Management Reporting

What is management reporting?

Management reporting (in German: internes Berichtswesen, Managementberichterstattung) describes the regular, uniformly structured reports with which the management, the advisory board and the shareholders are informed about the position and development of a company. A management report condenses KPIs, the income statement and liquidity. It shows the comparison with the plan (budget vs. actual) and the current expectation for the year (forecast), and explains causes and measures in a commentary.

A shift handover in a production plant does the same on a small scale: the outgoing shift leader names a few figures in a fixed order, explains what deviated from the usual, and says what the next shift has to decide.

Reporting is the visible result of controlling, which supports the management in planning, steering and monitoring. Its data comes from the bookkeeping, usually from the business management evaluation (BWA) prepared by the tax adviser or from the company's own monthly closing, the reconciled bookkeeping position of a month. Data from sales and HR is added. The company determines content and frequency, for example in its rules of procedure or advisory board rules. After a funding round, the investors' information rights determine the minimum scope, that is, their contractually agreed entitlements to regular reports.

Structure and content of a management report

A monthly report follows the same structure every month so that changes stand out immediately. The following building blocks are common and suit as a template for the structure:

• KPI overview: one page with the most important steering figures (KPI), each with plan, prior year and trend.
• Income statement: profit and loss account (P&L) for the month and cumulatively since the start of the year, structured according to the needs of steering. The gross margin (revenue less directly attributable costs, in relation to revenue) and costs by area are common.
• Liquidity: cash balance, cash outflow in the month, runway in months and available credit lines.
• Budget vs. actual: deviations per line item with an explanation of the material ones (budget vs. actual).
• Forecast: the current expectation for the financial year or a rolling window (forecast).
• Commentary: causes of the development, measures initiated and open decisions for the management or advisory board.

Frequency and timing

The standard is a monthly report. Sending it within the first two to three weeks after month-end is common. How early this can be achieved depends above all on how quickly the monthly closing with all accruals is available. To combine speed and accuracy, some companies send a preliminary short report (flash report) with revenue, liquidity and a few KPIs a few days after month-end, and let the full report follow.

Design and language

An effective report shows few KPIs, but always defined in the same way and always compared with plan and prior year. The most important points come first: position, deviations, need for decisions. Charts and a graphical overview page (dashboard) make it easier to grasp developments, but do not replace the commentary.

Complex figures are explained in plain language. The sentence "Receivables days have risen by twelve days" is correct but hard to place. More understandable is: "Customers pay twelve days later on average. With annual revenue of around EUR 6 million, this ties up about EUR 200,000 of additional funds." The commentary does not repeat the tables, but explains why the figures look the way they do and what follows from them.

Legal framework and external reporting

External reporting is regulated by law. The GmbH (German limited liability company) prepares annual financial statements under the German Commercial Code (Handelsgesetzbuch, HGB), submits them to the shareholders (Section 42a of the German Limited Liability Companies Act, GmbHG) and makes them publicly accessible under Section 325 HGB (publication, Offenlegung). This external reporting looks backwards, is standardised and is also aimed at creditors and the public. Management reporting, by contrast, is free in form and content, forward-looking and intended for internal readers.

Every shareholder of a GmbH can demand information from the management about the affairs of the company and inspection of the books and records (Section 51a GmbHG). The articles of association cannot exclude this right. It is, however, a right on request and not a duty to receive regular reports. The company owes regular monthly or quarterly reports only on the basis of contractual reporting obligations, typically from an investment agreement or shareholders' agreement. For the stock corporation, Section 90 of the German Stock Corporation Act (AktG) prescribes regular reports from the management board to the supervisory board.

In due diligence, the detailed review before signing a contract, investors and buyers check whether the reporting matches the annual financial statements. The monthly results of a year should be reconcilable to the annual result, and differences arising from closing entries should be explained.

Practical example: management reporting for the advisory board

A software company with 30 employees has, after its first funding round with professional investors, an advisory board with two investor representatives. The advisory board members receive, six weeks after month-end, a bookkeeping export with 25 pages of account balances, without commentary. The meetings consist mostly of follow-up questions on individual figures. The company switches to a four-page report that is sent by the 15th of the following month:

1. Page 1: six KPIs, namely recurring revenue, revenue, gross margin, monthly cash outflow, cash balance and runway in months, each with plan and prior year.
2. Page 2: income statement for the month and the year with budget vs. actual.
3. Page 3: liquidity development and rolling twelve-month forecast.
4. Page 4: commentary on the three material developments, the measures and the points on which the advisory board is to decide.

Since then, the advisory board meetings have dealt primarily with decisions. The quarterly investor update is derived from the same figures, so that the advisory board and the other investors do not receive diverging values. When an investor later reviews the company for the next round, the monthly reports of two years are available in a uniform form and can be reconciled to the annual financial statements.

Distinctions: management reporting, investor update and BWA

• Investor update: a condensed communication to all investors, monthly or quarterly depending on growth. It is an extract from management reporting that goes outside the company.
• Business management evaluation: the standardised evaluation of the bookkeeping by the tax adviser. It is a data source, but not a management report.
• Investment controlling: the evaluation of the reports by the investor for its investment, for which management reporting provides the basis.

Common mistakes

• A mass of figures without selection. A report that shows every available value leaves the selection to the reader and misses its purpose.
• Commentary repeats the table. A sentence such as "Revenue was below plan" without cause and measure provides no additional information.
• Changing definitions. If a KPI is calculated differently from month to month, developments are no longer comparable.
• No reconciliation to the annual financial statements. Differences between monthly reports and the financial statements that nobody can explain weaken confidence in all figures in due diligence.
• Different figures for each recipient. If the advisory board, bank and investors receive diverging values for the same period, a credibility problem arises.

Frequently asked questions

How extensive should a monthly report be?

As concise as steering allows. As a rule of thumb, one page of KPIs and a few pages on results, liquidity and commentary are enough. Detailed evaluations belong in an appendix.

What does a management reporting dashboard show?

The most important steering figures on one page, graphically and compared with plan and prior year. Examples are recurring revenue, gross margin, monthly cash outflow, cash balance and runway. The dashboard shows where something deviates; why is explained by the commentary.

Does a GmbH have to report to its shareholders monthly?

Not by law. The law grants a right to information and inspection on request. Regular reports rest on contractual agreements, as regularly made in funding rounds.

Who prepares management reporting?

The company's finance function, that is, controlling or the CFO. In smaller companies, this is often taken on by a fractional CFO, who is responsible for the finance function part-time, while the tax adviser provides bookkeeping and the BWA.

May preliminary figures be reported?

Yes, if they are marked as preliminary and later corrections are shown openly in the next report. A timely preliminary report is more useful than a complete one that arrives too late.

The Roemer Capital view

Careful reporting pays off twice for our clients: in day-to-day steering and later in the data room. In this organised collection of documents, investors or buyers review the monthly reports of recent years. As a fractional CFO, we therefore set up the report from the start so that it can be reconciled to the annual financial statements and shows the same figures to the management, advisory board and investors.

In Roemer Capital OS, clients receive their reports with explanations in plain language, so that shareholders and advisory board members without a finance background can also place the position. We derive the investor update from the same set of figures.