Financial reporting analysis can help your business grow. 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, and customers. In turn, their analyses inform the business, increase corporate agility, and point the way to cost savings.
Use these 5 Financial Reports to start analyzing to make better business decisions.
The income statement indicates the profit and loss of a company over a period of time. It takes all your income, revenue, or sales, and subtracts your expenses. You 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.
Having your income statement available on a daily basis will allow your CEO to see results overall before month-end. Many 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 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.
The balance sheet shows your assets, liabilities, and equity. 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.
The level of liquidity of an item impacts where it is placed in the balance sheet, with more liquid assets, 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 such as leverage and liquidity that analysts and banks use to assess the health of your company.
The cash flow statement is one of the most vital reports for a business. Many businesses do not prepare or perform cash flow forecasting due to resource constraints. This document shows 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.
It also 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 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.
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 some gray area for the CEO during the course of a month.
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.
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 receivables, payables, inventory, 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.
The 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.
The sales analysis report should be reviewed on a daily basis because sales is a very important number – when sales is performing on target, all other items will fall into place.
The report could show sales data by 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 be compared to the company’s sales targets to offer a solid perspective on how sales has performed over a 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, 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.
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Content originally from Sage Intacct.