The Monthly Financial Reports Every Founder Should Review

A profit on the page can arrive in the same month the account cannot cover payroll. SCORE’s financial management workbook says there is a real gap between making a profit and having cash.

Monthly financial reports close that gap only if you read more than one page. SCORE says the income statement and the balance sheet and the cash flow statement work as a set. The aging of accounts receivable tells you which of those sales are sitting unpaid.

The four reports and the question each one answers

A founder financial review is a short pass through key business reports. Each one answers a different question.

SCORE says these statements help you watch the business and spot trouble even when you are not asking a lender for money. Lenders and investors ask for them when you do. The SBA says a balance sheet is one document lenders read. An SBA 7(a) loan over three hundred fifty thousand dollars requires one.

AccountingCoach says a corporation’s full set includes the notes and a statement of comprehensive income and a statement of stockholders’ equity. It quotes the Financial Accounting Standards Board on a plain limit. No one statement is likely to hold every fact a decision needs. A nonprofit uses a different equity label. AccountingCoach says the equation there is assets equal liabilities plus net assets.

The SBA says private companies are not required to follow GAAP. The Financial Accounting Standards Board maintains those principles. GAAP is the common set of accounting rules in the United States. Your monthly pass is a management habit. It is not the same thing as an audited package.

When to look

Monthly bookkeeping review follows a cadence SCORE’s accounting guide lists.

• Each day. Track cash coming in and cash going out.
• Each week. Record billings and payments. Update payroll.
• Each month. Balance the accounts. Review payroll and payroll taxes. Review the month-end balance sheet.
• Each quarter. Review profit and loss projections. Make the quarterly payroll and tax payments. The SBA’s KPI guidance says to review key indicators each quarter.
• Each year. Review year-end inventory and the year-end financials. Complete the tax forms.

The month is where the four reports meet. SCORE’s financial management workbook says to run an income statement and a statement of accounts receivable on a regular monthly basis so you can see the cash stream. SCORE’s statement article says to compare the cash flow projection with the actual cash flow statement at the end of each month.

The SBA’s planning guidance says the point of a forecast is running the business. Each month you compare what happened with what you expected. Set the month next to the prior month and the prior quarter and the prior year. If sales rise, adjust inventory. If sales fall, adjust spending. Look at the work behind the numbers. Decide what to do more of and what to change.

A separate SBA post describes a monthly cash forecast in one line. Start with the checking balance. Add what you expect to collect in the next 30 days. Subtract the bills you expect to pay. A positive forecast helps you decide on inventory and on how much to hold for a slow stretch.

The profit and loss statement

P&L balance sheet review starts with the period in the heading. SCORE says an income statement records income and expenses for a month or a quarter or a year. Revenues are what the business earned in that period. Expenses are what it spent to run. SCORE says you subtract expenses from revenues to get net operating income. A simple one-person business may need only those two parts.

A fuller statement splits the story. SCORE says you can separate operating income from sales of the product or service and other income such as the sale of a piece of equipment. Subtract the cost of goods sold from revenue and you have gross margin or gross profit. Depreciation of fixed assets can sit on the statement too.

The monthly question is whether the costs outran the sales. SCORE’s example is the owner who feels fine because revenue is rising. The income statement then shows expenses that outpace that revenue. SCORE says you can pull the business back by reducing expenses or raising prices or both.

AccountingCoach says it is common for a corporation to prepare monthly statements for the people who run it. Statements between the annual reports are interim statements. A purchase that will serve many months should not all land on one month’s profit. AccountingCoach’s illustration is an asset bought for sixty thousand dollars with a life of sixty months. Each monthly income statement shows one thousand dollars of expense. The balance sheet asset declines by that same one thousand dollars.

Forbes Advisor separates the jobs that produce this page. Bookkeeping records the transactions. Accounting turns the records into reports. The chart of accounts is the list of categories behind every line. Forbes Advisor calls it the financial encyclopedia. Personal spending in the business accounts blurs the month. Forbes Advisor says to keep the business accounts separate from personal accounts from the start.

