The 3 reports you should look at every month, should be looked at in this order:
This is your checklist for whether or not, and how accurate your books are. You cannot rely on what is on any other report, until you know that this one is accurate. A simple example is, that if my bank accounts are not reconciled, to confirm that they are accurate, then transactions could be missing. If transactions are missing, this could impact any and every area of the financials. Missing deposits, cash is off. Those deposits are likely from customers. That means accounts receivable and / or income is off.
The balance sheet has to be checked, line by line first, and foremost, before you look at any other report.
Once the balance sheet is confirmed, then you can look at the profit and loss statement. At this point, everything that should be on the books is. When you review the profit and loss, especially in the context of knowing the Balance Sheet has been confirmed, then you are looking for errors in classification. In other words, you know everything is there. The question now, is, whether or not it is in the right place.
Are there expenses that should be capitalized? Is there something in “printing” that really should be advertising? These kinds of questions refer to how things are coded. These things are easily fixed. You edit the transaction, and re-code the account from one expense to another, or from an expense to an asset.
The statement of cash flows is usually overlooked, but it’s very important to look at. Where are your cash flows coming from? Is your accounts receivable increasing? Are we locking up too much cash in inventory, or by investing in fixed assets? Are we deriving too much cash flow from financing activity? These questions are all answered on the statement of cash flows, and the answer to that last one could mean the difference between a business that is doing well and one that is in big trouble.
On the surface, it might look like I am stating the obvious here, but if you go back and re-read the details, I believe you’ll have some less obvious insights into why it’s important to know these 3 reports you should look at every month. I believe I’ve now also outlined why it’s important to review them in this particular order.
In my next post, we’ll begin to look at how to take this to the next level. We’ll look at Financial Statement Analysis Strategies for managing your business using the information found on these reports. This is where the time, expense, and trouble you go to, in order to have really accurate and reliable financial statements begins to pay off.