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The focus for most business executives and entrepreneurs is on the performance of the company itself. This often means time and energy is focused on customer service, sales, marketing, human resources, production, and process improvement. Driven by passion for the service or product, it makes sense that foundational areas would consume the primary focus. Unfortunately, this often leaves little time and attention for other important functions such as accounting. In fact, many do not realize that numbers tell the story of the business, and accounting is essential to that story.

It is imperative to not only ensure that accounting is delivering accurate and timely reports, but that they are reviewed regularly. Small businesses which stay current with financial reporting usually perform better than those that do not. In fact, capital management is often the difference between success and failure. According to a Small Business Administration (SBA) report, the success rate of businesses that review financial reports monthly is 80%. The numbers sharply decline to 30% and lower when review happens less frequently. For this reason, it is important to regularly review financial reports to understand the entity’s financial vitality. To help clients, prospects, and others, Selden Fox has provided a summary of the key reports to review below.

Balance Sheet

The balance sheet is a financial snapshot of a company’s assets, liabilities, and (shareholder) equity. It is current as of the end of a specific reporting period, usually monthly, quarterly, or annually. The financial term book value is derived from the balance sheet, as the report shows how much a business is worth on paper.

When reviewed internally, the balance sheet can help owners easily determine if the business is succeeding or failing at a given point in time. External stakeholders, like banks or shareholders, use the information to evaluate company resources and financing structure.

Key financial ratios, like liquidity, profitability, and debt-to-equity can be calculated from the balance sheet.

Income Statement

Also called the Profit and Loss Statement (P&L), Statement of Operations, or Statement of Income, the Income Statement shows total profitability over a specific period. It does so by accounting for all revenue and expenses, including:

  • Gross profit
  • Cost of goods sold
  • Operating income
  • Income before taxes
  • Net income
  • Earnings per share
  • Depreciation

The goal, of course, is to generate more money in revenue or sales than expenses. Income statements are a vital tool in cash flow forecasting and overall financial strategy. Information derived from this report can help to inform whether profitability can be improved by increasing revenue, decreasing costs, or both.

Budget Versus Actual Costs

Budgeting business costs is more of an ongoing process than a one-time, once-a-year exercise. Accordingly, the point of a budget v. actual costs report is to see if general expectations for business performance are being met, if the business is trending ahead of schedule or behind, and what adjustments may be needed moving forward.

Owners should look for large variances, which could indicate key areas for company growth; consistent and reoccurring variances, which could indicate either errors in budgeting or financial mismanagement; and variances that grow each month, which could be early warning signs of cash flow issues.

Cash Flow Statement

The cash flow statement is an incredibly versatile financial reporting tool. Stakeholders from all levels inside and out of the organization can use it to extract information about business performance, investment decisions, departmental budgets, and overall business performance.

It contains three buckets of cash activities: operating, investing, and financing.

  • Operating activities detail the business functions necessary to keep the lights on, so to speak. accounts receivable, payable and inventory will be reflected here.
  • Investing activities involve selling, buying, or leasing assets, like vehicles, equipment, or real estate.
  • Financing activities usually don’t impact the bottom line but still affect how much cash is in the bank, like repaying bank loans.

Combined, these cash flow activities can show whether a company is in a growth phase, transition, or decline.

Accounts Receivable & Accounts Payable Aging Report

Failure to keep track of money coming in or going out can be disastrous. That’s where the accounts receivable (A/R) and accounts payable (A/P) aging reports come in. Either can be reviewed at any point. Customers or clients that are slow to pay hurt the business’ cash flow and paying too much to vendors can also negatively impact cash on hand.

Each report is divided into categories based on how long invoices have been outstanding:  current, 1-30 days, 31-60, 61-90 days, and more than 90 days past due.

Owners can improve A/R using a collection policy, which can include sending invoices as soon as possible, shortening the collection window, offering a discount for early payments, and establishing a process for handling default accounts.

Contact Us

Ongoing review of key financial reports will provide management with the information needed to track growth, capture opportunities, and adjust as needed. If you have questions about the information outlined above or need assistance with outsourced accounting, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Amanda Socha

Amanda Socha works with clients in various industries, including private educational institutions, municipalities, trade associations, and nonprofit organizations. She is devoted to offering guidance and accounting services to facilitate a learning environment with long-term benefits for clients and their staff.