Six Characteristics of Useful Information
During my management accounting career I discovered six characteristics of useful management information: (1) relevance, (2) comprehensibility, (3) reliability, (4) significance, (5) timeliness, and (6) action-orientation.
I do not recall exactly where I picked these up, but I practice these criteria and disseminated it to the teams I lead. In this blog and the next, I will discuss these criteria and methods to achieve the criteria.
Relevance
In order to support a management decision, information provided must be related to the management issue at hand. To illustrate I refer to a past experience. In a given month on the financial statements the product refunds was higher than usual, at about 30% of sales. The immediate interpretation was that customer satisfaction was very poor, suggesting the business was not delivering on its promise.
However, we took a second look using management information systems to reveal a different story. Product management had extended the refund policy on our best selling product to 60 days, and sales of this product were very strong six to eight weeks ago. Exacerbating the situation was naturally low sales in the current month as per seasonality.
When we took a sample of shipments and calculated product refunds it was 5%, in stark contrast to the initially reported 30%.
In this case, the revenue line reported current month sales, and the contra account reported refunds related to sales one to two months earlier. This incident illustrates that while the financial statements were relevant to understanding actual transactions occurring in the month, they were not relevant for calculating a product refund rate.
Comprehensibility
Management information must be understandable, and this is achieved through both content and presentation. Analysis is usually quite complex and requires creative methods or advanced mathematics. Many analysts tend to explain methodology in excruciating detail, partly to exhibit their brilliance (I was guilty of this early in my career). However, many managers do not know a correlation coefficient or F-score from Einstein’s theory of relativity, and they do not care. Instead, they only care about the conclusion, and maybe a top layer explanation of root causes.
In addition, many managers are on the receiving end of immense data tables packaged as “reports”. Instead, figures should be summarized at a high level and presented succinctly. I have a preference for exhibiting data in charts, as “a picture is worth a thousand words”. Trends and patterns are also more easily recognizable in charts. Management should be able to glance at the report and comprehend quickly the message. I recommend providing information in brief, and in back up materials provide drill down levels of supplementary information if requested.
Reliability – Management information must be truthful, accurate and transparent. Management metrics should measure appropriately the desired incidence, such as the product return issue mentioned above. While management information must be accurate, because of the timeliness of useful management information, there is a tolerable margin of error.
In order to deliver weekly or daily information, estimates or standard costs may be necessary. The key is to regularly validate that the margin of error is within tolerable levels and relatively consistent. As for transparency, methodology should be documented and available to stakeholders, rather than being a “black box”. Being able to explain methodology lucidly to stakeholders instils confidence in the information.
Reliability also reflects that the information is available when required, and the formatting will be consistent. Management does not want to have to hunt for figures in constantly changing report formats. Rather, they want to know where they can regularly find the metric required.
In my next blog I will discuss the remaining three criteria.
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