Noted financial and business expert Warren Buffet, has said that “accounting is the language of business” and businesspeople must know how to read and interpret financial statements. The clear consensus among accounting experts is that business owners should review your business’s financial condition each month. Among other institutions, Princeton University requires “regular, at least monthly” reviews for its organizations.
Why You Should Review Your Business’s Financial Condition Monthly
Clearly, to have an accurate bearing on a business’s financial condition, financial reports must be kept meticulously and accurately and that requires professional expertise.
Here are five reasons why you should review your business’s financial condition monthly:
First, financial statements give business owners a picture of a business’s performance over time so you can analyze decisions that were made and identify what has worked and why.
Second, financial statements help you understand current conditions, so you don’t fly blind in making crucial decisions.
Third, financial statements can help you predict the future to ensure the financial health of your enterprise.
Fourth, financial statements help you make informed decisions rather than “gut feel” decisions.
Fifth, financial statements contribute to the critical area of tax planning.
Consistent (at least monthly) review of financial statements will ensure that financial data is accurate and will help ensure the accountability of all employees who contribute to the financial statements.
Financial Statements Used to Review Your Business’s Financial Condition
Here are the five financial statements that should be used monthly to review your business’s financial condition:
- Profit and Loss (P&L) Statement. This report compares revenue generated to all expenses incurred and shows the resulting profit or loss during each month reviewed. Using this report, business owners can assess how well operations are driving the business. If losses are incurred each month, that indicates that changes must be made to the trajectory of sales or expenses. In net, is your business profitable, losing money, or breaking even?
- Balance Sheet. A balance sheet lists an enterprise’s assets, liabilities, and equity. Analyzing the trends and financial ratios provided by a balance sheet can show a company’s health, liquidity, and financial leverage. Figures from a balance sheet can help determine when to buy equipment, invest in inventory, or pay off a loan, for example.
- Cash Flow Statement. A cash flow statement shows the change in a company’s cash position, and it facilitates decisions in the areas of operating, financing, and investing. For example, depending on your cash position, you may need to cut expenses or secure more working capital.
- Accounts Payable. This statement shows how much you owe, so you don’t miss critical payments.
- Accounts Receivable. This statement shows how much you are owed so that you can keep on top of collections.
Insights You Can Get When You Review Your Business’s Financial Condition
Consider these insights you can get when you review your business’s financial condition:
A business owner can identify if there are opportunities to outsource some of the business functions. There may be potential tax deductions to secure. Signs of fraud can be detected, and steps identified so that risks of potential fraud are minimized. Opportunities for expansion can be revealed and redundant expenses can be eliminated.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.