The Benefits of Monthly Financial Reporting
Clients of Quality Back Office often ask me about whether financial reporting should be done annually with their tax return, quarterly, or monthly. I consistently respond with, “Monthly of Course!”
Let me explain why.
The primary purpose of financial reporting is to report business performance on a timely basis. If you are a cash basis taxpayer, this means reporting the cash you received from your business activities (sales) less the cash disbursements made to your people, landlord, vendors, and for other goods and services including local non-income taxes. The bottom line is net (cash) profit. You always need to know how the cash in the bank reconciles with the true cash on hand. If you are an accrual basis taxpayer, the same is true. Without monthly financial statements, you are operating in the dark.
Businesses who report monthly are giving themselves an important opportunity to identify “blips” in their business that they can quickly react to. For example, if cash receipts are down in the current month vs. a prior month, would you know why this is happening? What if a major customer started to limit orders because of dissatisfaction with your services? What if a supplier raised prices and you were not aware of it in time to call them or move to a new supplier? What if an employee was stealing from you?
The other important reason to report monthly is to track the seasonality that may occur in your business and to understand whether seasonality is impacting you differently currently vs. prior months or years.
So, if you want to manage your business tightly and recognize issues and opportunities quickly, please create full monthly financial statements. Quarterly and annual financial reporting may be convenient and less costly but the risk of delaying potential bad news for most business owners creates too much risk to bear.
From my perspective, small business owners who do not reconcile their cash accounts and credit cards and report monthly are inviting potential trouble. Sound business decisions depend on timely and accurate data.
By: Stanley N Logan