What your monthly financial statements should tell you

Many owners receive financial statements every month and look only at the bottom line, if at all. That is not a failing of the owner — it usually means the statements are not answering the questions the owner actually has. Good monthly statements should make four questions easy to answer.

1. Did we make money this month — and why?

The profit and loss statement shows revenue, costs and profit for the period. The useful version compares the month with the same month last year and with the year to date, so a change stands out. When profit moves, you should be able to see whether revenue, the cost of delivering it, or overhead moved it.

2. Where did the cash go?

Profit and cash are not the same thing. A profitable month can still leave less cash in the bank — because customers have not paid yet, because inventory was bought, or because loan principal and owner draws are paid from cash but do not appear as expenses. A simple cash summary, or a statement of cash flows, closes that gap.

3. What do we owe, and what are we owed?

The balance sheet shows what the business owns and owes at month-end: cash, receivables, payables, loans, and the owners’ equity. Watching receivables and payables month to month shows whether customers are paying on time, and whether the business is.

4. Are the numbers reliable?

None of the above helps if the underlying books are not right. Bank and credit card accounts should be reconciled to their statements every month, and the balance sheet should hold no surprises: no negative cash, no large amounts sitting in an “uncategorized” or “ask my accountant” account, and loan balances that agree with the lender’s.

Signs the numbers need attention

• The statements arrive months after the period ends, or only at tax time.
• Large or growing balances in suspense, clearing or uncategorized accounts.
• Profit that swings sharply from month to month without a business reason.
• Owner payments recorded as expenses, or personal and business spending mixed together.

Current, reconciled books — and someone to explain what they show — are what monthly accounting is for. It is also where year-round tax planning starts.