5 financial reports every business should be running

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Can financial reporting analysis really help your business grow? Absolutely! To employ a data-driven finance approach, CFOs need to move finance functions up the analytic value chain to offer more detailed analyses, better forecasting, and increasingly granular information on products, suppliers, customers, and more. In turn, their analyses inform the business, increase corporate agility, and point the way to cost savings.

Here are the 5 Financial Reports businesses can start analyzing to make better business decisions.

1. Income Statement

The income statement indicates the profit and loss of a company over a period of time. It essentially takes all your income, revenue, or sales, and subtracts your expenses. In standard practice, you would want to see actuals for the month, quarter-to-date, year-to-date versus the budgeted or forecasted values or amounts from the prior two years. For best practice, you can have a rolling 12 month income statement, which would give you a stronger indication of how your company’s sales and expenses are changing over the past year. While it is often delivered as a quarterly statement, the income statement should ideally be issued monthly.

Having your income statement available on a daily basis will allow your CEO to know what your results are overall before month-end. Generally speaking, most expenses are in the same ballpark range, so reviewing the income statement two to three days before month-end should give your CEO and CFO a good idea of your company’s profit. Key indicators to analyze within the income statement include margins, expenses as a percentage of sales and earnings before interest, taxes, depreciation, and amortization (EBITDA).

2. Balance Sheet

The balance sheet shows your company’s assets, liabilities, and equity at a point in time. By comparing your balance sheet year-over-year, you can see how these key aspects have changed, indicating whether or not the financial health of your company has improved or declined during this time frame.

More specifically, the level of liquidity of an item impacts where it is placed in the balance sheet, with more liquid assets (for example, trade debtors, inventory cash) called current assets, being classified separately from less liquid assets in the assets section. Similarly, current liabilities are also classified separately from long term liabilities in the liabilities section.

The balance sheet provides key financial ratios that analysts and banks use to assess the health of your company, including:

  • Liquidity – This reflects the ratio of current assets over current liabilities. It refers to your company’s ability to meet its obligations in the short term.
  • Leverage – The debt to equity ratio shows the financial risk of your company.

Here is a good resource which expands on the different values and ratios a balance sheet can provide.

3. Cash Flow Statement

The cash flow statement is one of the most vital reports for a business but many businesses  do not prepare or perform cash flow forecasting due to resource constraints or simply not knowing how to even start. The cash flow statement shows you how much cash was generated and how it was used. There are three core sections to a cash flow statement – operating activities, investing activities, and financing activities. Comparing these activities will allow you to see how well your company is managing its operations.

The cash flow statement shows you the actual movement of your dollars. This is where the income statement and cash flow differ. Your income statement could show a very rosy number for revenue but if most of that was contributed via credit sales, cash flow would not reflect this. Hence the phrase, cash is reality.

There are two main methods for preparing a cash flow statement – direct and indirect. Many ERP systems can be configured to provide data to enable the preparation of a cash flow statement using the direct method. However – it does take discipline.

The indirect method is more common as it takes information from the income statement and balance sheet. Numbers can then be easily linked between these three financial statements.

So how do you build a cash flow statement? Here is our white paper that explains how you can create a cash flow statement for your company.

4. Working Capital Report

While the income statement, balance sheet and cash flow reports form the three key financial statements, they are prepared on a monthly, quarterly, and annual basis. This creates what we call a “black hole” for the CEO during the course of a month.

Why is this? For example – major expense items such as salaries and rent are paid at the end of the month. Thus, an income statement would show a healthy profit for the entire duration of the month and a sudden drop when all the expenses are booked.

Another example would be that of managing cash on a day-to-day basis. The CEO and CFO should be alerted in advance if a certain payment is due and there is insufficient cash to cover it.

The working capital report can help to partially offset these concerns. Working capital is money available to the company for day-to-day operations, which is current assets – current liabilities.

Many organizations prepare it on a weekly basis by collecting key information such as receivablespayablesinventory, bank position, bank limit, top 10 supplies payments due, and top 10 debtors. The working capital report should be able to quickly identify if a company is unable to meet its short term obligations and trigger the CEO or CFO to look for ways to mitigate that risk such as extending credit and focusing on debt collections.

In addition to this, the working capital report can also address whether or not the company is utilizing its loans and overdrafts effectively, allowing its finance teams to quickly identify underutilization or overutilization and thus prevent it from becoming an ongoing problem.

5. Sales Analysis Report

The sales analysis report is the one report we recommend companies to review on a daily basis. This is because sales is a very important number – when sales is performing on target, all other items will fall into place. It should contain more granular information on sales than reported in the other reports mentioned above.

For example, the report could show sales data by major product lines, customer segments, or sales reps. It can also highlight quantities sold and post-discount prices to provide the average selling price for the day or month-to-date. These numbers can then be compared to the company’s sales targets to offer a solid perspective on how sales has performed over a specific period of time.

Looking at the amount of sales achieved in the sales analysis report would allow the CEO and CFO to assess the company’s financial position on a daily basis. In turn, they would be able to identify areas where volume of sales or average price is dropping or sales are higher or lower than expected, and review production and purchasing plans to fix the issue or take advantage of the opportunity.

With these five reports in hand, you can equip your executive team with the financial information they need to make smarter business decisions for your organization. Together, they give your executive team a holistic perspective on how the business is doing and where they should put their focus to benefit the company the most.