Financial reports are only useful if you apply the information within them for making informed decisions. Reviewing statements without acting is like reading a GPS and never turning the steering wheel.
Forecasting
Your Financial Statements are a snapshot of your business’s financial performance up to a given moment in time. They contain a backwards look at your business. However, that backward-looking information can, in most cases, provide you and your managers with a starting point for developing forecasts. These forecasts will enable you and your team to adjust many aspects of your organization’s operations.
Cash Flow Forecasting
Cash flow forecasts are one of the most important forecasts you should create and use. Cash flow forecasts are based upon your Accounts Receivable (A/R) aging and your Accounts Payable (A/P) aging reports and a tracking KPI of average days to collect A/R. Using your cash flow forecast will allow you to see when cash might tighten and adjust early—long before crisis mode. Alternatively, the cash flow forecast may show you that you have a surplus of cash in your company. That surplus cash may be used to pay down debt or invested in higher yielding short to medium term investments.
Monthly Budget Report
Another financial report that you should monitor is the budget report. This report will present a line-by-line comparison of budgeted amount, actual amount, and variance (both positive and negative) on a monthly and year-to-date basis. This report provides early insight into where your company or your departments may be trending away from expected results. The earlier you address variances, the better.
Sales Analysis and Other Sales Related Reports
At minimum the monthly sales register your bookkeeping system produces, or more sophisticated sales reports, sales force pipeline reports, sales by product reports, and many other sales related reports can by analyzed alone or can be fed into a dashboard system. Either way, the more sales information you have, the better your decisions regarding market trends or product mix will be.
Monthly Financial Review Meetings
All the reports mentioned above help build a consistent system of control in your organization. The alternative to this is to abdicate these matters which can lead to adverse consequences. You and your managers need to review these reports and forecasts on a regular basis (monthly in most cases) to effectively delegate operational authority to your departments.
Takeaway
Understanding your company’s financial reports and the forecasts and dashboards based upon them turns business owners and managers into confident decision-makers instead of reactive firefighters. Managing a business or department without these resources is the equivalent of driving your car with mud on the windshield.