I review multiple financial statements every month. While I don’t have an actual checklist and there are variations from one client to the next, I tend to follow the same process each time.
- I almost always start with a trend report of the income statement. Reporting capabilities vary across accounting programs but I’m typically looking at a minimum of six months. One of my clients has a program that produces a trailing 12 month report. It’s perfect for this purpose. Another only produces 4 months and for that one I keep a spreadsheet so I can look at a longer period of time. I’m looking for anomalies and to make sure nothing is missed (rent, is a good example). I’m also looking at both dollars and percent of each line item to total revenue. Here’s a short video if you’d like to hear more.
- Next I turn to how the company did vs. budget. Do any deviations tell a story? Do any suggest something wrong in the accounting for the month? What can I learn about the business by comparing actual to budget? Have there been changes in the business since we set the budget? Could we have budgeted a certain line item in a better way and can we incorporate that into the next budgeting cycle?
- My third step is to compare to the same period last year. Generally, I believe that I incorporated everything I knew about last year into the current year budget but it’s always a good comparison anyway.
- Usually, I turn to the balance sheet next. Again, I’m looking for a trend. What’s changed? Is inventory or receivables out of line? Do we understand trends in prepaid and accrual accounts? Are we validating the accuracy of deferred revenue?
- The statement of cash flows is next on my list. Some accounting systems do a good job of producing trend reporting. Others don’t so I make sure we maintain a spreadsheet. If you’re familiar with this report, you know it’s a listing of changes in balance sheet accounts from the prior month organized in a specific way. That said, there are times when I’ll notice something on this report that I didn’t notice during the balance sheet review.
- Next, I turn to various KPIs (Key Performance Indicators). These vary by company. They might include employee utilization, days receivable outstanding, revenue/employee, or inventory turns.
- Finally, there are usually a handful of accounts where I ask to see transaction detail. Sometimes I find a mistake but usually the actual activity tells me something about what’s going on in the business. Hopefully, this is confirmatory as I’ve had conversations during the month about important changes. I don’t like surprises at month end.
Use this as a guide. Drop me a note and let me know how it worked for you.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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your cash is flowing. know where.®
Ken Homza
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