Management Reporting Under High Inflation: Reading Real Performance

When prices rise fast, sales up 50% on last year can look like strong growth at first glance. If prices rose by a similar rate over the same period, the company may in fact have sold the same volume. A similar illusion arises on the cost side: sales made from stock bought at old prices make the margin look temporarily high. This article explains how the management report should show real performance under high inflation.

Statutory statements versus the management report

The statutory financial statements of entities applying TFRS, BOBİ FRS or KÜMİ FRS (Turkish reporting frameworks) are adjusted for inflation in accordance with the principles of TMS 29 (the Turkish equivalent of IAS 29) or BOBİ FRS Section 25 for the periods required by KGK’s announcement; whether this still applies in the current period should be checked against KGK’s latest announcements. For the method, see TMS 29. The management report, by contrast, is prepared for monthly decisions and should answer the company’s own questions. The two approaches may use different indices or methods; if so, the difference should be explained. It is not a problem for management to look at one figure and the audited statements at another; the problem is not knowing the difference.

1. Real comparison

When comparing periods, bring prior-period figures to the current price level, or deflate current figures to the prior price level.

Hypothetical example — not based on a real company.

	Last year	This year
Nominal sales (TRY million)	100	150
Average price index	100	140
Sales at last year’s prices (150 × 100 / 140)	100	107.1
Nominal growth		50%
Real growth		≈ 7.1%

Which index to use is a management decision. A general price index reflects purchasing power; a sector- or company-specific price index reflects the company’s own price movements. The chosen index should be written down and not changed from period to period.

2. Price and volume effects

The change in sales is split by product into price and volume effects. When volume is calculated at total or group level using an average price, the difference arising from a change in product mix appears separately as a mix effect:

• Price effect: (This year’s price − last year’s price) × this year’s volume
• Volume effect: (This year’s volume − last year’s volume) × last year’s price
• Mix effect: The difference arising from a change in product mix

This split shows which products and channels real growth comes from. For detail, see price, volume and mix variance analysis.

3. Margin at current cost

In unadjusted (nominal) management figures, cost of goods sold reflects the price at which inventory was bought. Because the selling price is current, the margin may include an “inflation profit” that will not recur when the stock is replaced. The management report can show two margins together:

• the margin in the accounting records,
• the margin based on the current (replacement) cost of goods sold.

The second can be the better guide for pricing decisions, because it reflects what will be paid to replace the stock sold.

4. Cash and working capital

Inflation inflates working capital in nominal terms. Carrying the same amount of stock and receivables needs more lira every month. In the management report, therefore:

• track working capital days (DSO, DIO, DPO) before amounts,
• make visible the loss of value on long-dated receivables against inflation,
• assess the cost of holding cash.

For the indicators, see the cash conversion cycle.

Suggestions for report design

1. Nominal and real columns side by side in the main table.
2. A price, volume and mix bridge for sales growth.
3. Margin at recorded and at current cost.
4. A short explanation of the index and method used.
5. A periodic reconciliation with the statutory statements.

Common mistakes

• Presenting nominal growth as performance: If targets and bonuses are tied to nominal figures, inflation is rewarded as if it were performance.
• Changing the index from period to period: Comparability breaks down.
• Treating stock profit as permanent: If prices are set on old costs, the margin narrows when stock is replaced.
• Cutting the management report off from the statutory statements: If the difference is not explained, two different realities emerge.

What it means for management

Under high inflation, the management report’s job is to show the real picture behind nominal figures. Real growth, the split between price and volume, and margin at current cost put pricing, cost and investment decisions on the right footing. A written, consistent method is essential for the figures to be trusted.

Sources last checked: 21 October 2026