Management Reporting: Truly Understanding Your Business

Transcription

1 : Truly Understanding Your Business THEO SCHULDT Assistant Controller GATX Corporation JOHN M. MORAND 1

2 Focus on profitability What does a CEO want? Why not GAAP numbers? Opportunity for accountants Measure to manage Segment financial statements Portfolio, SG&A and efficiency measures Challenges / hurdles Public company considerations 2

3 What do CEO s and other decision makers want out of management reports? Detailed information in order to make decisions! Decisions to be made: Is our strategy working? Should we refine it? Are we going in the right direction? Should we stay the course? Should we look to grow? Or trim? 3

4 Detailed information in order to make decisions Actionable information Enough detail, but not too much CEO s continually make decisions from information that is 70-90% complete Need to consider 100% of the population Tell manager where the soft spots are / what s missing Needs to be timely OK to compromise 100% accuracy / completeness for timeliness Need to know strategy Talk to salesmen Talk to management See if you can get the plant tour Understand compensation plans 4

5 Detailed information in order to make decisions!!!! Are we going in the right direction? Are profits growing, costs shrinking, and margins increasing? Should we stay the course? Did you do better than last month, quarter, or year? Are # s prepared in a consistent manner? Should we look to grow? Or trim? Is our market growing? Is this place in control, or out of control? Be aware of your environment. Should we refine strategy? Always! Get used to change, it is inevitable - only question is when? 5

6 Why not GAAP numbers? FASB not focused on tailoring information for managers Not flexible to accommodate specific situations and preferences Not detailed enough or sliced in a way to allow management to make decisions Don t identify reasons for trends in the numbers Managers need to know WHY 6

7 Why not GAAP numbers? However, managers still need and want to understand GAAP numbers because: investors and lenders use them management is evaluated / compensated on GAAP numbers GAAP numbers don t need additional explanation they are familiar need to reconcile management reports to GAAP numbers always perform a reasonableness check on non-gaap numbers relatively efficient for reporting group to produce procedures and systems set up to generate GAAP numbers Can be used for peer comparisons 7

8 Opportunity for accountants Put yourself in management s shoes May need to get outside your comfort zone What would you want to know if you were making the decisions and running an area of the business, or the entire business Can make suggestions to management Not compliance Opportunity to elevate reporting above compliance Managers will start to call you with questions You have best detail knowledge of the numbers Highlight your successes 8

9 Measure to manage With the right information prepared on a monthly, quarterly, and annual basis the CEO can review/confirm trends. Whether to enter or exit markets or change approaches How to align manager compensation with corporate goals Which operations need further attention Whom to bonus, or fire 9

10 Measure to manage Types of management reports Segment information Efficiency measurements Metrics Align with strategy / business model Certain reports are more effective at catching trends early. Other reports are more effective at identifying longer-term trends. 10

11 Management Reporting Ideas Segments Split consolidated financial results into smaller segments Geography (Sales regions) Lessee s industry Asset type Activity type (operating leasing, financing, managing, arranging) Management responsibility Salesperson Revenue source Direct Sales force (Each Salesman) Broker (Each Broker) Vendor (Each Vendor) Portfolio Acquisition (Each Portfolio) Income statement and balance sheet Which area would I look to expand first, or trim first? 11

12 Management Reporting Ideas Segment s Full Income Statement Direct revenues less direct costs and estimates of non-direct costs SG & A - Full Absorption of Costs Direct costs Identifiable, if data captured Salaries, Rent, T&E, Training, Communications Indirect costs May be non-gaap estimates / allocations Time study Net book value? Number of transactions? What basis for allocation should be used? Corporate overhead, administrative personnel costs, accounting and tax Cost of capital Leverage assumptions Interest rate assumptions Deferred taxes impact on leverage and allocating to balance sheet Estimates of credit losses 12

13 Management Reporting Ideas Segment s Balance Sheet May use simplified balance sheet Certain balances may not be material (ex: other assets) Primarily used to determine cost allocations on income statement What is cost of making and carrying investments Leverage assumptions Deferred taxes impact on leverage and allocating to balance sheet Identify and track characteristics which affect portfolio profitability, and base understanding Need to analyze trends in portfolio - yields/spreads/credit losses 13

14 Management Reporting Ideas Segment s Balance Sheet Understand the Lease Portfolio Asset types Accounting types Various terms Did we choose to do all business in this space or only a selection? Why these deals? Why did we decide not to do others? Which segments of our portfolio are most profitable? How could we do all winners and eliminate the losers? 14

15 Measure to manage Yield analysis - different patterns of lease income. Best for financing transactions. Direct financing leases constant yield and spread Operating leases increasing yield and spread Leveraged leases fluctuating yield and spread 15

16 Measure to manage Patterns of lease income - Direct financing lease 25,000 12% 20,000 10% 15,000 10,000 8% 6% 4% DFL income DFL NBV DFL inc as % of NBV 5,000 2% % 16

