Portfolio approach to management reporting

Background

​More and more companies are being re-organised by value chain (how the business adds value to its customers and stakeholders) rather than functionally (Products, production, finance, HR etc). Unfortunately management accounting has failed to keep pace in delivering value added proactive periodic financial reports!

This is particularly true in small to medium sized organisation (both for and not-for-profit sectors) where traditional accounting is used mostly as part of its compliance infrastructure. Among other disadvantages, this approach

1. forces the performance managers to be more like budget managers. Where there are indirect cost allocations, the performance managers will also have accountability over costs or their method of allocation are not in their control; and
2. is excellent in masking wastage!

 
Incorporating the portfolio approach to management reporting insures that

1. products and services stand on their own by making transparent, the resources consumed in generating margins by product / service and value for customers; 
2. there is ONE individual or team responsible for eliminating "wastage" by either transferring it out of the business or ensuring that its starts to add value to its customers and finally, but most importantly,
3. On an ongoing basis, the business managers will need to establish a direct relationship between one-off costs and value added BEFORE these are incurred!

​Although the concepts, in different incarnations, are applicable to both new and existing businesses, it is particularly beneficial to those at the cusp of a growth spurt.

Concept Illustration

The simplest way to illustrate the concept is with a warehouse simile.
Say a warehouse stores 4 products - A, B, C & D, where costs are loaded onto the products based on their footprint!
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When, product B, with, say better inventory management is able to reduce its foot print, it shares a reduced loading of warehouse operating costs.
As the costs of un-utilised space doesn't really disappear just because a product is using less warehouse space - these are then loaded onto the CEO (as the individual accountable for as s/he is now responsible for:

1. Encouraging the other products to grow their business to use the extra space, and / or
2. Subletting the extra space

Either way, as the CEO is now responsible, s/he carries the costs and the efficient product is rewarded rather than penalised for improvements in efficiency by carrying fewer costs, and
In evaluating product profitability / viability, each product carries the ONLY cost of expenditure decisions it makes and not of those outside of their control.
The whole concept is based on

1. increasing transparency & reporting on agreed critical KPI's, and
2. identifying "wastage" and charging a certain individual or a team with cutting that "wastage".

The key strategies employed in minimising wastages could include

1. Reallocating costs to products by re-scaling the products up or down and / or
2. Transferring the costs to outside the organisation (ie cutting that cost totally)

How to get to this view

Validate the concept by calculating profitability of existing portfolio of products based on direct costs only comprising of:

1. Direct production / purchase costs
2. Direct sales & marketing costs. Where campaigns generate cross sales, the costs only sit with the intended objective of the campaign.
3. Direct people cost (or where people work on multiple products, on % of time spent on the products or some other rational basis)
4. Direct cost of serve (if the product has a monthly subscription model)

Socialise the themes & some preliminary ideas of how to get there with the governance function and when approved, start work on the detail of how to get there including formatting prior year incomes and costs in product silos and agreeing the best way to move forward with re-organisation plan.

​Consider whether data warehousing can help minimise the "additional" work that could be needed to add dimensions to transactions in real time.

Draft a re-organisation plan including

1. getting the reporting system to start collecting cost data by product (& other relevant dimensions) over a period of time, and
2. develop strategies to build product teams.

Key message

Overall the simple message is this: consider whether your business could benefit with the portfolio approach. Then check in with your Core Business Services specialist to help create mock reporting proformas to assess whether the insights generate value on an ongoing basis before deciding to implement on production systems.

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Disclaimer
The above publication discusses income tax & other issues generally and is not intended to be specific advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action.