Chapter 5 —
EXECUTIVE (BUSINESS) REPORT
The executive report is probably the most common type of report in business,
and thus you need to practice doing them. Obviously, all such reports need to
be tailored to the particular situation, organisation and executive style; thus
this chapter is like a template for a ‘typical’ executive report. Unless
otherwise instructed, assume you are a consultant writing a report to the senior
executives. In addition, many executive report assignments are based on
established case studies, hence the reference to ‘cases’ in this chapter.
It is not always necessary to do every single section. Therefore, you must use
this chapter as a guide and use those sections that are relevant to the
case/problem/opportunity you are dealing with. Please also note that we are
giving you this guide for the rest of your career, not only for your assignments
whilst at university. As such, it can be tailored to each assignment.
Please also note that in business, essays are seldom written for executives.
executive reports are very focused, to-the-point, with many headings and sub-
headings. The writing style is a combination of brief statements, tables, lists,
bullet points, brief explanations and short linking paragraphs. None of that ‘as
the sun slithered over the horizon, …’ essay-type writing. This does not mean
it has to be boring. Executive reports must also hold the attention and interest
of the reader.
There is another crucial point to make here. In an executive report you do not
lecture to the reader on the theory behind the report. In other words, you use
the theory to deal with the organisation’s problems/opportunities.
If there are questions within or at the end of a case, you must include them
within the executive report structure. Please also note that in case studies
supplied to you, you must deal with it on the facts of the case then, not now.
It is often helpful to consult Web sites and other sources, but you must still
tackle the case as it is given to you.
Let us now look at the main sections of the executive report.
This is usually no longer than 1-2 pages. It is written for the CEO, Board
members or any very busy executive who might well read no more than this
executive summary. Thus it should be self-contained and complete as a
summary of the key points. In this section you state what you see as the one
or two main problems or opportunities, and your key recommendation (while
telling the reader that the details are in the main body of the report). Do not
tell these busy executives about the organisation’s history and other
background details they would already know.
Table of contents
This section simply shows the reader what is in the report and where they can
find it. It is particularly important in a very long report.
Brief Introduction and problem/opportunity statement
Keep this brief, and do not give too many details well known to the readers.
The problem/opportunity statement is focused on the main ones you have
found, not a repeat of your SWOT analysis.
This section is your protection, your ‘insurance policy’. Here you make it
clear that you have had to make some important assumptions. For example,
you can not foresee the future so you must assume that there will not be any
unforeseeable significant environmental disruption.
In addition, in case studies you have to assume that the details given to you in
the case are true. (Obviously in real-life, you need to cross-check certain
crucial facts and opinions.)
This covers all your analysis, and must include both internal and external
analysis. The situation analysis has the task of both clarifying your thinking
and also becoming the backbone of your recommendations later. Remember
to consider the case wearing the ‘hat’ of the CEO, and then the ‘hats’ of each
functional department and other key stakeholders.
SWOT Analysis The SWOT Analysis (Strengths and Weaknesses internal to the business, and
the Opportunities and Threats external to the business) is probably the most
common strategic analysis tool. If you do a very thorough SWOT analysis,
you will make the best start possible to a situation analysis. Some students
confuse the internal (SW) with the external (OT). Be careful not to do this as
putting something in the wrong category will mislead you. In addition,
remember that elements of some characteristic of a business may be a strength
whereas other elements of the same characteristic may be a weakness. For
example, an autocratic all-powerful leader is probably a strength in terms of
purposefulness and speed of decision-making, yet a weakness in terms of
Unless you know a business and its organisation extremely well, and are able
to involve several people in the SWOT analysis, there is no point in using
weighting and scoring systems. However, do the most comprehensive SWOT
Industry and The 2 main tools used here are ‘Porter’s 5 forces’ and the ‘Key Industry
Competition Success Factors’ analysis. The ‘Porter’s 5 forces’ model tells us whether the
Analysis industry is an attractive one to be in, and where within the five industry forces
the organisation needs to improve. The ‘Key Industry Success factors’
analysis is focused on determining what are those factors in that particular
industry which are essential for success. Students often confuse them with
identifying the organisation’s strengths, but this (KISF) analysis tool is
focused on the industry itself.
This step looks closely within the organisation itself. Depending on the
Company problem/opportunity, it would look at such things as morale, leadership and
Analysis culture as well as each of the main functional departments. Financial ratio
analysis fits in here (see other guides for more details on the ‘how to’ side).
