Most growing businesses produce more financial reports than they use. The system generates them and the bookkeeper sends them, but the numbers rarely change a decision. Five reports deserve a deliberate monthly reading. Each answers a different question, and each is misread in a predictable way.
1. The profit and loss statement
The profit and loss statement shows income earned and expenses incurred over a period, usually a month, quarter or financial year. It moves from revenue through cost of sales to gross profit, then through operating expenses to net profit.
Look at the shape rather than the final line. Gross margin as a percentage of revenue shows whether pricing and direct costs are holding; operating expenses should be read against revenue growth, with one-off items separated so they do not distort the trend.
The common misreading is treating profit as cash. Profit recognises income when it is earned and expenses when they are incurred, not when money moves. Unpaid customer invoices, stock on the shelf, loan repayments, equipment purchases, GST collected for the ATO and owners' drawings all move the bank balance without appearing in profit. A profitable business can still run out of cash.
2. The balance sheet
The balance sheet is a snapshot at a point in time: what the business owns, what it owes and the equity that remains. Where the profit and loss statement describes a journey, the balance sheet shows where the business stands at the end of it.
Look at working capital, meaning current assets against current liabilities, at amounts owed to the ATO for GST, PAYG withholding and income tax, at superannuation guarantee owing, and at loans between the business and its owners. These balances show whether profit has become something durable or been absorbed by obligations.
The common misreading is seeing the bank balance as money available to spend. Part of it is GST collected, part may be superannuation due next quarter and part deposits for work not yet done. The balance sheet shows those claims; the bank statement does not.
3. The cash-flow statement and forecast
The statement looks backwards and explains how the opening bank balance became the closing one, separating operating, investing and financing movements. The forecast looks forward, weekly or monthly, and estimates what will be received and paid.
In the statement, check whether operations generate cash or the business is being carried by borrowing or owner contributions. In the forecast, look for the lowest point rather than the closing balance, and for months in which BAS, income tax, superannuation and loan repayments fall together.
The common misreading is taking comfort from today's balance without asking what is committed for the coming quarter. A forecast is also not a budget: the budget states an intention, the forecast an expectation to be revised as the picture changes.
4. Aged receivables and payables
The aged receivables report lists who owes the business money and for how long. The aged payables report does the same for what the business owes. Together they explain most of the gap between profit and cash.
Worth checking each month:
- Amounts past agreed terms, and whether the same customers appear month after month.
- Concentration: how much of the total is owed by one or two customers.
- Disputed invoices, unallocated payments and old credit notes that make the report unreliable.
- On the payables side, suppliers being stretched to fund the business, and amounts owed to the ATO.
The common misreading is treating a large receivables balance as a sign of strong sales. It may be. It may also mean invoices go out late, credit terms are loose or collection is nobody's job.
5. Budget-versus-actual reporting
A budget-versus-actual report, usually the core of a monthly management pack, compares what the business planned with what it did. The value is in the variance column and the explanation beside it, not the totals.
Look for variances that are large, persistent or moving in one direction, and ask what year end looks like if the trend continues. A short commentary from whoever owns each line turns the report from a table into a conversation.
The common misreading is assuming a favourable variance is always good news. Revenue ahead of budget with gross margin behind it may mean discounting. Spending well under budget on marketing or maintenance may be storing up a problem, not saving money.
How the five connect
The profit and loss statement explains performance over the period. The balance sheet shows what that performance left behind. The cash-flow statement reconciles the two, and the forecast projects them forward. The aged reports explain the working capital on the balance sheet and the timing in the forecast, and the budget-versus-actual report holds all of it against what the business intended.
Read together on the same day each month, they turn accounting from a compliance exercise into management information. Read separately, or only at year end, much of their value is lost. The aim is not to produce five reports but to understand them well enough to act.
Where to start
- Agree a date each month by which the books are reconciled and the five reports produced.
- Set aside an hour to read them together and note the questions they raise.
- Ask your accountant to walk through one report a month, starting with the cash-flow forecast.
- Decide which measures matter most for the year ahead and put them on the management report's first page.
This article provides general information only. It does not take into account your objectives, financial situation or needs and is not a substitute for professional advice. Speak with a qualified adviser about your circumstances.