The balance sheet

The balance sheet is a snapshot. AccountingCoach says a balance sheet dated on the last day of the period includes every transaction through the end of that day. The equation is assets equal liabilities plus equity. The SBA uses the same equation. Its illustration is an owner who puts in one thousand dollars of cash. Assets are one thousand dollars. Liabilities are zero. Equity is one thousand dollars. The two sides match.

SCORE groups what you own. Current assets include cash and accounts receivable and inventory. Long-term assets include savings or investments you do not plan to turn into cash for at least a year. Fixed assets include equipment and buildings and vehicles you do not plan to sell. Current liabilities are debts due within 12 months, such as accounts payable and loan payments and taxes. Long-term liabilities are debts due after that.

The SBA says owner’s equity is what would remain after the liabilities are paid. For a sole proprietorship it is the cash and property the owner put in, minus withdrawals such as a monthly draw. For a corporation it is stock plus retained earnings, the profits not paid out. AccountingCoach connects the reports. A profit increases retained earnings. A loss decreases them. Compare equity with the prior date. The SBA says a decline is a reason to find out why. Paying down debt is one change it names. It calls a rising equity balance a good result.

Small business financial reports show leverage on this page. The SBA’s debt ratio is total liabilities divided by total assets. Its example is assets of one hundred thousand dollars and debts of fifty-five thousand dollars. The ratio is 55 percent. The SBA says a larger percentage means more leverage and that too much debt against assets can cause trouble. The SBA says an acceptable ratio varies by industry. The sources do not name one ratio for every trade.

AccountingCoach describes liquidity in plain math. Working capital is current assets minus current liabilities. That comparison is about having enough to meet payroll and other bills when they come due. The current ratio divides current assets by current liabilities. The quick ratio leaves inventory and prepaid expenses out of the current assets. Receivables and inventory help only if they turn into cash in time to pay those bills.

Some of what you built never appears. AccountingCoach says reputation and the customer base and a brand you developed yourself and the management team stay off the balance sheet when they cannot be measured in dollars. A trademark you bought from someone else can appear at its cost. A name you built through your own marketing does not.

Before you trust the page, AccountingCoach says to compare it with earlier balance sheets and with the backup.

• Cash should be the balance the bank reconciliation supports.
• Accounts receivable net of any allowance should match the aging.
• Inventory should match a cost schedule.
• Prepaids should match what you paid ahead and have not used yet.
• Accounts payable should match a list of what you owe.
• Accrued amounts should match costs you owe and have not recorded yet.
• Deferred revenue should match cash you received for work you have not earned yet.

The SBA says only C corporations must include a balance sheet with the annual tax return. Corporations with total receipts and total assets under two hundred fifty thousand dollars at year end do not complete that schedule. The form rule is not a reason to skip the monthly snapshot. The SBA says an accounting product can build the balance sheet from the information you enter. Or you can use a SCORE template.

The cash flow statement

Cash flow report review answers a different question from the profit page. AccountingCoach says the statement of cash flows is required for a complete set because the income statement is prepared on the accrual method. Many investors and analysts treat cash as the figure that matters. The statement shows the cash inflows and outflows for the same period as the income statement. It explains why cash changed from one balance sheet date to the next.

The three sections are operating activities and investing activities and financing activities. AccountingCoach says the statement discloses interest paid and income taxes paid. It discloses major investing or financing moves that used no cash, such as exchanging stock for land.

SCORE describes the same report in founder language. List cash received. List cash paid out, including payroll and loan payments and rent and inventory and taxes. Cash received minus cash paid is the cash at the end of the period. SCORE says running out of cash is the biggest reason small businesses fail. Watching the statement is how you see whether you can pay rent and people and taxes.

Add a 12-month projection. SCORE says to compare that projection with the actual statement at the end of each month so the trends show up. Two moves it names are practical. Send invoices without waiting so cash can arrive. Ask suppliers for 60-day or 90-day terms so the payment waits.

The SBA’s two hundred dollar example shows why the profit page and the cash page can disagree. You make the sale in January. The customer pays in February. Accrual puts the sale on January’s books. Cash puts it on February’s books. The SBA says accrual gives an immediate snapshot and the figures can deceive. Cash shows the cash more clearly and is easier to follow. Cash has less to say about the future. SCORE’s accounting guide adds a tax warning for accrual. You may owe tax on income you have not received yet.