Obviously you do the ratios you can do from the figures given; you are not
expected to do ratios in a case without the relevant financials available. More
importantly, you must give a clear picture of the firm’s financial health across
the 4 main areas (wherever possible) of liquidity, profitability, debt and
Stakeholder In this section you analyse the impact on the situation of any key stakeholders
Analysis you have not covered so far (e.g. environmental and other pressure groups, the
local community, etc).
Portfolio This tool (i.e. B.C.G, G.E.) is only used if the organisation has a portfolio of
Analysis SBUs or products and the analysis will help with the specific
Macro- This tool is best left until last and is done on an exception basis (or it can end
environmental up being too big and unfocused). For example, do not tell the reader that there
Analysis are 18 million people in Australia unless this is crucial to the business in the
Political, Note: Remember to use your analysis in your decision-making and
Technological, recommendations that follow. Some students just do it because it is
Geographic, required, and then ignore it in the rest of the report.
Statement of alternative options
Here it is important to show that you have identified all likely alternative
options, from closing down; selling up; leaving it as it is; expanding products
and markets; mergers; alliances; technologies; staffing; costing, etc. You
cannot just tell the reader your recommendations without showing that you
have considered the alternative options.
Reasons for Each contending option needs to be rationally rejected to complete the process
rejecting the of giving yourself and the reader maximum confidence in your
other options recommendations.
Recommendations (in detail)
Employers and paying clients are predominantly interested in your
recommendations and thus this should be as detailed as possible. Justify your
decisions in case the reader needs convincing.
Recommendations should cover the main problems/opportunities identified at:
a) the corporate level, and b) each of the functional levels.
‘Sustainable Right at the beginning you should have a heading entitled ‘Sustainable
Competitive Competitive Advantage’. Although stated in the singular, it is really a
& Action Plan’
collection of interlocking key decisions that together will give the business a
winning SCA. You must show that you have done a good job of this.
Also within this section is the heading ‘Implementation and Action Plan’. No
set of recommendations are worth anything if they are not implemented.
Consider here the firm’s people, culture, physical and financial resources.
Who will champion the changes? With what? What likely opposition will
there be, and what will be done about that? If possible, provide some action
plan examples (i.e. Who is to do what, by when.) and recommend that a
detailed action plan be put into place.
Appendices (for example, ratio calculations, industry
statistics, exhibits, maps)
Remember that what goes in here is up to you; you are not to put in
unnecessary, irrelevant or unobtainable appendices. It depends on the report
you are writing.
In an assignment case study, the source of the case study might be the only
item in here. You might also have used the Internet or other sources to get a
‘feel of the industry and business’, and those should be added as well
(accepting that case study assignments, unless otherwise stated, are marked on
the case as given to you, and as at the date of the case). Obviously, if you
were writing an extensive executive report for a client, you might have an
equally extensive reference list. This ‘guide to a typical executive report’ is
given to you for all the executive reports you will write or read throughout
your career, not just for your assignments at university.
FINANCIAL PERFORMANCE MEASURES AND THE
Financial performance measures and the use of financial ratios
USE OF FINANCIAL RATIOS
An understanding of financial performance measures and ratios is essential for
strategic management. It is a pre-requisite to:
• Identify and state the current position of the entity.
• Assessing the likely impact of proposed strategies and planned
objectives upon entity survival and profitability.
The following summation provides a brief overview of finance and financial
performance measure to enable the non-accounting practitioner to interpret
and understand historic and proforma financial statements.
Transactions All transactions of a business entity (that is assets acquired, liabilities
measured in incurred, sales made) are measured in monetary terms, and all transactions
monetary result in changes to the asset structure, liabilities, or owners’ equity within the
terms individual account items.
It is possible to calculate the effects of every individual transaction upon
assets, liabilities and owners’ equity. However, in practice, it is only
necessary to record and aggregate similar categories of transactions (such as
sales) for a given period of time, and to report upon the impact of the sum of
these transactions at the end of a period.
These periodic summaries form:
• a trading report, which is a ‘Statement of Financial Performance’ for the
period – usually monthly and/or quarterly and/or annually.
• a balance sheet, which is a ‘Statement of Financial Position’ of the
entity at the end of the reporting period.
A comparison of the current balance sheet with the balance sheet at the end of
the previous trading period will show the differences in asset, liability and
owners’ equity accounts primarily, but not exclusively, caused by current
period transactions – summarised in the trading report.
However, the above summarised financial statements contain financial data
which are relatively meaningless until they are related and compared with
Profit as a • A net profit before tax of $100,000 of itself is meaningless. However,
percentage if we relate this financial figure to sales in the same time period of
$1,000,000, we can say that the net profit earned on sales was 10%.
