Financial management reports—what to look at

Financial Management
Saturday 11th March 2023

Financial management reports—what to look at

Financial Management
Saturday 11th March 2023
Written by Steve Roxby

When you own a business, keeping a close eye on your finances and performance is crucial. 

If you know how you’re going, you can make smart decisions that drive success. For example, if profits are dropping, you can take action to attempt to reverse the situation with operational or marketing shifts. 

The best way to keep track of your business finances is through financial management reports. 

You probably already receive or produce financial management reports, but do you know what areas and key performance indicators you need to look at to get the most value from them?

Here’s an in-depth breakdown to help you analyse things more effectively. 

Financial management reporting and reports

Financial management reporting involves generating financial information to provide a clear and accurate view of your business’s health, performance and prospects. 

Not all information generated needs to be put into a financial management report. Reports simply provide an overview of your business’s financial performance and status. 

The two key financial management reports you need to produce are:

  • Profit and loss statement – Also known as an income statement, this report shows your business’s revenue and expenses over a specific period, including monthly and year to date
  • Balance sheet – This report provides a snapshot of your business’s financial position at a particular point in time

What to look at: Profit and loss (P&L) report

Actual to budget

What to do: Compare your business's actual revenue and expenses to the budgeted or planned revenue and expenses (for the specific period). 

Results: If your revenue is higher than your budget, this is a good sign. If your expenses are higher than your budget generally, this is a bad sign. If revenue is higher and expenses are lower, you may be performing better than expected. 

Actual to last year

What to do: Compare your current year’s actual revenue and expenses with the revenue and expenses of the previous year (see your previous year’s P&L). This is to help identify any changes or trends in your financial performance. 

Results: If your actual revenue is higher than the previous year's, this is a positive sign and vice versa. If your expenses from the current year are higher, it may indicate problems. Lower expenses are what you want to be aiming for. 

Year-to-date vs budget/last year

What to do: Compare your business's actual revenue and expenses for the current year-to-date (YTD) to the budgeted revenue and expenses for the same period.  

Results: If the YTD's actual revenue is higher than budgeted and/or your expenses are lower than budgeted, it indicates your business is performing better than expected. If the opposite applies, your business is likely doing worse than expected. 

Key performance indicators (%)

What to do: Take a look at the following key performance indicators:

  • Gross profit margin– Divide gross profit by revenue
    • Be sure to consider what expenses should and shouldn’t be in your gross profit and direct profit    
  • Direct profit margin – Divide direct profit by revenue 
  • Net profit margin – Divide net profit by revenue 
  • Sales growth – Compare revenue from one period to the same period in the previous year or quarter
  • Expense ratio – Divide total expenses by revenue 

Results: The higher the percentage, the better your business is doing financially. The only exception is the expense ratio. A low expense ratio shows that you’re managing your costs. 

Now look at the why and take action

Once you’ve analysed all the key aspects of your financial management reports, you then need to look at any trends and go through each, considering what the trends are telling you and/or why the results are higher or lower than expected or budgeted for. 

These could be factors such as more sales, greater efficiencies, expense variations or changes in market and economic conditions. Once you determine what they are, you can make adjustments to improve performance if needed. 

What to look at: Balance sheet

Cash balances 

What to do: Determine if you have enough cash to meet obligations and fund your business operations, including growth plans. Also, look at where your cash is coming in and project forward to confirm if/when it might run out. 

Results/action:  If there are problems with your cash flow, consider how to improve it.  This could be simply by reducing costs or by more strategic action. If your cash flow looks good, you should be considering how to apply those extra reserves—perhaps reinvestment in your business, debt reduction or returns to the owners.

Working capital 

What to do: Closely related to cash balances and short-term cash flow, working capital also factors in your other current assets, such as accounts receivable and inventory. Review to ensure they're sufficient to cover your current liabilities.

Results/action: If your working capital is too low, you may need to take steps to rectify it. Increase trading performance to improve over time or look for opportunities to shift some current (short-term) liabilities to non-current liabilities.

Aged debtors and debtor days

What to do: Determine how many aged debtors (unpaid customer invoices) you have. They present a risk to your cash flow and can be a credit risk. Also, look at the average number of days your debtors take to pay you.

Results/action: If you have a high number of aged debtors or debt collection is slow, it may be necessary to review and revise your collections process to improve cash flow and reduce the risk of bad debt. You may also want to adjust your financial statements to reflect the potential loss from bad debt.

Stock turnover 

What to do:  Look at how long you keep stock before it’s sold. Divide the cost of goods sold (COGS) by the average inventory value over a specific period. The result is your stock turnover ratio.

Results/action: A high stock turnover rate indicates that your business is efficiently managing its inventory, while a low stock turnover rate may indicate you’re holding onto excess inventory. 

Several things you can do to improve stock turnover include reviewing your inventory management practices, analysing your inventory mix, adjusting your pricing strategy and liquidating excess inventory. 

Tax provision 

What to do: Make sure you understand both your historical unpaid tax liabilities and the tax liability you’re accruing through the current financial year. Are you recording the current provision in your accounts? And do you have the cash put aside to fund it?

Results/action: If your current tax liability is higher than your tax provision, you may need to adjust your provision to reflect the increased liability. You may also want to analyse the reasons for the differences. 

Ageing of equipment 

What to do: Review your fixed asset inventory to assess the condition of each item and determine whether it’s still in good working order or requires dealing with. 

Results/action: Equipment can be dealt with in several ways, including repairing and refurbishing, replacing, retiring or monitoring. If investment is needed, consider how this will be funded, and ideally, identify and budget for this well in advance.

Employee leave provisions/liability 

What to do: Look at the balance of the employee leave provision on the balance sheet. If it’s not recorded on your balance sheet, consider adding it. At the very least, make sure you can monitor it through other payroll reporting.

Results/action: Record it as a liability as it represents the amount of money your business owes to your employees for accrued leave entitlements. By understanding your employee leave provisions, you can manage your obligations to your employees effectively while providing insight into your business’s financial performance and future cash flow.

Review your reports regularly 

We hope this has given you a good understanding of what to look for in your financial management reporting, what the results mean, and what actions to take. We recommend you report on a regular basis as follows:

  • Monthly – Profit and loss and working capital position
  • Quarterly –  More detailed monitoring, including rolling forecast (what’s coming up) and tax provision and projection
  • Annually/biannually – Tie finance performance into your strategic review 

The more you understand your financial management reports, the deeper insights you can gain and the more effective action you can take to make improvements in your business to boost your position and bottom line. 

Do you have questions about your financial management reports? Contact us today for insights and personalised advice.