How to create a monthly financial review process
As a business owner, you need to be clear about your finances. Regardless of business size or sector, you need to pay attention to the money flowing in and out of your business. This doesn’t mean only reviewing things when something goes wrong, such as if you notice your profits dropping or your cash reserves dwindling. It means reviewing your finances on a strict monthly basis. This gives you reliable, accurate information about performance, risks and opportunities, which helps you to make decisions ahead of time, instead of having to react in a moment of chaos.
What Does a Monthly Financial Review Look Like?
A monthly financial review is an organised way for you to look at how well your business is doing. It’s more than just keeping track of how much money your business has; it’s a strategic look at your business’ finances, to help you decide what needs to happen next. It’s the ideal way to see how much money you’ve made since last month, if you have enough money to continue operating in the way you currently do, and whether you’re doing better or worse than you predicted. It’s also a way to highlight if any financial risks are looming and if there are, what you should do to prepare. During a monthly financial review, you need to look over financial statements, compare performance to budgets and forecasts, determine cash flow risks, estimate tax liabilities, and make strategic decisions based on what you find. It also helps you to meet your ongoing reporting and compliance requirements.The Main Goals of a Monthly Financial Review
- To keep an eye on your finances
- To protect and strengthen cash flow
- To spot profitability trends and seasonal changes
- To identify where cost can be cut
- To help with financial planning for the future
- To make financial predictions and forecasts more accurate
- To find small issues and mistakes before they worsen
Step-by-Step Guide to Setting Up a Monthly Financial Review
Create a Monthly Financial Close Process
Before reviewing your business’ financial performance, you need to make sure your accounts are complete and accurate. This is known as closing, and it should be done at the end of the month. This step includes reconciling all bank and credit card accounts, recording all invoices you’ve issued and received, collating payroll and pension costs, recording loan interest and repayments and accounting for accruals and prepayments. You also need to update depreciation schedules and verify director balances. This makes sure all of your finances are up to date, giving you an accurate financial overview.Build a Standardised Financial Reporting Pack
Your monthly financial review should be based on a standardised reporting pack, which ensures you’ll have the same reports to work from each month. Make sure your pack includes a profit and loss statement, balance sheet, a cash flow statement, and a comparison between your budget and actual costs. It’s also important to include payroll summaries, loan balances and a VAT summary, along with your KPI dashboard and cash flow forecast. Having a standardised financial reporting pack ensures consistency in your monthly reviews, making it a lot easier for you to carry out meaningful trend analysis.Take a Good Look at Profitability
Your profit and loss statement shows financial performance, but how you interpret that information is what matters in a monthly financial review. Take a look at your revenue – including monthly trends, pricing changes, recurring and one-off income – gross profit, operating expenses and net profit. You need to determine if profitability is improving, stable or deteriorating, and why.Perform a Detailed Cash Flow Review
Having an impressive profit isn’t the same as having cash, which is why cash analysis is key. Look at the cash that’s been generated from various offerings, major outgoing payments, debt repayments, capital expenditure, VAT payments and seasonal fluctuations. You also need to review your business’ short-term liquidity, including current bank balance, available credit and how many months of operating your cash reserves cover.Examine Your Balance Sheet Properly
Compare Your Budget and Actual Spending
You can learn a lot by looking at the difference between your budget and your actual spending. This includes revenue shortfalls or overperformance, cost overruns and profit margin changes. If anything has a significant difference, look into why and what that means for your business’ finances.Review Receivables and Payables Management
A lot of SMEs struggle with credit control, but poor credit control can put a lot of stress on cash flow. To avoid this, you need to review receivable and payables management. Analyse how long it takes debtors to pay on average, how old your overdue invoices are, who your high risk customers are, supplier payment terms and early payment discounts. This will help you to determine if payment plans are needed, if credit limits need to change and which suppliers are worth negotiating with.Select Financial KPIs to Monitor
When you track KPIs, you turn financial data into performance indicators. Gross margin, net profit, revenue per employee, overheads, asset turnover, debtor days, creditor days and inventory turnover can all be tracked. You can track KPIs on a month by month basis, seeing what’s improved and what needs a push.