This percentage figure can then be compared with the same ratio of net
profit/sales for previous years for the same company, and with other
companies within the same industry. The former comparison enables
management to identify favourable and unfavourable trends within their
company, whereas the latter comparison is made between the company
and the performance of other companies within the same industry for
the same time period.
• Similarly, a net profit before tax of $100,000 is meaningless until
related to the amount of equity capital invested in the business. If
equity capital (or shareholders’ funds) is $500,000 we can say that the
pre-tax return on equity funds is $100,000/$500,000 = 20%. Is this an
What returns on equity capital has the company generated in previous
What returns on equity capital is being generated by other companies
within the industry?
These relationships (ratios) of financial data can be related and compared to
• favourable and unfavourable performance trends within a business; and
• entity performance relative to the industry performance, providing
industry data is available.
Financial Ratios also convert a large mass of financial data into a meaningful set of
Ratios information for strategic management planning, performance monitoring and
However, there are no absolute or ideal ratio measures. They are merely
pointers or indicators to performance improvement, avoidance of loss or
financial failure, and may be used as a basis for assessing the financial impact
of proposed strategies and objectives upon the entity.
There is no ‘right’ or ‘wrong’ answers in ratio analysis, merely pointers or
indicators which, when analysed individually or in concert with other ratio
information, show where management action is required.
When comparing changes in ratios from period to period, care must be taken
in interpretation. For instance, a change may primarily be due to a change in
accounting methods rather than in performance. However, dynamic analysis
(i.e. comparing changes in a ratio from period to period) does provide
indicators for business audits and performance improvement, the latter being
beneficial when followed through by management.
Inter-firm Comparisons (IFCs)
As previously discussed, it is possible (through use of financial ratios) to
compare and contrast the performance of one entity within an industry with
that of another within the same industry. It is also possible to compare and
contrast the performance of one firm with that of the whole industry, or a large
sample or particular segment of that industry. However, these comparisons
may suffer from one or more of the following limitations:
1. Different accounting methods may be used by individual firms making
up the industry sample, or by the firm being compared.
2. The industry figures may be biased by one or a few very large firms
within the sample.
3. Conversely, an industry mean may be misleading for a small or large
firm being compared with the mean. Ratios may vary for different sizes
4. The companies within the industry sample may span across more than
one industry classification.
5. The industry figures may be relevant for a different financial period,
and could possibly be out-of-date.
A summary of the most commonly used financial
No standard set There is no exclusive or standard set of ratios and performance measures. A
of ratios number of different relationships can be developed and measured, depending
upon the information needs of management. For instance, personnel
management measures are usually not included within the commonly
recognised financial ratios (e.g. the percentage of lost time through industrial
accidents and sick leave, etc. compared with total paid hours).
Other measures may include the percentage of export sales to total sales, or
the percentage of reject parts to total parts produced, or the percentage of late
deliveries to total deliveries. There is no constraint on the types of ratios that
management may require for planning and control purposes.
The more common financial ratios may be grouped or categorised into
liquidity, activity, debt/equity, coverage, profitability and other ratios. The
relevance or significance of each ratio within each category will vary
depending upon the financial structure of the firm and the nature of the
industry. In particular, relevance will depend upon whether the entity:
1. Produces and sell products.
2. Purchases finished products for resale.
3. Provides personal or professional services.
4. Provides other services or infrastructure, such as a building or civil
Liquidity ratios are designed to measure or predict the ability of an entity to
meet its maturing financial obligations (liabilities due for payment) out of its
‘current’ or most liquid assets.
It is important to note that businesses do not fail in the short-term because they
are unprofitable; they fail because they run out of cash (i.e. cash outflow
commitments exceed cash inflows). Thus profitable businesses and growing
businesses in particular, may fail through a liquidity crisis or poor cash
Current Ratio = Current Assets
Liquid Ratio = (Current Assets – Inventory)
Cash position Ratio = (Cash + Short-term Investments)
Although the above ratio measures are helpful and meaningful to prospective
lenders and investors, they should also be supported by a detailed cashflow
Activity (working capital) ratios
Activity ratios are designed to measure efficiency in the use of ‘working
capital’ and point to improvements in working capital management.
(Stock Turnover) = Cost of Goods Sold
Average of opening and closing inventory at cost
Average Inventory at selling price
Turnover = Credit Sales
Average of opening and closing debtors
Turnover = Credit Purchases
Average of opening and closing creditors
Debt: equity ratios
Debt: Equity ratios show how the assets of the business are financed. That is,
the ratio illustrates the proportion financed by debt, and the proportion
financed by owners’ equity by means of contributed capital and reserves.
