Why financial reports matter for companies

Why the bank balance is not enough

The bank balance says how much you have today, not how much you earned. It may be high because customers paid in advance and you still owe goods, because supplier bills are unpaid, or because VAT due has not been paid. Or the reverse: a low balance with good profits because customers pay late. Financial reports separate cash, profit and obligations.

The five monthly reports

1. The income statement

Revenue minus expenses for the period = net profit. Read three numbers: gross profit (sales minus cost of goods sold) and its ratio to sales, operating expenses and their ratio, and net profit. Compare them with the previous month and the same month last year.

2. The balance sheet

A snapshot of the company at a moment: what it owns (assets), what it owes (liabilities), and what is left for the owners (equity). Read: current assets against current liabilities (can you pay what is due within a year?), the customer balance (growing faster than sales is a sign of slow collection), and the inventory balance (is it swelling?).

3. The cash-flow statement

Where cash came from and where it went: operations, investing and financing. A profitable company can go bankrupt if operating cash flow stays negative because profits are locked in receivables and stock. Read the operating cash-flow figure first.

4. Receivables ageing

Who owes you and how late: 0–30 days, 31–60, 61–90, over 90. Every riyal in the last column is increasingly likely to be lost. This report is the collection team’s weekly call list.

5. The VAT report

Output VAT minus input VAT = what is due to the authority. Read it monthly even if you file quarterly, so you know how much must be set aside in the bank for the payment date.

Additional reports by business type

• Trading: sales by item with margin, and stock age.
• Contracting and services: project profitability and budget versus actual.
• Multi-branch: an income statement per branch.
• Labour-heavy companies: payroll cost by cost centre.

One condition for correct reports

A report is only as good as the entries beneath it. If sales are entered late, purchases booked as expenses and inventory kept in a separate spreadsheet, you will read a beautiful and wrong report. The fix is not a better report but a system where the invoice, receipt and salary are the source of the entry automatically, so the report is right the moment you open it.