The Three Numbers You Should Be Reviewing Monthly

Keeping track of your company's finances is one of the most important things you can do as a business owner. With all the financial reports available for review, it can be overwhelming to decide which numbers to pay attention to. In this article, we will discuss the most important financial reports and financial numbers to review monthly.

Profit and Loss Statement

The profit and loss statement, also known as the income statement, is the first report we will discuss. The profit and loss statement summarizes all the income and expense transactions your business conducts over the course of a specific time period. Many companies use monthly, quarterly, and yearly income statements.

Why is the income statement important? First, by having an idea of the actual income and expenses of your business each period, you can more easily tell if there are major discrepancies between actual and projected income and expenses.

For example, suppose you expected to sell $10,000 worth of a certain product to your customers this month. When the income statement is generated, you realize that your business only made $5,000 in sales. You can use this information to speak with salespeople or other relevant parties to determine where the shortfall is coming from.

Now suppose you have limited time and just look at the net profit for the month. Similar to above, if net income comes in much greater or much less than expected, you can look at the breakdown of income and expenses in the report to determine where the variance is coming from.

The profit and loss statement is a valuable tool to gauge business performance over a certain period of time and is one of the most useful numbers to review monthly.

Cash Flow Statement

As a business owner, you have probably heard the phrase that “cash is king.” That is especially true when it comes to business, and the cash flow report is the next of the data-rich numbers to review monthly.

Cash flow simply refers to the cash inflows and outflows your business undergoes each month, quarter, or year. You might be wondering why we need a cash flow statement since we have income and expenses from the profit and loss statement.

It can be easy to confuse profit for cash, but the two reports are different. Net profit includes sales made on account, or accounts receivable. Cash inflows refer to actual cash coming into the business.

For example, suppose you sell a product on account for $100. The $100 is added to your income because you made the sale, but it will not be included in your cash flow statement until the client actually makes payment and clears their account.

Cash flow is extremely important as it gives you insight into how your business will meet its operational needs, whether it has enough cash to invest in new capital, or whether it needs to look for additional financing in lean times.

For day-to-day needs, the cash flow from operations is the number to look to. Net cash provided, or used by operations tells you whether your day-to-day business activities generated enough cash to cover expenses such as salary, rent, and utilities. If not, you can make adjustments to terms offered for credit sales, such as making payments due within 30 days instead of 60.

Additionally, the cash flow report can give you an idea of whether you should invest in a new piece of equipment, or will need to cut cash outflows in other areas.

You can see how important the statement of cash flows is, and why it is one of the numbers to review monthly.

Aging AP/AR Report

The aging AP (accounts payable) and AR (accounts receivable) reports are both important numbers to review monthly. These reports work together with the cash flow report and are an important tool to help smooth and even increase your cash inflows.

The basics of these reports are as follows: Accounts are classified by the length of time they are due, usually in categories of 30, 60, and 90 days or more. Collection actions such as email reminders or collection calls can then be placed to aid in collecting the payment due.

Here is a simple example of an aging AR report:

From the above example you can conclude that a call should be made to customer B to collect on their $700 balance, and maybe an email reminder to customer A about their $600 balance outstanding.

The actual categories are flexible, and can be changed depending on your company's needs. It can be easy to overlook the older accounts, so you can see why the aging reports are important numbers to review.

Summary

We hope this discussion has been helpful in giving you an outline of the important numbers to review for your business. If you are interested in more information on our accounting and business services, check out the rest of the Balancing Keys website!