How can you use segment reporting to identify growth opportunities?

1 What is segment reporting?

Segment reporting is a method of accounting that shows the revenues, expenses, assets, liabilities, and cash flows of each segment of a company separately. A segment is a part of a company that engages in distinct business activities, has different customers or markets, and is subject to different risks and opportunities. Segment reporting is required by accounting standards for public companies and is useful for internal management and external stakeholders.

2 Why is segment reporting important?

Segment reporting is important because it provides more detailed and relevant information about the performance and position of a company than consolidated financial statements. It can help you to evaluate the profitability and return on investment of each segment, identify their strengths and weaknesses, allocate resources strategically, and communicate with external stakeholders. Additionally, it can give you insights into factors that affect each segment's performance, such as market conditions, competition, customer preferences, and cost structure. This information can be used to make decisions about investing in new products, expanding into new markets, or divesting underperforming segments. Segment reporting also helps to communicate the sources of value and risk in the company and how the company manages them.

3 How to use segment reporting for profitability analysis?

The main purpose of segment reporting is to analyze the profitability of each segment and how it contributes to the overall profitability of the company. To do this, you must first identify the segments of your company based on criteria like business activities, customers or markets, and risks and opportunities. You can also calculate the segment revenues, expenses, and profit or loss for each segment with the same accounting policies as in the consolidated financial statements. Additionally, you should allocate common costs and assets shared by multiple segments using a reasonable and consistent basis. Finally, compare the segment profitability and margin with consolidated profitability and margin, segment goals and benchmarks, industry averages, and competitors' results to assess your competitive position.

4 How to use segment reporting for growth analysis?

Another purpose of segment reporting is to analyze the growth potential of each segment and how it affects the overall growth of the company. To do this, you can calculate the segment growth rate, which is the percentage change in segment revenue or profit or loss from one period to another, and also the compound annual growth rate (CAGR). Additionally, it's important to identify drivers and barriers of segment growth such as market size, customer demand, product innovation, pricing strategy, cost efficiency, and regulatory environment. Furthermore, you can use the PESTEL framework to analyze external factors that influence segment growth. Moreover, you can evaluate the segment growth potential based on current and projected performance and position of the segment with the help of BCG matrix. Finally, you can develop segment growth strategies based on the segment growth potential and company's objectives and resources with Ansoff matrix.

5 How to use segment reporting for reporting and communication?

The final purpose of segment reporting is to report and communicate the segment performance and position to the internal and external stakeholders of the company. To do this, you need to prepare the segment report according to the relevant accounting standards and guidelines, such as IFRS 8 or US GAAP Topic 280. It should be material, reliable, comparable, and consistent with the information used by management to make decisions and assess performance. Presenting the segment report in a clear and concise format is also important, as it should highlight key figures and indicators of each segment and the company as a whole. Visualizing data with tables, charts, graphs, or dashboards can help compare segments with previous periods and targets. Explaining the segment report in a narrative form provides context and analysis of results, as well as implications for strategy and outlook. Using the SMART framework – specific, measurable, achievable, relevant, and time-bound – is a great way to set and communicate segment goals and actions. Ultimately, segment reporting is an effective tool that can help identify growth opportunities by providing more insight into profitability, risks, and trends of each segment. It can help evaluate, compare, and improve performance while making better decisions for your company's future.