There are many misconceptions about financial statements and what you need to see how your business is doing.
The usual statements accountants produce are the Profit & Loss Account or Income & Expenditure statement, the Balance Sheet and finally a Cashflow statement. These are done on an annual basis and if the company is listed on a stock market also produced quarterly. These statements are prepared in line with generally accepted accounting principles (GAAP) and other regulatory requirements, which are very prescriptive and are not the easy for a lay person to understand.
It also important to realise that the formal financial statements all document history and usually for a business to monitor its progress, additional information such as forecasts of future activity are also required.
So what do you need to monitor the progress of your business?
You should have the usual three statements documenting your profits, cash flows and the balance sheet. Since these show what the business has achieved, it is also important to produce a rolling revenue and expenditure forecast and a 12 month cashflow forecast. These should be prepared on a monthly basis.
Here are the key tips and what to include in your monthly statements and what to look for.
Profit and Loss Statement
The profit and loss statement should include the following key items.
- Summarise the revenue and expenditure for the period and show earnings before interest, depreciation, tax and amortisation (EBITDA). It’s a common term used by investors since this figure is used to value a business, i.e. a multiple of EBITDA is what a business can be sold for.
- Show Operating profits, which is after deducting depreciation from EBITDA and also Net profits, which is Operating profits after interest and corporation tax.
- The above are all important and you can show each of them divided by the revenue as a percentage to compare these against your industry sector. This will give you an idea of how well your business is performing, e.g. the EBITDA margin should be similar for mature businesses in a sector and if its much lower, then there maybe inefficiencies in your business.
- Always compare the revenue and expenditures to a budget or forecast.
This is a snapshot of the assets and liabilities of the business at any one time
- Have the latest figures and comparisons of the previous month and the previous year-end so that you can see how the assets and liabilities have moved over time.
- If your current assets or current liabilities have changed significantly, find out why.
This will summarise the cash arising from operations and how it was spent, e.g. on machinery, taxes etc. However, it is a summary of what has already taken place and may tell you what you already know. So the important statements to produce are the rolling forecasts.
Get a 12 monthly profit and loss forecast for the next 12 months and every month roll it forward a month to get your rolling forecasts. After some time, your forecasting will get better especially if you keep comparing them to the actuals achieved.
From this, it is easy to prepare a rolling 12 monthly cashflow forecast, so that you can monitor any negative cash balances that may arise in the future and plan accordingly.
A good Finance Director or CFO should be able to get these statements prepared and also make sure these are produced on a timely basis. However, your accounting processes and systems must also be up to date. There is no point at looking at some thing that is a few months old!
With such monthly statements, you will be able to better understand your business and where it is going.