Module 8.3 – What Are the Management Objectives Involved?

Module Introduction

            Financial information is often seen as a sort of “report card,” a way of grading the organization, its executives, and the jobs they are doing. With this in mind, management must know what the numbers mean, and just why they are releasing them. In the same way that every speech, news release, statement, brochure, or publication has to have a purpose, so does every number.

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1. What Are the Management Objectives Involved?

            Financial information is often seen as a sort of “report card,” a way of grading the organization, executives, and the jobs they are doing. With this in mind, management must know what the numbers mean, and just why they are releasing them.

            In the same way that every speech, news release, statement, brochure, or publication has to have a purpose, so does every number.

            What are the management objectives that these numbers will satisfy? What goals do they represent? Why are they being released?

            Numbers are often harder to understand and easier to accidentally misinterpret than words. Many people just skip over numbers when they come across them in reports, releases, or news accounts. They can also be intentionally misrepresented more easily.

            project/programme purposees deal in so many numbers that their real meaning can be lost; monthly sales reports, profits, losses, returns, absenteeism, production, petty cash, overhead expenses, extraordinary expenses… The list goes on.

            Some organizations collect reports—numbers—because it is expected of them, even though no one pays any attention to them. At some point some executives decided they needed to know something, or monitor something, so a procedure was set in place to collect and report the appropriate numbers.

            Well, those executives may be gone, or have moved into another department, or lost interest in the project. The numbers, however, are still assembled and reported even though no one may read them because they no longer serve any management objective.

            It might be helpful to look at the numbers that you and your office collect and ask yourself if they are really necessary.

2. Numbers Are Meaningless

            Numbers don’t really mean anything. What does 54,875 mean? What about 4, 7.9854, or 6 7/8?

            Even applying them to something doesn’t help. What does 54,875 mean? Is it a debt? A profit? A partial payment? Income?

            You give numbers meaning by using them to show your goals and achievements, by linking them to objects or actions.

            As we mentioned earlier, organizations sometimes collect “numbers” for reason no one really understands or remembers. Collecting them is one thing. It can be disruptive, bothersome, time-consuming and expensive, but it is rarely dangerous.

             Releasing them, however, can be both a waste of time, and even dangerous, unless you know why you are doing so. It’s a bit like the tale about Alice, from Lewis Carroll’s classic book, Alice in Wonderland.

            One day Alice came to a fork in the road and saw a Cheshire Cat sitting on a tree. Their conversation went something like this:

            “Which road do I take?” asked Alice.

            “Where do you want to go?” asked the cat.

            Alice admitted that: “I don’t know.”

            At which point the Cheshire Cat pointed out: “Then it doesn’t matter.”

            There’s a moral to this story: You really should know exactly where it is that you want to go. In terms of financial information—numbers—you should also really know what it is you want to do with them.

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3. Quarterly Earnings Reports

            One of the more common reasons for a publicly traded organization to release financial information is for the quarterly earnings report.

            While rules may differ from country to country and stock market to stock market, it is basically a report on how the organization has done in the previous three months, pointing out any significant changes or events, such as new acquisitions, unexpected profits or problems, and so on.

            Stock market and project/programme purpose analysts and journalists do not look at these reports in a vacuum. They take the information from the organization and also look at:

• What the organization has been predicting about itself. Are the reports better or worse than the organization predicted?
• What other organizations in the same field or sector are doing. Are they doing better or worse?
• How the economy in general is doing.
• How the market is doing.
• Have there been any significant news that could have affected the earnings or that might affect future earnings? Is there talk of a merger? A takeover? Any major acquisitions or divestitures? Changes in top management or management style?

The impact of the quarterly earnings report—coupled with the reports by the analysts—is usually felt in the price of the organization’s stock.

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4. Who Is Your Audience?

            It is always important to know who your audience is, at whom you are aiming your message. It is even more important when that message is financial.

