What to Look for in Monthly Financial Reports
If you’re like many business owners, you know that monthly financial reports are an important part of keeping your business in check. Whether it’s monitoring cash flow or tracking expenses, these reports help with strategic decision-making and sound financial management.
But entrepreneurs find themselves just “going through the motions” and aren’t crystal clear on what to look for when reviewing their monthly financial reports. In this article, we’ll review the basics of financial reports to make sure you’re using them to your advantage.
Accurate and Timely Monthly Financial Reports
In the hustle and bustle of running a business, it’s tempting to view monthly financial reports as a chore to rush through or simply put off altogether.
Don’t give in to the temptation!
Accurate and timely monthly financial reports can serve as the bedrock for informed strategic decision-making. They offer incomparable insight into a company's financial standing and can uncover trends, identify areas for improvement, and give you confidence in your finances.
Neglecting monthly financial reports can result in:
Financial Risk: Inaccurate or delayed financial reporting can hide emerging financial risks, such as cash flow shortages or unsustainable debt levels, leaving businesses vulnerable to unforeseen crises or regulatory penalties.
Poor Decision-Making: You may lack the necessary insights to make informed strategic choices, resulting in reactive rather than proactive responses to financial challenges or market trends.
Misallocated Resources: Without up-to-date financial data, businesses may misallocate resources, leading to inefficiencies and missed opportunities for growth.
Key Components of Monthly Financial Reports
Monthly financial reports typically consist of several key documents which together provide a more holistic view of the company's financial situation. Below is a summary of some of the more common reports that businesses produce and review regularly.
Income Statement
The income statement offers insight into a company's financial performance over a specific time period. An income statement will provide you with insight into:
Revenue: The total income generated from your sales and/or services during the period.
Expenses: Costs incurred, including operating expenses, depreciation, and taxes.
Profitability: Your net income or loss, highlighting the company's overall financial health.
By analyzing revenues and expenses, you can assess the effectiveness of sales strategies, identify areas of cost inefficiency, evaluate the financial viability of specific products or services, and set realistic targets.
Balance Sheet
The balance sheet provides a comprehensive overview of a company's financial position at a given point in time, detailing:
Assets: Resources owned by the company, such as cash, inventory, property, and equipment.
Liabilities: Obligations including debts, accounts payable, and accrued expenses.
Equity: The company's net worth, calculated as assets minus liabilities.
By looking at the balance sheet, you can go beyond seeing if there’s enough income to pay the bills and make decisions about potential investments and other growth areas.
Cash Flow Statement
The cash flow statement tracks the inflow and outflow of cash during a specified period, offering insights into a company's liquidity and ability to meet its financial obligations. You can expect to see the following on your cash flow statement:
Operating Activities: Cash generated or used in the day-to-day operations of the business, such as sales revenue and operating expenses.
Investing Activities: Cash flows related to investments in assets, such as property, equipment, or securities.
Financing Activities: Cash flows from activities such as borrowing or repaying debt.
By looking at your cash flow, you’ll be able to see if you have enough cash available to meet all of your financial obligations and take advantage of new opportunities. It can also help you determine if you’re spending too much cash on certain activities, such as buying new equipment or paying off loans.
Tracking Budget to Actual Analysis on Monthly Financial Reports
Budgets are rarely 100% accurate, because it can be difficult to fully predict income and expenses. However, by comparing your planned budget with actual expenditures and revenues, you can identify major discrepancies from your financial targets.
But tracking budget to actuals doesn’t only help detect potential overspending or underspending areas. This process can be a regular opportunity to proactively adjust where you’re putting your company’s resources.
Lastly, as time goes on, you’ll improve your ability to budget and forecast, allowing you to further refine future budgetary decisions, improve overall financial management practices, and make strong financial decisions.
Tracking KPIs on Monthly Financial Reports
Key Performance Indicators (KPIs) are a concise way to make sense of the detailed financial information available. Tracking KPIs is a bit like checking your company’s scoreboard to see how you’re performing. Examples of KPIs include:
Revenue Growth Rate: The percentage increase in revenue over a specific period, indicating the company's ability to generate more income over time.
Profit Margin: The percentage of revenue that translates into profit after deducting expenses.
Return on Investment (ROI): the profitability of an investment relative to its cost.
However, KPIs don’t need to be purely financial. You can develop KPIs based on your business goals and values, such as customer satisfaction, operational efficiency, employee turnover, and environmental sustainability.
Using Monthly Financial Reports for Decision-Making
Monthly financial reports are important for informed decision-making in business, but you don’t have to develop them on your own. At Accounting Made Accessible, our team can help define your business goals, make sense of the numbers and how to reach your goals faster, neutralize potential roadblocks, and create an action plan.
Contact us today to learn how we can assist with your monthly financial reporting and beyond!