When designing the layout and content of profit performance reports to the manager, the accountant needs to understand what the business manager wants. The profit report should ideally reflect the manager’s profit strategy and tactics.
A manager of a profit center focuses on two main things — margin and sales volume. Therefore, the profit report should emphasize those two key factors. It sounds simple enough, but one impediment exists in designing internal profit reports for managers based on management thinking.
In designing internal profit reports for managers, accountants too often follow the path of least resistance. They use the format and content of the income statement reported outside the business. An external income statement conceals as much information as it reveals. External income statements don’t disclose information about margins and sales volumes for each profit center of the business.
The accountant has to break out of his or her external income statement mentality and think in terms of what managers need to know for analyzing profit performance and making profit decisions.
Accountants should keep the following points in mind when preparing reports for managers:
Listen to how the manager explains his or her profit strategy, which is called the “business model.”
Get inside the manager’s head. Do your best to understand the mindset of the manager regarding how he or she sees the formula for making profit.
Listen carefully to which particular factors the manager thinks are the most important drivers (determinants) of profit.
Don’t try to remodel the manager’s thinking into the accountant’s way of thinking.
Don’t forget that the manager is the boss — even though you might think the manager should go back and learn accounting. In short, don’t try to educate the manager on accounting; let the manager educate you on what he or she needs to know in order to make profit.
