How to read monthly financial statements

If your life is spent between management meetings, strategy development and steering a corporation, chances are you’re a busy CEO. You’re the captain of the ship and the visionary for the business, but an understanding of the financials can never just be outsourced to the CFO.

Understanding the financial issues facing your organisation is vital. Knowing how to search quickly those monthly financial statements that come your way can give you a good grasp of exactly where the business is at.

If you’ve been doing this for a while, chances are you know exactly what to look for and what should catch your eye and focus each month. But if mastering the minutiae of a financial statement isn’t really your thing, here are five places to look for a good overall picture of how things are going.

Knowing exactly what to look for each month will help ensure your company remains sustainable and profitable in the long term. You’ll spot anomalies quickly and won’t get a shock when the auditors come for their visit, annual or otherwise.

The following metrics establish whether your company is generating sufficient cash flow and show how your borrowings are tracking. We investigate briefly the balance sheet and what to look for, and the need to prepare the financials in a timely manner.

Also of major importance are the bottom, middle and top-line revenue measures. Take a quick look to see if you’re casting your eyes in the right place on your monthly financial statements.

1. Review the balance sheet. This helps assess whether the business has the necessary resources to continue carrying out its daily operations, implement the new strategies planned and ensure future capital expenditure can be met. Servicing existing debt is vital, as is taking into account the planned capital expenditure. Ensure you’re familiar with two major ratios: net working capital (current assets minus liabilities), and debt-to-equity ratio (liabilities divided by equity).
2. Ensure financial statements are prepared on time. Accurate preparation and distribution of the financial statements is very useful for management. Ensuring everything is prepared in a timely manner can help with audits and reviews. Having information to hand also means operational managers are able to get data they need as required.
3. Top-line financials allow CEOs to compare revenue results to current budgets versus previous actual years. This is a great gauge to show if the company is trending positively and helps evaluate the financial performance of any business.
4. An often overlooked area is sometimes referred to as the middle line of the business, or gross profit. Revenue less the cost of goods and services sold leaves the gross profit, which is a highly important indicator of whether all the revenue streams are producing a profitable business.
5. How’s the bottom line looking? Net income is vital to the success of the business. This means all areas are covered: expenses, sales, interest costs and taxes. Knowing the business is a profitable enterprise is of primary concern to any CEO.