Why Reviewing and Understanding Your Financial Reports Matters

How often are you reviewing your financial reports?

Let’s face it: financial reports might not be the most thrilling part of running a business (unless you’re accounts professional like us in which case you just love them!), but they’re super important. They give you a clear picture of your business’s financial health and help you make smarter decisions.

Knowing your finances inside and out is crucial to steering your business in the right direction. But many business owners find understanding financial reports tricky, whether you’re handling it yourself or working with an accountant or bookkeeper.

In this post, we’ll dive into why it’s key to check your financial reports monthly. First, though, let’s examine the essential reports every business should have in their toolkit.

The four financial reports every business needs

The number of reports you review every month will be dependent on the complexity of your business. Regardless of how elaborate your business is, these are the four essentials.

Statement of Financial Performance: This is your Profit and Loss report or Income Statement. It shows how much your business earned and spent over a specific period (monthly, quarterly, yearly). It breaks down into:
- Revenues: How much you made
- Expenses: How much you spent
- Net Operating Income: Subtract expenses from revenues to see your profit.
Statement of Financial Position: (Balance Sheet). This report shows your business’s assets, liabilities, and equity at a point in time. It includes:
- Assets: Things like cash, equipment, and accounts receivable.
- Liabilities: Debts like bank loans, credit cards, and accounts payable.
- Equity: The difference between your assets and liabilities, including retained earnings and owner contributions.
Accounts Receivable Ageing Report (Aged Receivables): This report details how much money is owed to you and is typically broken down by how overdue each amount is (e.g. Current, 30 days, 60 days, 90 days).
Accounts Payable Ageing Report (Aged Payables): This shows what you owe to others, also broken down by overdue periods.

These reports are like the financial dashboard of your business.

Why you should be reviewing your financial reports monthly

So now that you know what reports to review each month, let’s consider the bigger question – why?

Here’s why they are super useful for every business owner.

Know Your Business: Check your Profit and Loss report monthly to see how your business is doing. Comparing months can help you spot trends and catch any weird expenses or errors in your accounting.
Loan Info: When applying for a loan or overdraft, banks will review your Profit and Loss report and Balance Sheet together.
Get Paid Faster: Review your Accounts Receivable Aged Summary each month to chase overdue payments. The sooner you follow up, the more likely you are to get paid.
Supplier Relations: Keep track of your supplier bills with your Aged Payables report. Paying on time is key to maintaining good relationships with your suppliers.
Cash Flow: Knowing what you owe and what you’re owed helps with cash flow planning. This understanding also helps in planning sales and marketing to keep revenue flowing.
Smart Decisions: Your financial reports show how your business is performing. The better you understand these reports, the better decisions you can make to improve your profitability and financial health.

With financial reports more is possible!

Regularly reviewing and understanding your financial reports is crucial for making smart business moves.

Swift and sharp business decisions are not the product of historical information – they are the result of the latest figures in your financial reports telling your business’s overall financial story.

Whether you’re a new business owner or have been running a company for years, the financial review process plays a crucial role in making informed decisions and driving growth.

So, if you aren’t reviewing your financial reports monthly it’s time to kick that financially unhealthy habit. Pencil in a monthly review into your calendar.

If you would like to know which other financial reports are relevant to your business and how to read them to make more possible, book a chat with Balanced Beans today.