The SBA says someone has to manage accounts receivable and accounts payable and available cash and the bank reconciliation and payroll. That is the work underneath this report.

Aged receivables

The aging is the report behind the accounts receivable line. AccountingCoach says the general ledger holds one total. The customer detail lives in a subsidiary ledger. Those details must equal the control account. The aging sorts unpaid invoices by customer and by invoice date so you can see who is slow.

AccountingCoach’s illustration uses a report dated August 31 and terms of net 30. Unpaid invoices dated in August are current. July invoices are 1 to 30 days past due. June invoices are 31 to 60 days past due. Older invoices fall in the next columns. Most accounting software builds this report from the open invoices.

The risk is time. AccountingCoach says a customer that meets a lax supplier will pay a stricter one first. An older unpaid invoice is more likely to become a credit loss. SCORE’s financial management workbook cites commercial debt-recovery benchmarks. It puts the average recovery near 55 to 60 percent once an account is 90 days past due. After six months it puts recovery near 40 percent. After one year it puts the chance of collection at 10 to 25 percent. SCORE mentor Frank Wey gives this follow-up. If the terms are 30 days, call on the 35th day.

The same workbook says you need to know how much you are owed and which accounts are past due. You need cash on hand today and next week and next month. The aging is how the “how much” becomes a list of names.

A company can use the aging to estimate what it will not collect. AccountingCoach shows that estimate coming from the company’s own past experience by age bucket. The rates in that illustration belong to the example. They are not a standard you should copy.

If you use the cash method, the SBA says the sale hits the books when the money arrives. The open invoices can sit in the aging before they are income. You read the aging to collect. You read the profit statement for the method your books use.

Pitfalls that waste the hour

• One report. A strong profit with unpaid invoices and a thin bank balance is the gap SCORE describes. Read the set.
• Mismatched headings. A month next to a quarter will look like a collapse or a miracle. Match the period before you judge the change.
• A one-time gain in revenue. SCORE says the sale of equipment is other income. It is not proof the product sold better.
• An asset dumped into one month. AccountingCoach’s sixty-month illustration is the pattern. Spread a long-lived cost. Do not hide a true monthly cost in a long schedule.
• An aging that does not match the balance sheet. AccountingCoach says the customer detail and the receivable total have to agree. If they do not, fix the list before you call anyone.
• Equity that falls because of draws. The SBA says a sole proprietor’s withdrawals reduce equity. A draw is not the same event as a drop in sales. Name which one happened.
• Numbers with no decision. The SBA says to look at the business behind the report and choose what to change.

A monthly finance checklist

Review financial statements after the bank is balanced. AccountingCoach will not treat the cash line as finished without that reconciliation. Then walk the pages in this order.

1. Confirm the heading on each report. Period or date. Same month.
2. Read the profit and loss statement. Separate product or service sales from other income. Compare gross profit and expenses with last month and with the forecast.
3. Read the balance sheet. Confirm the equation. Compare equity with the prior date. Note working capital.
4. Read the cash flow statement. Compare it with the 12-month projection. Note operating cash and any loan or equipment cash.
5. Read the aging. Tie the total to accounts receivable. List every balance past the terms you set. Call on the date you promised.
6. Write one change. A price. An expense. A collection call. A slower inventory order. The SBA’s planning guidance is the reason for the sentence. The review ends with a decision.

Business performance reports are the record of that decision next month. You will see whether the change showed up.

When the categories and the bank activity live in one system, the four reports are pulls for the month you closed. QuickBooks Online is one place to keep that file. The software does not decide whether an expense outran sales or whether a customer should hear from you. You do.

Set a date each month and keep it. SCORE’s checklist names the month-end balance sheet. The SBA names the monthly comparison. If the reports come from QuickBooks Online, open them after the reconciliation. The profit tells you the period. The balance sheet tells you the date. The cash statement and the aging tell you whether you can fund the next one.