Thursday, October 13, 2011

The Importance of a Management's Discussion and Analysis Report

Most companies and their executives do not include “emerging risk information into their strategic planning process” (Wyman, 2010, p. 4) and most have never heard of the Management's Discussion and Analysis of Financial Condition and Results of Operations Report (MD&A).  Why is this report neglected by executives and why is it rarely discussed on financial websites?  

The MD&A analyzes the past and makes projections of the future.  Because the MD&A is projection-focused, this type of financial statement is an example of precise accounting, rather than simply accurate accounting.  At the surface a financial statement can look accurate, but it may contain errors of all kinds.  Even if the financial statement has all of the required elements, the statement may still not be precise.  For the financial statements to be precise they must be able to be analyzed and looked at year over year to show some predictability for the future of the company.  As Kevin Keene of Day Inc. explains, “In this economy more than ever, all businesses whether start-up or currently operating, live and die based on their ability to make accurate assumptions and projections of future revenues and expenses” (Corrente, n.d., para. 2).  Financial projections look at the product or service being supplied, selling price, assumptions of sales for coming year, monthly growth anticipation, and costs and expenses for the coming year.  Without understanding all of these elements the company has a weak business plan and is not in good place to make decisions – essentially “going in blind.”  Making precise financial projections can mean the difference between the survival and demise of a company. 

Sustainability is all about securing our future through our actions today, and the goal of MD&A report is just that.  Companies need to stop chasing their tails and simply sweeping their messes under the rug.  They instead need to plan ahead for the future, setting goals of how they will improve and contribute their goods and/or services to society in a responsible manner.

The MD&A is set up to ask questions that challenge executives to truly examine their business practices and future goals.  For example, one question in the report asks: “Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations and, in each case, indicate the extent to which income was so affected” (University of Cincinnati, 2011).  This requires a bit more thought than answering a question like, “what was the operation income in FY2010 as compared to FY2010?” Another outstanding question probed in the MD&A is: “Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” (University of Cincinnati, 2011).  

Although the MD&A does not ask any specific questions in regards to sustainable business practices, by completing the report the company is examining their risk and implementing a strategic plan for the future.  Less than 10% of executives surveyed in Wyman’s report consider environmental, social, or technology threats to their business.  Companies that understand that climate change, social sustainability issues, and other sustainability concerns are a legitimate threat are ahead of the game.  Integrating a strategic risk plan with an emphasis on sustainability will ensure that the company is better suited for success in the future.   

B. Accuracy vs. precision, and error, and uncertainty. (n.d.).. Retrieved from http://scidiv.bellevuecollege.edu/physics/measure&sigfigs/b-acc-prec-unc.html

Brigham, E. F., & Ehrhardt, M. C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning.             

Corrente, W. (n.d.). Successful entrepreneur's know the importance of financial projections. Retrieved from http://willcorrente.com/successful-entrepreneur%E2%80%99s-know-the-importance-of-financial-projections 
Investopedia. (2011). Management decision and analysis – MD&A. Investopedia. Retrieved from http://www.investopedia.com/terms/m/mdanalysis.asp#axzz1aiSYCvyF

University of Cincinnati. (2011).Standard Instructions for Filing Forms under the Securities Act of 1933, Securities Exchange Act of 1934, and Energy Policy and Conservation Act of 1975: Regulation S-K:  Item 303 -- Management's Discussion and Analysis of Financial Condition and Results of Operations. Retrieved from http://taft.law.uc.edu/CCL/regS-K/SK303.html

University of Wisconsin. (2009).Course Description: BSAD 7110 Management Decision Analysis. Retrieved from http://www.uwplatt.edu/disted/courses/BSAD7110.html

Wyman, O. (2010, August).  Global emerging risks survey: steering the course, seizing the opportunity. Retrieved from http://www.oliverwyman.com/pdf_files/OW_EN_CR_PUBL_2010_EmergingRisks.pdf