Running a business involves much more than providing goods or services to customers. As a business owner, you must maintain a firm grasp of your firm's financial health to ensure long-term success. One of the best ways to do this is by regularly reviewing key financial documents.

Here are the key financial documents you should review regularly and what you should look for in each.

1. Profit and Loss Accounts (P&L)

A profit and loss (P&L) account is one of the most fundamental financial documents for any business. It summarises turnover, costs, and expenses over a specific period - typically monthly, quarterly, or annually - to show whether your business is making a profit or incurring losses.

What to look for:

  • Turnover trends: Are sales increasing or decreasing? Is there a seasonality to your sales? Identifying patterns in your turnover can help you adjust your business strategy accordingly.
  • Cost of goods sold: Is the cost of producing goods or services too high? If so, consider reducing expenses without compromising quality, such as renegotiating terms with existing suppliers or identifying new ones.
  • Operating expenses: Are administrative and overhead costs under control? Identifying unnecessary expenditures and ways to reduce overheads can improve profit margins.
  • Net profit: Ultimately, the bottom line tells you if your business is profitable. If not, it's time to re-evaluate pricing strategies, cost control, and income generation.

2. Monthly Management Accounts

Unlike the P&L account, which provides a periodic snapshot, management accounts offer more in-depth, real-time financial insights that aid decision-making. These reports typically include the profit and loss account, balance sheet, cash flow statement, and key performance indicators (KPIs).

How management accounts differ from P&L accounts:

  • Frequency: Management accounts are typically reviewed monthly, whereas P&L accounts are often assessed quarterly or annually.
  • Detail level: Management accounts provide more granular insights, including breakdowns of income streams, expenses, and profit margins by department or product line.
  • Decision-making focus: They help business owners make proactive, data-driven decisions rather than just reviewing past performance.

What to look for:

  • Profitability by product or service: Understanding which areas of your business are most profitable helps you focus on high-margin activities.
  • Cash flow position: Healthy cash flow ensures you can pay suppliers, employees, and other obligations on time.
  • Budget vs. actuals: Comparing projected performance against actual results allows you to identify deviations and take corrective actions early.

3. Aged Debtors and Creditors Reports

Aged debtor and creditor reports help you manage cash flow effectively by tracking outstanding invoices - both what customers owe you (debtors) and what you owe suppliers (creditors).

Aged Debtors Report (Accounts Receivable)

What to look for:

  • Customers with overdue invoices who may need follow-up reminders or stronger credit control measures.
  • Patterns of late payments from specific customers that may indicate cash flow issues on their end.
  • High outstanding balances that could impact your working capital.

Aged Creditors Report (Accounts Payable)

What to look for:

  • Suppliers you owe money to and whether payments are overdue.
  • Ways to negotiate better terms with your suppliers.
  • Ensuring your cash flow can support upcoming payment obligations.

4. Other helpful financial documents to review

In addition to the above, here are a few other key financial documents that business owners should review regularly:

Balance Sheet

This document provides a snapshot of a business's financial position at a specific point in time. It includes assets (what the business owns), liabilities (what it owes), and equity (the owner's interest in the business).

What to look for:

  • Liquidity ratio: Do you have enough liquid assets (cash or near-cash) to cover short-term liabilities?
  • Debt levels: Are your liabilities increasing at an unsustainable rate?

Cash Flow Statement

A cash flow statement identifies how money moves in and out of your business. Unlike the P&L, which focuses on turnover and expenses, cash flow statements track actual cash transactions.
What to look for:

  • Operating cash flow: Is your core business generating enough cash to cover expenses?
  • Financing and investing activities: How much cash is being borrowed, invested, or repaid?

Budget and Forecast Reports

These reports help business owners compare actual performance against projections.
What to look for:

  • Are you staying within budget?
  • Do you need to adjust forecasts based on actual performance?

Conclusion

Reviewing financial documents regularly is crucial for making informed business decisions. By monitoring your profit and loss account, management accounts, and aged debtor and creditor reports, you will better understand your company's performance and be able to take proactive steps to enhance profitability.

How DWilkinson&Company can help

Understanding and analysing financial documents can be complex and time-consuming. DWilkinson&Company specialise in supporting small businesses and start-ups across Leeds and Rochdale with expert financial analysis and guidance.

We can ensure your financial strategy aligns with your business goals, allowing you to make quicker, smarter decisions for long-term success and profitability.

If you need assistance with your business's financial analysis, contact DWilkinson&Company today for a free consultation at 0113 320 0001 or email office@dwco.co.uk