and is available by the tenth working day.
3. A monthly budget for the current year is derived from the financial model and approved by the shareholders' meeting.
4. Recurring revenue, gross margin and customer churn are defined in writing.
5. A monthly report with budget-versus-actual comparison goes to management and the advisory board, and the forecast is updated quarterly.

In the later due diligence, the company can reconcile recurring revenue to the revenue in the annual financial statements and demonstrate for two quarters how accurately it planned. Follow-up questions about data quality therefore remain rare, and the review can concentrate on the plan for the coming years, on which the valuation is based.

Distinctions: controlling, accounting and investment controlling

• Investment controlling: the ongoing monitoring of a holding from the viewpoint of the shareholder or investor. Controlling within the company supplies the reports; investment controlling evaluates them for the investor.
• Accounting: documents completed business transactions according to statutory rules. Controlling uses this data to plan and steer the future.
• Auditing: the external, statutory audit of the annual financial statements with an audit opinion. Controlling is an internal function without an audit mandate.

Common mistakes

• Controlling as hindsight. If the finance function only analyses past months, management lacks the basis for decisions: expectation, liquidity runway and options for action.
• Monthly figures without accruals. Annual invoices, bonuses and holiday entitlements distort the monthly result if they are not spread over the correct periods. Variance analyses then lead nowhere.
• Inconsistent definitions. If recurring revenue is calculated differently in sales, finance and the pitch deck, contradictions arise that become apparent in due diligence at the latest.
• Deviations without consequence. A deviation that is identified without a responsible person, measure and deadline has no consequence.

Frequently asked questions

Is a GmbH legally obliged to have controlling?

Not expressly. The duty of care and early crisis detection do, however, presuppose that management knows the situation of the company. Without planning and ongoing analysis, this can hardly be achieved in a growing company.

Can the tax adviser take over controlling?

In part. The tax adviser supplies bookkeeping, the business management evaluation and annual financial statements, and thus the data basis. Planning and variance analysis, by contrast, require detailed knowledge of the business and generally lie within the company or with an external CFO.

Which controlling documents do investors request in due diligence?

As a rule, the monthly reports of the past one to two years, budgets and forecasts of this period, the definitions of the most important metrics and a reconciliation of the management figures to the annual financial statements. From these, planning accuracy and data quality can be read.

Is controlling worthwhile in a company that is still making losses?

Yes, especially there. As long as a company finances its losses from equity, the accuracy of planning and forecast decides when the next financing is needed and how much room remains until then.

The Roemer Capital view

Before we enter a funding round or a sale process with a company, we look at how it is managed. We check whether monthly figures with accruals exist, whether earlier plans have been compared with actuals and whether the most important metrics are defined consistently. Investors and buyers check these points anyway. The earlier they are clarified, the more time remains in the process for the equity story, that is, the case for why an investment is worthwhile.

Where such steering is missing, we build it up as part of our Fractional CFO services. In the client portal Roemer Capital OS, clients see the results bundled: the budget-versus-actual comparison and the integrated planning of income statement, balance sheet and liquidity. Added to this are reports that explain the material developments in plain language. Bookkeeping and annual financial statements remain with the company's tax adviser.