Going Back to Basics – Part Three: Building a Comprehensive Reporting System

July 3, 2024

In the last two articles, we discussed many ideas, all of which are actionable and important in their own right:

- Take an active role in defining contribution and do not leave it up to the software consultant (you all know that my view of the word is to simply use material margin).

- Keep your general ledger buckets pure by not comingling costs.

- Put your financial statements into “estimating system format” at least down to the contribution line.

- Define and create meaningful cost centers to help you understand and manage your business.

- Separate manufactured from nonmanufactured goods and their related activities on your income statement.

- Define and create profit centers within the various manufactured and nonmanufactured goods categories, and track profitability within them.

- Keep the face of the income statement clean, and utilize subschedules to add details.

- Add nontraditional performance metrics to include color and analytics to your results.

These are all considered to be best practices in financial reporting, and although none of what I have written is terribly expensive to implement, it can be time-consuming and will cause significant changes to general ledger architecture, financial reporting, and the ability to compare with prior periods, product code reporting, and possibly estimating system design. The question is, why is the benefit of implementation greater than the associated costs? The answers are as follows:

1. Facilitate reconciliations between actual and estimated results. While you may currently be able to do a “big picture” reconciliation of contribution between actual and estimated results, it is almost impossible for you to tie in any of the details. Understanding where you are making the highest margins and comparing that data with where your estimating system thinks you are making the highest margins is just about the most important information that a converter can have at their disposal.

1. Ability to understand the profits generated by various business segments. While converting paper into packaging will always be at the core of what you do, most independents tend to focus on value-added and niche business because that cannot compete with the low-cost structure of larger mill-based companies.

1. Gain a greater understanding of the costs of various endeavors. If you don’t report on departments in any meaningful way, it is almost impossible to know what they really cost.

1. Looking at expenses on a percentage-of-sales basis can often lead you to the wrong conclusion because the higher the sales price, the lower the cost looks as a percent of the sale. Two companies with a similar-sized plant, workforce, and equipment could have the same dollar cost of a particular expense, but on the books of the company with the higher sales price, the expense will have a lower percentage of sales. This is why many companies like to express their costs as a function of the footage shipped. The problem with this is that from a manufacturing perspective, what matters is footage produced. You can have a high production month, when a lot of the goods produced get shipped in the following month, so looking at expenses solely on the basis of footage shipped can yield flawed data.

With all that said, let’s look at what some improved financial reporting might look like for you. Start with the face of the income statement in Table 1. This is typically what you see with expense listings as the subschedules.

As you can see in Table 2, the face of the income statement segregates manufactured sales from nonmanufactured sales and provides many subschedules that can contain all kinds of statistics and analytics. This statement also provides some insight into the estimating system, which is apparently overestimating contribution on manufactured and labor-only sales. This would be considered problematic because most converters want to have confidence that their estimating systems are predicting profitability conservatively. Estimating system contribution should always be lower than actual contribution. If you are interested in learning more about creating an enhanced reporting system for your company, stay tuned for the next part in this back-to-basics series titled “Enhanced Financial Reporting – Part One.” Or better yet, join us for AICC’s School for Financial Managers and Controllers course, which will be given in the fall of 2024.