Debt : Total Assets = (Current + Non Current Liabilities)
Equity : Total Assets = Owners’ or Shareholders’ Equity
(Total Assets = Debt Finance + Equity Funds)
Debt : Equity Ratio = Total Liabilities
Owners’ or Shareholders’ Equity
Level of A highly geared company has greater risk of financial failure than a low
gearing geared company, because interest payable on loan funds must be met from the
cashflows as and when the debt falls due. The firm has a legal obligation to
meet interest payments and eventual payment of loan funds when they become
due for payment, whereas a firm financed by equity capital is under no
obligation to pay a dividend or to return capital to the equity holder.
Thus a highly geared company is more vulnerable in times of an economic or
industry downturn affecting cashflows.
It follows that entities within declining or volatile industries, where cashflows
are uneven or irregular, should gear conservatively.
Coverage ratios measure the capacity of an entity to meet its short and long
term debt financing commitments.
Interest (Times Earned)
(Coverage Ratio) = (Net Profit Before Tax + Interest Payments)
(Fixed Charge Coverage) = (Net Profit Before Tax + Interest Payments +
(Interest Payments + Lease Payments)
Long Term Finance :
Fixed Assets = (Non-Current Liabilities + Equity Funds)
Long Term Solvency Ratio = Total Liabilities
Net Profit Before Tax + Depreciation +
Prepayments – Accruals
Profitability and return ratios
Measure the performance, return for risk, and overall effectiveness of the
Break Even Sales = Fixed Expense
Gross Profit Ratio
Margin of Safety Above
Break Even = (Total Sales – Break Even Sales)
Gross Profit Ratio = Gross Profit
Expense Ratio = Period Expenses
Net Profit Ratio = Net Profit OR
Before Tax Net Profit After Tax
Return on Total Assets
(ROTA) = (Net Profit Before Tax + Interest Payments)
Return on Owners’ Equity or
Net Assets (RONA) = Net Profit OR Net Profit Before Tax
Sales Owners’ Equity Funds
Cash Return on Total Assets
(CROTA) = (Net Profit After Tax + Interest + Depreciation)
Cash Return on Net Assets
(CRONA) = (Net Profit After Tax + Depreciation Expense)
Net Assets or Owners’ Equity
Economic Value Added Net Profit After Tax + Interest + Expense
(EVA) = Adjustments – The Cost of Capital (WACC)
Fixed Asset Turnover = Sales
Total Asset Turnover = Sales
Sales Per Employee = Sales
Total Number of
Gross Profit Per Employee = Gross Profit
Total Number of
Earnings Before Interest
and TAX (EBIT) : Sales = EBIT
EBIT : Total Assets EBIT
(Return on Total Assets) = Total Assets
Other ratios (earnings and retained profits)
Net Profit After Tax :
Drawings or Dividends = Net Profit After Tax
Drawings or Dividends
Earnings per Share = Net Profit After Tax
Number of Ordinary Shares Issues
Price : Earnings Ratio = Share Price at Balance Date
Earnings Per Share
Earnings Yield = Earnings Per Share
Share Price at Balance Date
Dividend Yield = Total Period Dividends
Share Price at Balance Date
Total Assets = Retained Earnings for the Period
Sustainable Growth Rate = Retained Earnings for the Period
Total Assets/(Asset Turnover Ratio * 1/Equity
Relative to sales demand, there are a number of ways to improve profitability:
• For a given level of sales volume:
- reduce the level of overhead expenses or the variable cost of
manufacturing products; and
- reduce the value of inventory required to meet sales demand and
capital required to fund credit sales. Action taken to reduce
working capital will have a twofold positive effect. It will reduce
interest expenses and thus increase profits. It will also reduce the
total level of assets being funded and thus increase the financial
return on assets used.
• If sales volume is growing:
- reduce the variable cost of each product manufactured;
- ensure that overhead expenses increase at a slower rate than gross
profits generated from increased sales; and
- ensure that non-current and working capital assets will be
contained and the return on assets used will be higher.
Reducing the risk of financial failure
A number of failure prediction models, and discriminant functions, have been
developed over the past twenty years. Most claim a predictive reliability of
80% or more. Although research is continuing in the area of predictive
modelling, there is sufficient commonality between models to show that low
• forecast and manage their cashflows and working capital;
• maintain adequate liquid assets to meet their maturing financial
• maintain a “reasonable” ratio of debt to equity funding; and
• generate acceptable returns on funds (assets) invested in the business.
