What Your Financial Reports Should Be Telling You About Your Business

By Chris Stenhouse, Director, Professional Bookkeeping Service

Over the years, Leanne and I have worked with many business owners who know their industries extremely well but don't always have the time to examine their financial reports in detail.

They understand their customers, their operating costs and the work involved in running their businesses. However, when we sit down to review the monthly figures, we sometimes identify changes in financial performance that deserve a closer look.

I've found that business owners can become accustomed to checking the overall profit or loss without examining what's happening within individual areas of the business.

For example, revenue may have increased over the month, but if the costs associated with delivering that work have risen faster, the business could be earning less from it.

These are the details we encourage clients to pay attention to because they can influence decisions about pricing, expenditure and the way the business operates.

What We Pay Attention to in Financial Reports

When reviewing monthly management reports, we look at how revenue and expenses have changed, how the business is performing against its budget and whether there are any figures that require further investigation.

Sometimes an increase in expenditure is expected because the business has taken on additional work or made a planned investment. In other situations, a particular expense may be increasing without management realising how much it is affecting profitability.

The way financial information is recorded also matters. If costs are allocated to the wrong categories or transactions haven't been reconciled properly, it becomes harder to identify where changes are occurring.

Our bookkeeping and data specialists spend considerable time maintaining the records behind these reports so that the information business owners receive is accurate and useful.

That work gives Leanne and me a reliable basis for discussing the figures with clients and understanding which areas may need attention.

When a Client's Reports Revealed an Unexpected Cost

We've worked with Hayden Burt and his business, Evisent, since January 2022. Over that time, our team has become familiar with the financial requirements of his IT management and cybersecurity business and the information he relies on to make decisions.

I caught up with Hayden recently, and we discussed how his approach to managing the financial side of Evisent has changed since we first started working together.

One example he shared has stayed with me because it illustrates the value of reviewing the detail behind the monthly figures.

Evisent identified that it was spending approximately $3,000 on a particular product while receiving only $2,400 in associated revenue.

The difference became apparent through the monthly management reports our team prepares. With that information available, Hayden investigated the issue and made changes to address it.

For businesses offering several products or services, this is an important consideration. Overall revenue can appear healthy while individual activities are generating less income than they cost to deliver.

Having the information organised appropriately makes it easier to identify those differences and understand where further investigation may be worthwhile.

Hayden also reflected on the time he has recovered since our team took responsibility for Evisent's ongoing bookkeeping and payroll.

Before working with us, he regularly dedicated Fridays to financial administration. He now estimates that reviewing his monthly reports and following up on financial matters generally takes around half an hour each month.

What I appreciate about our relationship with Hayden is that he remains closely involved in the financial decisions. Our team manages the bookkeeping and reporting, while he uses that information to assess what the business needs.

Hear From Hayden Burt, Founder of Evisent

"What I feel with PBS is we're not handing over control. We're handing over responsibility. We still maintain control of things because the reports come back to us."

Hayden Burt, Founder, Evisent

Getting More Value From Your Financial Reports

If you're receiving financial reports each month, I'd encourage you to look at how the figures are changing over time and whether the information helps explain what's happening in the business.

Start by reviewing how revenue and expenses compare with previous periods and the budget. Where there are significant differences, consider what has caused them and whether they need further attention.

For businesses with several products or services, it can also be useful to review the income and costs associated with those individual activities. As Business Victoria explains, regularly examining profit and loss information can help identify changes in performance and areas requiring further analysis.

I'd also suggest discussing with your bookkeeper or accountant whether the reports you're receiving provide the level of detail needed for your business.

Sometimes the information is already available in the accounting software but needs to be organised differently. In other cases, the underlying bookkeeping processes may need to be reviewed before more detailed reporting can be prepared.

Leanne and I have seen how useful these conversations can be, particularly when business owners are considering additional expenditure or trying to understand changes in profitability.

If you'd like to review how your financial reporting is managed and whether you're getting the information you need, we're always happy to discuss your current arrangements.

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References

1. Business Victoria. Understand Basic Bookkeeping Principles

2. Australian Government, business.gov.au. Guide to Managing Cash Flow