17 Measure to manage Patterns of lease income - Operating lease % 45% % % 30% 25% 20% 15% 10% 5% Op lse margin Op lse NBV Op lse margin as % of NBV % 17

18 Measure to manage Patterns of lease income - Leveraged lease 6,000 35% 5,000 30% 4,000 3,000 2,000 25% 20% 15% 10% Lev lse income Lev lse NBV (pre-tax) Lev lse income as % of NBV 1,000 5% % 18

19 Measure to manage Operating lease portfolios Average rent amounts by type of asset Could estimate by dividing operating lease income by number of assets of given type Could also divide by asset OEC to express as % of OEC Average age of assets by type of asset Typically older portfolios generate more book earnings due to the operating lease income pattern Current market conditions sell or continue to lease 19

20 Measure to manage remarketing Results after initial lease term Report on disposition categories: Sales to customer, Sales to third parties, Releases Which is most profitable? Which is most controllable? Are we getting the what we should get? 20

21 Measure to manage - SG&A Most controllable cost Receives high degree of scrutiny Thorough understanding of costs of doing business is integral Can be challenging, costly and sensitive Consider reporting: SG&A by activity SG&A by person Various types of costs by salesperson or employee, such as T&E Reporting can drive behavior How do compensation amounts, especially bonuses, relate to income generated 21

22 Measure to manage - Efficiency measures/ performance indicators Used to establish & monitor goals Can identify trends earlier than numbers Can be helpful to explain why the numbers are they way they are Can be the most challenging to gather and report if the inputs are not in the general ledger 22

23 Measure to manage Measure and management action Portfolio profitability measures - yields on different slices of portfolio Leases with repeat customers Lease investments greater than and less than $5 million Lease investments with each customer greater than $5 million in aggregate Operating leasing vs direct financing leases Action: focus on more profitable areas of business / revise strategy Non recourse debt spread over treasuries Action: more efficient placement, change process Awarded Transaction / Bid transactions Action: focus on higher success areas / revise strategy 23

24 Measure to manage Measure and management action Efficiency measurements: Revenue per employee (total and by area) SG&A per employee (total and by area) SG&A per $ equipment cost financed # of lease schedules prepared per contracts person per day # days from shipment to schedule preparation & billing # of leases negotiated per attorney per month notification of tax delinquency notices transition time / transition cost from one lessee to another Action: review / change process, change manager, change compensation 24

25 Challenges / hurdles Becoming part of the decision-making process and a resource for the decision-making process Gaining trust of CEO Demonstrating you have a full perspective on the business Reluctance to link up market-knowledgeable people with reporting function to prepare reports Be sensitive to organization politics Management concerned with performance and how it s perceived Compensation / bonus plans what do people cost aligned with what they produce 25

26 Challenges / hurdles Balancing benefits with resources/costs General ledger and asset management system capabilities Don t want to create reporting that can t realistically be completed regularly and timely Programmers may not understand business Confusion about how numbers tie back to GAAP financial statements Can be a headache for accountants 26

27 Challenges / hurdles Comfort with using estimates Trade-off: timeliness and effort with accuracy of fully-audited numbers Can still be informative and actionable No measurement is perfect Avoid paralysis because of imperfections with measurements Imperfection does not mean measurement does not provide actionable information Allocations especially judgmental Patience to let reports evolve May take time to refine reports and measurements 27

28 Public company considerations FAS131 Disclosure requirements based on the management approach Management approach model based on the way management organizes segments within the enterprise for making operating decisions and assessing performance Report the same information that management uses 28

29 Public company considerations SEC rules on non-gaap measurements If management wants to use non-gaap measures in public disclosures Sarbanes-Oxley Act required SEC to adopt non-gaap disclosure rules In summary registrants have to explain non-gaap measures and tie them back to GAAP measures Definition: numerical measure of past or future financial performance that: Excludes amounts that are included in the most directly comparable GAAP measure; or Includes amounts that are excluded from the most directly comparable GAAP measure 29

30 Public company considerations SEC non-gaap measurements (cont d) Requirements cannot make public a non-gaap financial measure that is misleading must provide: the most directly comparable financial measure determined in accordance with GAAP a quantitative reconciliation of the differences between the non-gaap measure and the associated comparable GAAP measure the reason that management believes the presentation of the non- GAAP information is useful for an investor s understanding the additional purposes, if any, for which management uses non-gaap measures applies to any public disclosure of a non-gaap measure 30

31 Conclusion Think about what you would want to know if you ran the organization Develop a base understanding of the business and portfolios Develop a senior management perspective on the business and related # s Refine your perspective and ideas with management. (Be Columbo!! By the end of the show, he understood all the relevant pieces, put them in perspective, and reached a conclusion). Perspective! Be patient and allow time for reports to be refined 31