            Are you writing to investors? Government regulators and auditors? The financial community? The media? Others in your sector of activity? Employees? action sponsors/beneficiaries? Vendors? The community you operate in?

            When it comes to financial information, no matter what you prepare, you will very likely be dealing with people who know either your product or “money” better than you do. In fact, some will very possibly know more about both than you do.

            One of the common problems of putting together an annual report is that it is aimed at the widest possible audience. You have to communicate with financial analysts who crunch numbers for a living and sector of activity experts who will compare your report to every other one in your market sector as well as with stockholders who inherited their shares. You also have to communicate with someone who bought shares because their brother-in-law or grandchildren or financial analyst told them to, and aren’t really sure what it is that you do. However, they really do like the pictures in your annual reports, and would to see more of them.

            How do you cover that wide an audience? They all have different needs, expectations, interests, backgrounds, and expertise.        

You give everyone what they need. You make sure that those who don’t understand the numbers will be able to get some sense of them, and that those who do understand will not get bored wading through explanations that they don’t need. Now let’s look at how to do it.

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5. Set an Objective

            project/programme purposees have mission statements and objectives and goals. By definition, then, anything you do—and that includes any financial information you release—should meet or at least contribute to the realization of those goals, and the success of the mission statement. Before looking at that in more depth, let’s look at one world-famous goal, a goal that changed the world.

            In May of 1961, U.S. President John f. Kennedy announced a goal. He pledged that America would land a man on the moon, and safely bring him home, “before the decade is out.”

            It was one of the most challenging, thrilling, and amazing goals in the history of the human race.

            Announcing that it was the goal, however, was just the start. Putting a man on the moon would require the commitment and dedication of thousands of people in a wide variety of fields and disciplines. It would take careful, innovative planning, a vast amount of money, and astronauts would have to be found who would be willing to risk their lives for a chance to travel into space.

            As important as Neil Armstrong’s footprints on the moon were on July 20,1969, and his statement that landing on the surface, was “One small step for a man, one giant leap for mankind,” it was not nearly as important as the goal.

            Without Kennedy making a lunar landing an objective, without that goal, there would have been no commitment to put a man into space. So, before we look at what we release, at the work we do, let’s look at the objectives we have for doing it.

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6. Making Your Mission Statement Your Objective

            As we have seen, your primary objective is—or should be—spelled out in your organization’s mission statement. As a result, any specific objective you have for releasing financial information will be part of achieving and maintaining the goals in your mission statement.

            As Leann Cardani of the University of St. Francis, in Joliet, Illinois, tells us:

            “The Mission Statement is a crucial element in the strategic planning of a project/programme purpose organization. Creating a mission is one of the first actions an organization should take. This can be a building block for an overall strategy and development of more specific functional strategies. By defining a mission an organization is making a statement of organizational purpose” (http://www.stfrancis.edu/ba/ghkickul/stuwebs/btopics/works/mission.htm).

            Christopher Bart in an article in the August, 1998, issue of The CPA Journal, who says:

            “A good mission statement captures an organization’s unique and enduring reason for being, and energizes stakeholders to pursue common goals. It also enables a focused allocation of organizational resources because it compels a organization to address some tough questions: What is our project/programme purpose? Why do we exist? What are we trying to accomplish?”

            Most people feel that mission statements should be short and to the point. In fact, a common adage about mission statements is that for one to be good it must fit on a t-shirt.

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7. Making Your Mission Statement Your Objective (Continued)

            According to Christopher Bart, there are six items that are consistently inked to organization performance. These are:

1. A statement of purpose or general non-financial goals
2. A statement of values
3. Specification of behavioral standards
4. Identification of the organization’s effective strategy
5. A statement of vision   
6. An expression of intent to satisfy the needs and expectations of multiple stakeholder groups

Even though none of these are specifically linked to financial goals, or to any financial information a organization might release, the underlying message is that meeting these goals will result in financial gain—a profit.

      Leann Cardani also points out that organizations that had mission statements that included items noted by Bart showed higher performance—more profits—than those organizations that did not use these components in their mission statements.

