There are thousands of financial reports that your company can write and use, but the following 10 key reports are a must to run your company successfully.
(1) Income Statement Trend Report
An income statement report that shows consecutive monthly results next to each other, which forms a trend, is useful in evaluating income statement anomalies. This trend report should at a minimum display 3 months, but an annual trend is useful in determining seasonality changes as well as account inconsistencies. These account inconsistencies need to be reviewed to determine why they occurred. These occurrences can be simply explained as normal operating conditions or coding errors that require your accountant to record journal entries to correct.
(2) Gross Profit Report by Product
Understanding each product line or service’s gross profit and percentage is critical to determining what is generating the corporate profits and therefore where your company should be focusing their resources. Having a report that shows each month’s products or services sold or provided allows the user to determine inaccurate postings or transactions. Through this report the user can identify by evaluating the gross profit percentage (GP%) which products and services meet the desired budgeted percentage and which do not. The products and services that do not meet the desired GP% should be reviewed to identify if inaccurate postings or transactions have occurred.
Therefore, if your company sells products, the report should tell the user what product was sold, how many units were sold, the sales price of each item, the extended sales price (units sold * Sales price of each item), Cost of each item, the extended cost (units sold * Cost of each item), Gross Profit (Extended Sales Price minus Extended Cost) and Gross Profit Percentage.
If your company is a service company than the cost should be the direct related cost (i.e. salaries, payroll taxes and benefits) to provide that service for that client; therefore, the report should tell the user what service was sold to what client, how many service units were sold, the sales price of each type of service, the extended sales price (service units * Sales price of each type of service), Cost of each service, the extended cost (service units sold * Cost of each type of service), Gross Profit (Extended Sales Price minus Extended Cost) and Gross Profit Percentage.
(3) Income Statement versus Budget
If you followed the 10/15/09 blog on corporate budgeting, than you have the necessary information to use the income statement versus budget report. By comparing the actual monthly results versus budget, you will be able to identify variances. Each company establishes a variance parameter rule in which a certain dollar amount change or a certain percentage change will need to be explained.
(4) Balance Sheet
Balance Sheet reports show the assets, liabilities and equity of a company as of the date of the report. Typically, balance sheets are compared Year to Year (i.e. 12/31/2009 vs. 12/31/2008) or Quarter to Quarter. The balance sheet accounts can only be explained if first each account’s activity has been reconciled for the specific date of the report. Therefore, if you understand in detail what makes up the activity of the Accrued Expenses account as of 12/31/2008 and also for 12/31/2009, you will be able to explain the differences.
For non-service companies, maintaining tight inventory control procedures is important to the financial success of the company. In order to monitor inventory procedures, the company should weekly review the inventory report to make sure each inventory item has the correct inventory cost method (i.e. LIFO, FIFO, Average, etc), number of units are accurate, inventory adjustments have been correctly recorded, unit prices and cost reflect type of unit measure (each, lot, etc.).
Old/obsolete items should be cleared out of inventory.
(6) Accounts Receivable
The Accounts Receivable (AR) report allows you to keep track of individuals or companies that owe you money. As your company grows it is important to monitor your AR continually. Allowing a customer to drag out payments while continuing to provide sales and/or services leaves you at risk of extending too much credit and potentially loosing the entire receivable. Establishing policies and procedures for collecting and establishing proper reserves will be imperative to enforcing collection rules while maintaining a risk reserve.
(7) Accounts Payable
The Accounts Payable (AP) report allows you to keep track of individuals or companies that you owe money. Initiating policies and procedures early in the company’s development reduces the chance of the AP department area becoming uncontrollable. It is advisable that all invoices be opened and logged. Invoices should be approved (signed off) by the responsible party within your organization. Once the invoices have been approved, they should be entered into the accounting system. Checks should be cut or ACHs established. The person cutting the checks or establishing the ACH should not be the same person authorizing payment or transmitting the ACH transfer. The individual entering the invoices into the accounting system should attach proper backup and approved invoice. This information should be attached as support to the check. The authorizing check signor or ACH payer should review each invoice’s supporting backup before the check is signed. The signed checks should not go back to person entering the invoices into the accounting system, but to the individual who opened and logged the invoices. This person should mail out the checks. The invoice and backup should be sent back to the person entering the invoices into the accounting system for filing purposes.
(8) Cash Flow Statement
See 12/15/09 Blog on Cash Flow Management Techniques
(9) Cash Flow Forecast
See 12/15/09 Blog on Cash Flow Management Techniques
See upcoming Blog on Measuring a Company’s Stability and Success