Data-led decisions: the must-have financial reports to cut costs and drive performance
10 July 2023
Running a successful business requires making tough choices, particularly in the face of higher operating costs, shrinking household budgets, and business uncertainty. In today's volatile economic landscape, the stakes have never been higher for business owners and senior leaders to make astute decisions that drive productivity and profitability.
In these market conditions, monthly financial reports are an indispensable component of your ongoing business operations. Any accounting and business advisory professional will tell you that when strategically harnessed, they can unleash a wealth of benefits, including cost savings, sharper decision-making, and an overall enhancement in business performance.
Let’s dive in to learn about the monthly financial reports your business should be analysing to provide financial data and insights that will ultimately result in costs savings and better business performance.
Understanding the value of management reports
Management reports collect and visualise the information business leaders need to help them make better operating decisions. These financial reports detail key performance indicators (KPIs) that create a picture of how your business is performing compared to its competition and often include reports on operations, finance and more.
Management reports can be used to improve just about any part of your business' operations as they allow you to see strengths, weaknesses, and areas needing improvement quickly and precisely.
Financial reports to include in a management report
While management reports are customised according to your business objectives and priorities, there are some critical financial reports you should monitor every month to help you control costs and improve the performance of your business operations.
If each of the following financial reports are included in your management report, you will have the information and insight you need to move your business forward.
Income statements (profit and loss)
An income statement, also known as a profit and loss statement, details your business' revenue, expenses, and profit over a predetermined period, typically a month, quarter, or year. This report is crucial to being able to understand the financial state of your business. It's also vital to identify current trends alongside opportunities for improvement.
An income statement includes the following components:
Revenue: The total amount of money generated from sales of products or services.
Cost of Goods Sold (COGS): The direct costs associated with producing or delivering the products or services sold, including materials, labour, and manufacturing overhead.
Gross Profit: Calculated by subtracting the COGS from the revenue, it represents the profit generated before accounting for operating expenses.
Operating Expenses: The costs incurred in running the day-to-day operations of the business, such as salaries, rent, utilities, marketing expenses, and administrative costs.
Operating Income: Derived by subtracting the operating expenses from the gross profit, it indicates the profit or loss from the core operations of the business.
Other Income and Expenses: Additional revenues or expenses not directly related to the core operations, such as interest income, interest expense, gains or losses from investments or asset sales, etc.
Net Income: The final result after accounting for all revenues, expenses, and taxes. It represents the profit or loss for the period.
Analysing your income statement helps identify trends in revenue growth, cost fluctuations, and overall profitability. It also enables comparisons with industry peers or benchmarks to evaluate your business’ performance.
A balance sheet is a financial statement that provides a snapshot of your business’ financial position at a specific point in time. It presents your assets, liabilities, and shareholders' equity, offering insights into your overall financial health and solvency.
A balance sheet consists of the following components:
Assets: Representing what the company owns or controls, assets can be classified into current assets (e.g., cash, accounts receivable, inventory) and non-current assets (e.g., property, plant, equipment, long-term investments).
Liabilities: These are the company's obligations or debts, including both current liabilities (e.g., accounts payable, short-term loans) and long-term liabilities (e.g., long-term debt, deferred tax liabilities).
Shareholders' Equity: Also known as owners' equity or net worth, it represents the residual interest in the company's assets after deducting liabilities. It includes common stock, retained earnings, and additional paid-in capital.
The balance sheet provides valuable information about your business’ liquidity, financial stability, and capital structure. Analysing your balance sheet will help you assess your business’ ability to meet its short-term and long-term obligations and evaluate its overall financial position.
A cashflow statement details the inflow and outflow of money and shows how solvent your business is for the specific period of the report. It provides insights into your business’ cash position, its ability to generate cash from operations, and its capacity to meet financial obligations. The cashflow statement typically consists of three sections:
Operating Activities: This section shows the cashflows resulting from the company's core operations, such as cash received from customers and cash paid to suppliers, employees, and other operating expenses.
Investing Activities: This section reflects the cashflows related to the purchase or sale of long-term assets, investments, or other financial instruments.
Financing Activities: This section includes cashflows associated with the company's financing activities, such as borrowing or repaying loans, issuing or repurchasing shares, or paying dividends.
Your cashflow statement provides valuable information on your business’ liquidity position, its ability to generate cash, and its cash management.
A three-way forecast connects the income statements, balance sheet and cashflow estimations together to provide a comprehensive view of your business’ financial performance and position.
It combines the future expectations of revenues and expenses (income statement), assets and liabilities (balance sheet), and cash inflows and outflows (cashflow statement). By connecting these reports, a three-way forecast can help you assess your financial viability, identify potential cashflow issues, and make informed decisions regarding resource allocation, investment opportunities, and financing needs.
KPIs are financial ratios and statistics that provide insights into your business’ overall financial performance and progress towards its strategic goals. These indicators can vary depending on the specific objectives and nature of your business. Some common financial KPIs include:
Return on investment (ROI): Measures the profitability of investments.
