How often should I review my financial statements?
As a small business owner, it is important to keep an eye on the company financials and take out time to review your financial statements, such as profit and loss statement, balance sheet and cash flow statement. How often do you take a look at or review your business’ financial statements? If the answer is every year then it’s time to reconsider.
Why should you review it every month?
Taking a look at your financial statements at the end of the month can let you see if you are bringing in enough revenue compared to your expenses and also if your revenue is increasing, decreasing or holding steady from month to month. It can also be worth your time to compare your statements from each month to the statements from the same month in the previous year. That way, you’re able to see if there are any patterns in your business and can help you predict how busy you’ll be going forward or whether some times of the year are likely to be slower than others.
Here are the 3 financial reports that small business owners must review with their accountants every month.
Income statement: A profit and loss statement (P&L; also referred to as an Income Statement) helps you analyze profitability. Your company’s income statement contains your bottom line, which tells you your net income after all expenses have been subtracted from revenues. With your income statement on your business review checklist, you can ensure costs aren’t taking away from your bottom line and putting you in a mound of debt your company can’t pay off.
Here are the questions to ask:
- Is the company profitable for the month, quarter, and year?
- What can you do to improve profitably? Eliminate certain expenses, improve efficiency etc.
- Is everything accurate?
Balance Sheet: It is an overview of the company’s current finances. It shows the assets, debts, and equity the company holds during that reporting period.
Here are the questions to ask:
- Is the company collecting on all of its accounts and paying bills on time?
- Are bad debts or write offs properly accounted for?
- Are there any potential liabilities that should be records on the balance sheet?
Cash Flow Statement: Another monthly accounting report to review is the cash flow statement. A summary of all cash coming in and going out each month, this statement is different from the reports above in that it only takes into account cash activity.
Unlike the balance sheet or income statement, there is no credit or loss information. The cash flow statement is an important document because it offers the most intuitive level of insight into all the transactions that go through a company.
Here are some questions to ask:
- Do you have enough cash available to make the necessary payments?
- What are the steps needed to improve the cash flows such as improving accounts receivables or slowing accounts payable?
- Has the company properly accounted for all fixed, variable, and non-operating cash needs?
For small business owners, the terminology surrounding financial reporting can be intimidating. Reviewing financial reports isn’t just something that you do at the end of the year to prepare your corporate tax return. It’s an ongoing process that allows you to have information at your fingertips when you need it.
DM Tax provides a full range of bookkeeping and accounting services. If you’d like to discuss getting better financial reporting for your business, please schedule a consultation. We’d be happy to help.