Growing Businesses NEED MD&A

Management’s Discussion and Analysis (MD&A) is a key part of public company filings like 10-Ks and 10-Qs, but are public companies and their investors the only ones who can benefit from this practice? Of course not! Today, we are going to discuss MD&A and how it can be used to support small and growing businesses. 

What is MD&A Normally?

MD&A is a section of a company’s annual or quarterly report where the Company’s executives analyze the performance of the Company and discuss the relevant contributing factors for the reporting period. This commentary typically covers financial performance, systems, market analysis, and plans for the upcoming year, including goals and challenges. MD&A is a required section of these reports for publicly traded companies, but is not required for similar reports of smaller companies. A typical financial statement audit that is completed to maintain a bank’s lending requirement of something similar only involves the basic financial statements and footnotes. Because this section is not required for these smaller companies, it is seldom done for external reporting purposes. When it is required, MD&A has certain requirements outlined by governing boards to ensure that key information is included in the report in a way that isn’t too biased.

What does MD&A mean in this context?

For a small or growing business, MD&A is not required, especially to the extent that the SEC and the FASB require for publicly traded companies. However, businesses that actively engage in the analysis and review of their monthly activities are much more informed when making decisions. These businesses should consider making their own version of MD&A to accompany their regular internal financial reporting. My clients have implemented this into their monthly process in the last year or so and it has made a considerable difference in the way they look at and understand their financial position.

How To Implement This Style of MD&A

The beauty of being a small or growing business is that you don’t have to deal with the SEC and FASB’s public company disclosure requirements. This means that the MD&A can be whatever you want it to be! However, you don’t want it to be extra work that adds no value to your operations. The best way to get value out of this exercise is to make a repeatable process for creating your internal MD&A that highlights the key business drivers by asking simple questions. Here’s an example set of questions I would use to gather commentary from my clients:

  1. Your operational decisions are driven mainly by the following financial statement line items, please provide some commentary over the current balances:

    1. Cash

    2. AR

    3. Inventory

    4. AP

    5. Line of Credit

  2. How are sales and expenses looking? Can you please provide some commentary over the following for this month?

    1. Revenue

    2. Gross Margin

    3. Operating Expenses

    4. Net Income

  3. How is everything going outside the financial statements? Can you please provide a brief update on the following areas?

    1. Headcount and Hiring plans

    2. Contract Backlog / Upcoming Projects

    3. What is one thing you would like to improve on in the next month? How are we going to see that improvement?

    4. What is one thing you would like to improve on in the next quarter? How are we going to see that improvement? 

Why is This So Important?

Any accountant can tell you the numbers as long as they have all the right data. A good accountant will be able to scan through the general ledger, tell you what was recorded, and make some pretty informed guesses as to how the business is doing. The best accountants and business advisors will extrapolate the data and document the context around it. By taking the time to answer these questions and document the responses in the financial reporting package along with the regular numbers, you are capturing the context that the numbers cannot convey on their own. This context is often the differentiator that is needed to make better operational decisions, and it’s not often documented by smaller businesses. I challenge you, as a small business owner or finance employee, to capture this information in your next internal report! 

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