Most companies are familiar with financial reports they are required to have for external reporting purposes to shareholders, banks, sureties, etc. This reporting is typically done after year end and is “historical” information on the year that just ended. Internal reporting, however, provides information in real-time much closer to the period end and gives management the ability to make informed decisions on any changes of course that may be necessary.
Where do I start when developing Internal Reports?
Not sure where to begin your internal reporting? Start by focusing on month-end. Every month your accounting team should prepare a month-end close. The month-end close should focus on the four R’s:
- Reconcile – As part of any close process internal financial records should be compared against external sources such as statements, compared against other documentation, or an internally produced schedule to ensure balances are correctly stated. The timely reconciling of accounts helps detect errors, discrepancies, and fraud.
- Record – The normal course of business does not always fall into line with recording of accounting entries, as a result accruals or adjustments need to be recorded. Staying with the number four, there are four transactions that should be evaluated monthly for the adjustment: accruals (both revenue and expense), unearned revenues, prepaid expenses, and depreciation.
- Review – After all transactions are recorded and accounts are reconciled its time to take a step back and look at the monthly financial results from an analytical point of view. This is where the adage “the numbers don’t lie” comes into play. Evaluate ratios (quick ratio, working capital, debt to equity ratio, return on equity, etc.) and review budget to actual results.
- Report – Provide and discuss a concise overview of the previous month’s financial results with management.
Why do Internal Reporting Monthly?
Financial information is a more useful tool for management if it is timely and accurate. Errors or discrepancies are also easier to locate and control when looking at a smaller time frame. Having month-end reports allows management to make informed decisions on current data as well as monitor trends and patterns to more accurately make changes that will be impactful.
What are the uses for Internal Financial Reporting?
Along with having current financial data and checking for any discrepancies, there are several questions to consider when reviewing your monthly reports. For example:
- Are jobs being priced correctly?
- Are jobs experiencing gains or fades in profit?
- What is profitability by customer?
- What is profitability by project manager?
- What is profitability by region?
- Do we need to add to our workforce?
- Do we need to reduce our workforce?
When management is asking and answering these questions, they are able to effectively monitor and communicate Key Performance Indicators such as: net income, revenue growth, gross profit percentage, working capital, debt to equity, return on assets and equity, backlog, and net cash due. Having this timely internal financial reporting allows management to be proactive rather than reactive.
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