Gone are the days when you would take a shoebox of statements and receipts to your accountant once a year. A few months later, your accountant would produce your financial reports and tax return based on the data provided.
Perhaps you grumbled a bit and were surprised by the taxes owed. But you paid. Some more chit chat and you were done for the year.
But that’s not how modern growing businesses run their business. Astute business owners schedule a monthly review meeting with their cloud based accountants with the goal of understanding their business performance on a regular basis.
This allows them to learn from what happened and apply this knowledge to make smarter business decisions going forward.
We’ll list below 5 financial reports that progressive business owners must review with their accountant every month.
1. Profit and Loss
This one’s a given … to review the income and expenses for the past month and understand your profitability. Here is what you should pay attention to when reviewing this report:
- Accrual v/s Cash – you should understand if the financial reports are on Accrual basis (i.e. based on dates when transactions happened) or Cash basis (i.e. based on dates when transactions were settled for payment). To measure true financial performance, your books should be on an accrual basis.
- Comparison – make this a comparative report to the performance for last few months as well as same month last year. This allows you to assess trending and how your business has done relatively. This is especially important for seasonal businesses.
- Margins – For businesses that run on tight margins (who doesn’t these days!), insert rows for Gross Margin % and Net Profit %. Again, this percentage analysis allows you to monitor if your margins are being squeezed by rising costs, even if your sales are increasing.
2. Balance Sheet
Many businesses don’t look at Balance Sheet on a regular basis, but they should. Here’s what they should watch out for:
- Bank and credit card balances – Confirm with your bookkeeper that all banks and credit cards have been reconciled. You can do your own comparison to the actual statements.
- Accounts Receivable and Payable – Get a sense at a high level where these balances stand and whether they have been increasing or decreasing over time. We’ll get to the detailed reports below.
- Tax liabilities – This section is particularly important. Keep an eye on your sales tax (GST/HST) liability whether you file quarterly or annually. Many business owners are surprised by the amount of GST/HST owed at the time of filing. Also, ask your accountant for an estimate of income taxes owed at the end of the year, or ideally, accrue this estimate on your balance sheet.
- Loans – If you have bank loans, seeing the number on the balance sheet gives a broader perspective of seeing all your liabilities in one place.
- Dividends or Shareholder loan account – if you withdraw money during the year in lump sums, then keep an eye on this balance so that you know how you’re trending toward taking dividends into personal income. This way, when it’s time to pay personal taxes, you can plan better.
- Assets v/s Liabilities – Many business owners manage their “performance” by monitoring money in the bank, while disregarding the liabilities and other short term cash outflow items. Take a macro view of your balance sheet and make this assessment.
3. Cash Flow Statement
Remember that the Net Profit on your Profit & Loss does not equal your Cash Flow! This is especially true if your financial reports are on an accrual basis.
This report can come right out of your accounting system. Xero particularly has a great simplified report for the cash flow movement.
This report bridges the gap between your opening and ending bank balances. Here’s what to watch out for:
- Cash flow from Operations:
- Accounts Receivable (AR) – If your AR is increasing, this will be a negative on your cash flow statement. Therefore, you should take measures to collect money faster, such as offering early payment discounts, make the payment process convenient, and send regular reminders.
- Accounts Payable (AP) – Similarly, if you are paying down AP, this will be a negative on the statement, which is fine as long as you are generally aligning your AP cycle with your AR cycle.
- Inventory – If you are continuously stocking up inventory, this will be a negative. Ensure you are only stocking up fast moving inventory and getting rid of inventory (through special sales, etc.) that is slow moving. Measure your inventory turnover monthly.
- For the most part, the rest of the items will be a summarized reflection of your P&L. Of course, this report will be specific to each business’ situation.
- Cash flow from Investing:
- If your business requires regular capital investment, this is where that would show up.
- If you make financial investments of excess cash, that use of cash, and returns from investment, would show up here.
- Cash flow from financing:
- When you receive new loans, that influx of cash will be a positive here
- When you pay down those loans, that negative will also be here
- Your dividend payments will be here
4. Accounts Receivable Aging
This report shows details of your Accounts Receivable listing by customer and puts them in buckets of how long the invoice has been due. For e.g. Current, 30 days overdue, 60 days overdue, 90+ days overdue.
Your goal is to lower the 60 and over days as much as possible. Again, if early payment incentives don’t work, you should send a strong signal to customers who delay payments to you that you are not a bank. Communicate your policy on charging interest clearly and enforce it.
You can also compare this report to previous few months to assess if your 60+ and 90+ day buckets are trending higher or lower. You can set a goal/benchmark for your company that, say, no more than 15% of AR will be more than 60 days overdue.
Needless to say, this varies by industry. In restaurants and e-commerce businesses, this report is not much relevant. However, for service based and manufacturing businesses, it’s one of the most important.
Key message from this report is this –> You’ve already done the work. Collecting payment on that work is what allows you to pay your rent, your staff, etc. Make every effort to collect as soon as possible after sale.
5. Accounts Payable Aging
Similar to AR Aging report, this report shows the detailed listing of amounts you owe to your vendors in the respective buckets discussed above.
You don’t want to owe money to your vendors for too long, but you also don’t want to pay down your AP too fast!
Keep an eye if your vendors have been charging you interest if you have been paying late.
Call your vendors to negotiate better payment terms to ease your cash flow.
If cash is really tight, call your vendors and ask that if you’d pay right now v/s 30-60 days later, would they knock off 5-10%.
Finally, make sure that items on this report are actually payable! We’ve seen several instances where payables on this report have already been paid! These duplications can cause your financial reports to be inaccurate across the board.
Reversing of AP can also cause an HST issue in case you’ve claimed HST on these bills twice.
Conclusion
Producing the above financial reports may sound like a lot of work but once you and your bookkeeper/accountant get in the flow of it, these financial reports are generated quickly from your accounting system.
The key is not to spend a lot of time preparing these reports but to spend quality time, say 60 minutes, discussing these reports with your bookkeeper.
Pro tip – Have these reports prepared in advance and sent by your bookkeeper before the call, so that you come to the call already prepared with your questions and observations.