How To Use Financial Reports To Run and Scale Your Business

Every month, companies large and small work to compile monthly financial reports – basically the 411 on your business’s money status. Accountants and bookkeepers use the latest business results to generate reports for owners and managers to make the best, most informed decisions, plan for taxes and prepare the business to meet short and long-term financial goals.

Running a business without updated monthly financial reports is like driving down the highway – but blindfolded. Why would you? You have to see what’s going on around you. Otherwise, you won’t know what direction to go in. Or if that left turn you just made was right! 

Here’s a closer look at how monthly financial reports come together and how to use them to drive your business’s growth and put more money in the bank. Because who doesn’t like a good money move?

What are Monthly Financial Reports?

For most businesses, including small businesses and large enterprises, there are three primary monthly financial reports: 

• Income statement aka a profit and loss statement
• Balance sheet – basically the business’ financial health record
• Statement of cash flow – the money in, money out docs 

Each offers important insights into how much money the business is earning and spending, what the company has and owes, and where money is coming from and going.

Companies open to public stock market investments are required by law to share these three reports with the general public quarterly. However, most require internal accounting teams to prepare the reports monthly for management and financial accounting purposes.

Whether you operate a business where you’re the sole employee or one with thousands worldwide, these reports are vital for understanding where the business stands financially – and where to direct focus for long-term financial goals.

Essential Financial Reports for Small Businesses

There are three main financial reports every business should review monthly:

Profit and Loss Statement or Income Statement

Your profit and loss statement, often abbreviated P&L, breaks down your company’s revenue and expenses by category – all in one easy-to-read place. Without an updated P&L, you don’t know which end is up! If you’re making money or losing money, your most significant revenue sources, and your most important expenses.

Even if you’re bringing in revenue easily, you money magnet, high expenses could lead to a monthly loss. You can spend time looking over your P&L results to understand where to focus your efforts for the highest revenue and where you may want to concentrate on cutting expenses.

The profit and loss or income statement gives you results for a specific period, for example, monthly, quarterly, or annually. Collective members receive monthly bookkeeping services and a monthly financial report package that includes a P&L.

Balance Sheet

The balance sheet is a snapshot of what your business owns and what it owes, which helps calculate how much the owner, well, owns – and how liquid the business is. Financial data is broken down into several categories to help you know where your business stands at any given moment.

At the top of the balance sheet, you’ll see a total of your short-term and long-term assets. 

Short-term assets are things like: 

• Cash
• Product inventories
• Accounts receivables – what you’re owed
• Investments you expect to hold for less than one year
• Long-term assets like computers, property, equipment, and investments you expect to keep for one year or longer

Next, you’ll find the business’s short and long-term liabilities. That’s basically anything the company owes. 

Short-term liabilities include accounts payable (what you owe the other companies and vendors), credit card balances and loan balances you’ll have to pay within a year. 

Long-term liabilities include any other debts, like a long-term business loan.

At the bottom, the difference between assets and liabilities is shown as owner’s equity. This is how much money you would have left over from your business if you shut down right now – and paid off any outstanding debts. Higher equity equals a more valuable business.

Statement of Cash Flows

The statement of cash flows shows where money entered the business and where it went. The three main categories used for the cash flow statement are:

1. Cash changes from operating activities

Operating activities are the main way your business is making money and whatever it costs to do it. It’s made up of your business’s primary revenue and expenses related to delivering your company’s product or service. 

2. Investing activities 

Investing activities include cash in or out from buying property or equipment or any financial investments like stock.

3. Financing activities

Financing activities focus on borrowing from banks and other lenders and cash flows to or from investors.

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Using Small Business Financial Reports to Grow Your Business

While you’ll likely need quarterly (every three months) and annual (every year) financial reports for tax purposes, they’re the G.O.A.T for a lot of other good reasons.

Arguably, the most important reason to prepare and review monthly financial statements is to spot opportunities to improve business profits – how much you have left after you’ve paid what you owe. For example, you may notice that a particular product or service sells at a higher rate than others or operates with lower margins (costs less to produce). 

You might use your balance sheet – remember that’s your snapshot – when applying for a small business loan or a new credit card. Or you could grab your cash flow statement – money in, money out – to understand why your bank account balance dropped last month.

Big companies have teams of financial analysts. They review these and other reports throughout the year, looking for opportunities to improve financial results. When you run a Business-of-One, well, that responsibility usually falls on you! 

In addition to taxes and the what’s what of your finances, your monthly and annual reports may be used when applying for new credit or working with outside investors. In most cases, it’s a good idea to review these reports, at least monthly, so you have the most updated information to inform business decisions.

Monthly Financial Reports Helped Me 3x My Revenue

Using financial reports to grow your business isn’t just busy work. I’ve used financial statements to grow my business dramatically. Thanks to the information I found on my P&L, I was able to 3x my revenue over about three months, and it has remained at that level or above almost every month since.

When I quit my old day job to work for myself full-time, I offered two main services to clients. After a few months of self-employment, I couldn’t figure out why my business income wasn’t growing faster – despite longer hours and an intense focus on reaching $10,000 in monthly revenue.

An analysis of my P&L showed that one service only led to 20% of revenue, despite taking about 80% of my time. The other service made about 80% of my income and took only 20% of my time. If you’re familiar with the Pareto Principle, or 80/20 rule, you can probably guess what I did next.

That fall, I told clients of my lower-income service that I would stop offering it the next month, then I started spending nearly 100% of my business efforts on the better-performing segment. After three months, I hit my $10,000 revenue goal for the first time, about 3x what I was earning before I discovered my 80/20 opportunity.

Run Your Business With Your Eyes Wide Open

Without monthly financial reports, you don’t know if you’re earning big money or taking serious hits. Unless you review your P&L, you may not know where to spend your time to increase revenue and cut costs. Business reporting could be all you need to make the best decisions to reach record levels of success.

Collective customers get a copy of their three main financial statements included in their monthly subscription plan and access to a team of financial experts. If you’re looking for help to level up your business, click here to get started with Collective today.