The question is, ‘What is adequate, reasonable and acceptable?’ There is no
clear answer to this question which would apply in all situations, to all
industries and firms within an industry.
One approach to determining what is adequate, reasonable and acceptable
resides within industry ratios (Inter-Firm Comparisons) which give an insight
into how a particular industry views its relevant liquidity, activity, risk and
Diagnosing problems and improving performance
Identified Check the Following Ratios or Factors
High Stock Stockturn Ratio.
Levels: Stock (Inventory) Control Systems & Methods.
Percentage of Scrap, Rejects or Damaged Stock.
Unfavourable Variances to Standard Cost.
Slow & Obsolete Stock.
Stock Shrinkages & Losses Not Accounted For.
High Debtor Accounts Receivable Turnover & Control Methods.
Levels: Use of Aged Debtor Statements & Controls (Days
Bad or Doubtful Debts Not Accounted For.
Cashflow Cashflow Projections & Seasonality Factors.
Crises: Current Ratio (Current Assets/Current Liabilities).
Liquid Ratio (Current Assets – Inventory)/Current
Cash Ratio (Cash + Marketable Investments)/Current
Accounts Receivable Ratio.
Accounts Payable Ratio.
Excessive Drawings & Dividend Payments.
Repayment or Refinancing of Liabilities.
Gearing & Degree of Risk in the Capital Structure.
Total Asset Turnover Ratio.
Expenses to Sales Ratio.
Poor Cost Requisitioning & Payment Authority.
Control: Budget -vs- Actual Expenditure.
Expenses to Sales Ratio.
Sales Turnover per Employee.
Variances to Standard Cost.
Control Over Discretionary Expenditure.
Unfavourable Trends in Ratios.
Poor Costing System & Pricing Policies or Structure.
Profitability: Do Cost, Volume, Profit Sensitivity Analysis.
When were Selling Prices last increased?
Opportunities to Increase Selling Prices.
Gross Profit Ratio & Trends.
Net Profit Ratios & Trends.
Earnings Before Interest & Tax/Total Tangible Assets.
Working Capital Turnover : Frequency per annum.
Total Asset Turnover : Frequency per annum.
Break Even Sales.
Margin of Safety above Break Even Point.
Excessive Investment in Fixed Assets.
Financial Debt : Equity Ratio.
Structure: Times Interest Earned.
Fixed Assets / (Owners’ Equity + Long Term Debt).
Quick Asset Ratio.
Identified Check the Following Ratios or Factors
Internal Financing Ratio = Funds Generated / Total Funds.
Long Term Debt Coverage Ratio.
Asset Structure: Fixed Assets / Total Assets.
Inventory / Total Assets.
Fixed Assets / (Owners’ Equity + Long Term Debt).
Diagnosing problems and improving performance
Unfavourable Probable Causes
Declining Sales Decline in demand may be due to:
Turnover Customers being alienated.
Products in decline stage of life cycle.
Low market acceptance of products due to quality or
High prices relative to competitors or substitute products.
Decline in population and/or income in the geographic
Insufficient promotion or outlets for products.
Declining Gross May be due to:
Profit Margin On Direct costs or manufacturing expenses increasing at a
Sales faster rate than sales.
Significant changes in the mix of product items sold.
Failure to recover cost increases plus an average profit
margin on cost increases.
Declining Net May be due to:
Profit All or some of the causes listed in 2 above.
Fixed overhead expenses increasing at a faster rate then
increases in sales.
Fixed overhead expenses declining at a slower rate than
decline in sales.
A lack of management control over expenses.
Decline in Asset Due to one or more of :
Turnover Ratio Inventory and debtors increasing at a faster rate than sales,
or declining at a slower rate than sales.
Acquisition of non-current (fixed) assets or a decline in
Decline in Rate Due to one or more of:
of Return on The causes outlined in 1 to 4 above.
Decline in Due to:
Working Capital Inventories increasing at a faster rate, or declining at a
Turnover slower rate than sales.
• Executive reports are probably the most common type of business
• This chapter is a guide/template only; not all sections will be needed for
• Executive reports are very focussed, to-the-point documents
• Headings and sub-headings are used to structure the report
• Executive reports are frequently about diagnosing problems and
Windschuttle, K & Elliott, E 1999, Writing, researching, communicating:
communication skills for the information age, 3rd edn, Irwin/McGraw Hill,