Investors, customers, regulators and a host of other stakeholders including staff are increasingly asking not just how much profit a company generates but, crucially, how it does so. Among the reasons for this is the growth of interest in sustainable and responsible business practices.
In answering this question, enterprises have seized upon a sustainable accounting practice called Integrated Reporting, in which they communicate how much value they have created – and indeed destroyed – by measuring six types of capital.
The six capitals that are measured in Integrated Reporting are:
- Financial – investments and other measures of financial performance
- Manufactured – physical assets and products
- Intellectual – knowledge and processes
- Human – health and wellbeing of staff
- Social and Relationship – interactions with customers, suppliers and society
- Natural – how the organisation impacts the natural world
Data-led technology has enabled measurement of these capitals. The gathering of information from all parts of the enterprise and its integration into cross-departmental processes gives broad visibility into the organisation’s activities and its impacts on the six capitals.
That process of analysis – mostly executed by ERP and EPM systems – also generates its own data that can be used to improve performance and, crucially, aid in financial planning and analysis (FP&A) that seeks to ensure the company’s future success.
What is Integrated Reporting?
The Integrated Reporting Technology Initiative, a program of the International Integrated Reporting Council (IIRC) dedicated to building understanding around Integrated Reporting, summarises the discipline in this way:
“Integrated reporting brings together material information about an organisation’s performance across all relevant resource areas or ‘capitals’ in ways that enable better-informed management of the business and enhanced communication outside it.”
More than simply a record of a company’s financial performance, Integrated Reporting offers a detailed, holistic snapshot of the organisation’s entire value-creating activities. It illustrates how each department works to fulfil corporate targets and offers explanations of where and how improvements can be made. And Integrated Reporting provides a window into how the company performs against each of those capitals over the short, medium and long-term.
Importantly, Integrated Reporting also provides the framework around which the process of gathering the data needed to communicate that performance can be built.
The process creates a continuous cycle of data that enables departments to collaborate better: it offers an enriched understanding of performance and profit; it can quantify financial impact and interdependencies; better coordinate sales and operations to improve profitability; and, it enables business flexibility.
Understanding the technology behind Integrated Reporting
Integrated reporting can only occur in organisations that have undertaken a digital transformation of their finance systems. The primary sources of the data and insights critical for Integrated Reporting are ERP and EPM systems.
ERP software helps in the automation of processes and keeps a record of all transactions. It provides insights that lead to better decision making across a multitude of operations, from human resources to procurement and accounts.
EPM systems, meanwhile, measures the effectiveness of those operations and provides performance metrics against the six capitals. The data it generates is fed back into the system to inform financial planning processes, budgeting and other forward-looking objectives.
These and other software applications can also assist good corporate behaviour, for example in areas like financial regulatory compliance. They reduce the burden of gathering and collating data necessary to fulfil regulatory obligations and can help monitor the frequent changes made to the legal codes of the jurisdictions in which organisations operate.
How can integrated reporting help long-term financial planning?
Armed with the accurate insights and forecasts that digitalisation brings, companies can better plan their financial futures.
Communicating the holistic story of value creation wins trust and strengthens corporate reputations by fostering better relations between investors, employees and other stakeholders. That can help secure financing at reasonable costs (investors will want to know where their money is going – a holistic report can demonstrate that).
It also provides a real-time view of where value is being created – and where it isn’t – providing for the future allocation of resources to the best-performing activities. The generation of rolling forecasts that’s made possible by data gives a more accurate picture of likely future performance and risks so that appropriate hedging and mitigation strategies can be enacted.
From a process point of view, technology applications such as AI also help companies to automate the huge amount of manual work that has traditionally been required in financial planning. In doing so it is eliminating data entry errors that can throw off track the forecasts that support planning processes.
Such valuable insights on both the day-to-day and long term running of the business ultimately helps put finance leaders at the heart of their organisation’s decision-making process – for more information read “How business intelligence & business analytics give finance leaders a seat at the top table“.