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WHAT A MONTHLY FINANCIAL REVIEW SHOULD INCLUDE


By Dave Costello, TCV Growth Partner -

After you get the books closed each month what should your financial review include? A financial review is pretty natural for someone like the CFO, but what if you are a relatively young company and can’t afford a CFO? Don’t worry! There are resources that can assist, beginning with this post.


There are several reports at which you should be looking. Some I consider required; others could be as available or as necessary. My list of required reports are the balance sheet, the accounts receivable aging report, the income statement, and the budget/actual variance comparison. Reports that could be reviewed, if available, include a cash flow statement and possibly a forecast of performance for the remainder of the year.


So what should you be looking at when you review these reports? Read on!


Balance Sheet:


First let’s talk about structure. I like to look for trends on the balance sheet to see what has been happening over time. By trend I mean take a look at the prior year end and several months in between the current date and the prior year end. For example, if you are reviewing the March balance sheet, you might structure it to show December, January, February and March. When looking at May, you might structure it to show December, March, April and May. You can also add variances to this report, if that’s helpful, so that you can see the change from December to March or December to March and to May. Whatever you deem valuable and helpful for you to manage the business can be included.


The reason I like to see a trend is that it shows me what is happening over time with important accounts on the balance sheet. What are those important accounts? Well, cash and accounts receivable are at the top of my list. For many businesses these may be the only accounts you need to focus on to have a handle on the health of the business. For larger businesses that may have more investment tied up in balance sheet accounts, you might look at inventory, some fixed assets if your business makes capital investments that are part of the operations such as a fleet of cars or trucks, and some businesses may need to look at the level of accounts payable if a payables account is used to capture amounts due to vendors.


What can these accounts tell you? If cash is declining and receivables are increasing it may mean you are financing your customers! You should monitor your cash closely and you should review your accounts receivable aging every month. You will develop a feel for the amount of cash you should maintain and that your company’s operations can generate, and you should make sure you are comfortable with the level of cash throughout the month. An estimate of a minimum level of cash might be two months of payroll expense (or greater) to provide time for collecting your invoice. Of course, this depends on the complexity of your business and also whether or not you are purchasing inventory materials or other kinds of operating assets.


Accounts Receivable Aging:


The accounts receivable aging report shows the length of time the invoices you sent to your customers have been outstanding. If you notice more customers are aging into the over 90 days outstanding category that’s not a good sign. You should have a process in place to call customers who’s accounts receivable balance goes beyond 30 days. Your script would be 1) I just want to make sure you got my invoice, 2) I want to make sure there was no problem with the work or service that was performed, and 3) could you provide me with an estimate for when it will be paid? Do this every month with every invoice that reaches 30 days outstanding. Your message obviously gets a little stronger if the invoice reaches 60 days and stronger still if it gets to 90 days. But collecting for the work you performed is critical to your business’s success so don’t be afraid to ask for payment on amounts that are due. Don’t be your customer’s bank and finance their operations!


Other metrics you could use to monitor cash and receivables are the quick ratio and days revenue outstanding. These are not critical in most cases, it depends on the size of your business, and they are not really necessary in most small businesses.


Income Statement:


The income statement shows you how much money your business made, or lost, in the month. It’s important to review this every month so you know how the business is performing. While incurring losses occasionally will happen, it’s not a great strategy in my opinion.


The income statement shows your company’s revenues or income at the top and then deducts from the revenue total the expenses you incurred during the month. The bottom line is your net income. You didn’t go into business to lose money although in some cases a startup may take time to get sufficient traction before achieving positive net income on a regular and recurring basis. If you are in that situation you definitely want to see monthly revenues increasing towards the point of generating positive net income consistently. This is also where the budget variance report can be very helpful!


What periods should you be looking at in the income statement? I think it depends on what is important to your business but what I like to look at is current month, prior month, current year-to-date, prior year-to-date. You could also include quarters in this if that is valuable information to have for your business, and you can include variance calculations as well. If it’s helpful, you could also look at the trend over a period. Sometimes the prior year-to-date may not be meaningful if since that time there has been a significant change in your business, like a sale of a particular sector or line of business.


There are obviously some key accounts to look at. Many small businesses have only one revenue stream but if you have more than one you should record them separately in your accounting records so you can monitor them. Payroll is typically a large expense item for small businesses, so that will be critical to monitor. You might also be to the point of measuring utilization of your staff meaning that if you pay them for 40 hours a week, are they working on projects that you can bill for all 40 hours? Typically, 100% utilization is a very difficult goal, but if you don’t know what the measure is, you can’t take action to improve it. Many admin type roles may have 20% to 50% utilization, which is acceptable, but for staff doing client work, most of the time you would want it to be at 75% or higher. Again, it depends on the business and its complexity, and you probably need to consider vacation or sick time in that measure as well.


A helpful measure is gross profit margin, which is the percentage of revenue that remains after deducting costs associated directly with client work.That means your accounting system has to be set up to capture those direct costs. Those direct costs are called Cost of Goods Sold. Small businesses sometimes don’t have the systems to be able to do this and it’s OK to make assumptions of direct vs. indirect costs to estimate the gross margin. In larger businesses, you will see a section that captures Cost of Goods Sold and below that all the SG&A Costs, short for Selling, General, and Administrative Costs. At the end of the day, many industry groups capture and report industry averages for gross profit margin and that’s what you would be comparing to your gross profit margin.


Budget/Actual Variance Report:


A companion report to the income statement is the budget/actual variance report. The actual numbers come from the income statement and the budget is what you prepared at the beginning of the year that represents the plan for the business for the year. You should prepare a monthly budget so that you can do the budget/actual variance report on a monthly basis. This is what I recommend to my clients. Monitoring variances on a monthly basis provides the early warning system that tells you when something may be going off the rails, or significantly different than the budget.


The periods for review are similar to the income statement periods but typically are current month actual, current month budget, variance; year-to-date actual, year-to-date budget, variance. This review will readily tell you when the actual results are straying significantly from the budget. That’s the point you need to take action to get things back in line! And this is the value of this report.


Certainly, you need to monitor variances in sales or revenues to see if that is on track, and you need to monitor variances in significant expenses such as payroll and any other major spend in your business. The budget/actual variance report is a great tool to help you manage the business, keep it on track, and establish accountabilities within your company.


The income statement shows you how much money your business made, or lost, in the month. It’s important to review this every month so you know how the business is performing. While incurring losses occasionally will happen,.


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