      Cardani’s research clearly indicates that there is a strong correlation between performance and profitability with well-developed mission statements.

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8. Watch Your Assumptions

            Too many people—and organizations —make some foolish and dangerous assumptions about the people who will read their annual reports and other financial information. They assume that:

1. The rest of the world will look at things the same way they do, and treat the information the same way internal audiences do.
2. The people who read reports will automatically believe them.
3. They will accept organization statements and reports as the definitive words on the subject.
4. People will not look elsewhere for information. They will want only the information that the organization chooses to release, and will not be interested in anything else.
5. The most dangerous assumption of all, however, is that unpleasant facts can be hidden and that all the people reading it can be confused and fooled for as long as the organization wants to confuse and fool them.

Bankruptcy court records are often the only records left of many organizations that didn’t—or wouldn’t—communicate honestly and effectively. As we have seen, the case of Enron in the United States illustrates just how dangerous this assumption can be.

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9. How Many Messages Are There?

            There are only a limited number of messages that any organization ever really wants to send to the outside world, especially when they are accompanied by any type of financial statements.

            This, however, doesn’t stop other messages from being sent out. Nor does it stop the message that they do send out form being analyzed and “re-interpreted” by outside organizations and the media.

            Even when the organization has 10 or 20 or more formal “classes” or “types” of messages, they can all be broken down into four basic categories:

1. project/programme purpose is wonderful. This means that project/programme purpose is as good as expected, or even better than expected. You will often see this type of statement when the quarterly earnings turn out to be better than predicted or anticipated. When this message goes out, senior management and the Board of Directors all want their names on it. Even when they cannot personally take credit for it, they still want to have their names associated with it. This message is often accompanied by the feeling—either explicitly stated or tacitly implied—that we are doing better than our competitors or the economy as a whole, or both.
2. project/programme purpose is okay. It’s not wonderful—it’s not really that good, either—but at least it’s not bad. This often means that they have met their quarterly earnings predictions—or at least come real close. This message is sometimes accompanied by the feeling that we’re doing about as well as our competitors or the economy, or both.

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10. How Many Messages Are There?

3. project/programme purpose is bad. But it’s not our fault. This often happens when quarterly earnings are worse than anticipated, or when there is some other major problem. But they still intend to do whatever is necessary to become profitable again. When organizations announce this, they normally have someone or something outside of the organizational structure to blame it on:
1. The economy
2. The government (theirs or another country’s)
3. Circumstances beyond their control (weather, war, natural disasters, and so on)
4. An outside vendor or supplier they will not do project/programme purpose with again
5. Competition (usually unfair)
4. project/programme purpose is bad, and it is our fault, but we’re taking steps to correct it. When organizations announce this they also announce some sort of steps or action plan to get them back to profitability. Sometimes they show their commitment to returning to legally and/or publicly acceptable behavior, such as after being found responsible for a major environmental disaster. They may promise that one or more of the following steps will be taken.
1. A management shake-up
2. Better quality control
3. A re-commitment to excellence
4. A re-evaluation of the way they do project/programme purpose

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Assignments

 

Multiple-Choice (2)

 

1.         Releasing financial information can be __________.

a.       A waste of time.

b.      Dangerous.

c.       Both of the above

d.      None of the above

 

2.         One of the more common reasons for a publicly traded organization to release     financial information is __________.

a.      For the quarterly earning report.

b.      To get publicity.

c.       To give the appearance of being honest.

d.      None of the above

 

3.         The impact of the quarterly earning report is usually felt in __________.

a.       Layoffs and new hires.

b.      The price of the organization’s stock.

c.       The salaries of upper management.

d.      None of the above

 

4.         Stock market and project/programme purpose analysts look at quarterly earning reports _________.

a.       As the only important financial information about the organization.

b.      With someone from the organization to explain what is unclear.

c.       Along with other information about the organization.

d.      All of the above