Debt-to-equity ratio: Indicates your business’ leverage and financial stability.
Profit margins: Assess the profitability of sales.
KPIs can be used to set targets, and monitor performance over time, enabling your business to evaluate its financial health and make data-driven decisions
A budget is a detailed financial plan that outlines your business’ anticipated revenues, expenses, and profits over a fixed period, typically a year. It serves as a roadmap for financial management, guiding the allocation of resources and providing a benchmark to evaluate performance.
A budget helps your business monitor its financial performance by comparing actual results against projected figures. By tracking and analysing budget variances, you can identify areas of concern, adjust spending patterns, and take corrective actions to align with your financial goals. A well-designed budget provides financial discipline, promotes cost control, and supports strategic decision-making.
How management reports can enable better business performance
A management report can help you see and understand what factors are affecting your business, which helps you develop strategies and plans to move your business in the right direction. In tough economic conditions, they can help you find opportunities for growth.
Identify cost cutting opportunities
Cashflow management is imperative during tough market conditions. Financial reports equip you with the tools to identify cost control opportunities, allowing you to trim unnecessary expenses, optimise resource allocation, and improve overall efficiency. By closely monitoring your financial performance, you’ll be able to:
Target cost drivers and areas that could mean savings.
Analyse expense trends and discrepancies.
Perform cost-benefit analysis for primary business initiatives.
Use benchmark data to find and take advantage of opportunities for improvement.
Put cost reduction plans into action based on observations from your management report.
Information is crucial in identifying overspending, waste, and other expenditures that can be diminished or eliminated. With financial reports, it's always clear when cutting costs is working or needs to be adjusted. This benefit alone makes having a management report with critical financial data invaluable for any business.
Unveil market trends and opportunities
Stanford economist Paul Romer once famously said, “a crisis is a terrible thing to waste.” Some of the most successful companies, including Microsoft and Airbnb, have sprung out of a recession and leapfrogged their competition. Others, like Netflix and Apple, pivoted or started during economic chaos because necessity is the mother of all innovation.
Financial reports serve as a treasure trove of insights into market trends and customer behaviour. By analysing sales data, customer segmentation, and market share figures, you can identify emerging opportunities and tailor your strategies accordingly. Armed with a deep understanding of consumer preferences and market dynamics, you can pivot your offerings, seize untapped niches, and gain a competitive edge even in turbulent times.
Mitigate risk and safeguard financial stability
In an uncertain economic landscape, managing risks and maintaining financial stability are paramount. Financial reports provide you with a comprehensive view of your business' financial health, highlighting areas of vulnerability and potential risks. By proactively monitoring financial ratios, debt levels, and liquidity indicators, you can take pre-emptive measures to mitigate risks, secure funding, and ensure the long-term stability of your business.
With financial reports, you'll be able to:
Use financial data to assess the profitability of various products or services, customers, and market segments. This data can also help identify where your products or services aren't viable or market segments you currently don't have a presence in.
Assess investment opportunities and ROI estimations. When you can see the numbers alongside any progress, you may find that there's room for growth or improvements.
Evaluate pricing strategies and profit margins. Monitoring this information is vital to maintaining or improving your business's financial health, leadership skill, and potential for growth.
Forecast cashflow, thereby making informed financial choices. These predictions allow a business to evaluate whether or not it can meet its cash obligations. When the cashflow is healthy, then companies tend to run smoothly.
Keep track of and manage work capital efficiently. This includes managing inventory, accounts receivable, accounts payable and cash. Good capital management can improve a company's cash flow.
Build trust with stakeholders
During challenging economic conditions, relying on guesswork or intuition alone can be perilous and trust becomes a valuable currency.
Financial reports, characterised by accuracy and transparency, help instil confidence in your stakeholders, including investors, lenders, and partners by presenting a wealth of data-driven insights that prove you have a solid foundation for your decision-making.
By presenting a clear and comprehensive picture of your financial performance, you strengthen relationships, attract investment, and foster collaborative partnerships that can propel your business forward.
Thrive in any market and improve the way your business operates today
All the data about your business is useless if it isn't seen as a tool to grow and improve how it operates. But, as a business owner or senior leader, just finding the time to analyse and report on your data can be challenging let alone thinking about the software and systems you’ll need to implement it.
A Virtual CFO helps you make sense of your financials so that you can make strategic decisions that help drive sustainable growth.
Tailored to your exact needs, budget, and business size, our Virtual CFOs get to know your business intimately in order to help you address critical issues like cashflow management, financial forecasting, raising capital, and so much more.
If you’re not quite ready for the services of an outsourced CFO but need a better view of your financial situation, Findex can support your business with automated and templated financial reports backed by a responsive customer success team.
Download your complimentary sample reportsto see the type of financial reports we can help you create, including a sample cash flow forecast produced by our forecasting tool and a sample dashboard report that provides an instant snapshot of business performance. For Franchises, not-for-profits, and industry specialists, we’ve included sample reports of how we can help you aggregate, rank, and benchmark.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Group Limited.