What Should Be Part of Your Monthly Financial Analysis?

Written by Amanda Bower    |    Published: May 2, 2023

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A team discussing their monthly financials.

A monthly financial analysis gives management a concise overview of the business’s financial status for the previous month. The reports generated include up-to-date information on cash management, cash flow statements, profit and loss statements, expense trends, and client projections while evaluating future plans and decisions.

Monthly financial reporting offers a panoramic view of the company’s economic affairs and includes daily and weekly reports. It allows you to drill down into critical metrics over four weeks, and the data primarily focuses on creating bigger and long-term strategies, changes, and initiatives.

Business leaders who evaluate financial trends from periodic (daily, weekly, and monthly) financial reports and statements can manage their long-term profitability more effectively. In addition, the findings assist businesses in improving their internal performance by informing everyone about noteworthy changes and developments in their cash flow and financial position.

The ability to use monthly financial insights and metrics to make informed business decisions sets you apart from the pack in this data-driven age. In addition, the current fast-paced business environment keeps CFOs under pressure to provide end users like financial analysts and executives with timely and concise periodic profitability analyses.

This article discusses what to include in your monthly financial analysis and the essence of having a team doing this for you.

1. A Balance Sheet

A balance sheet shows your financial health at any given moment. It’s a two-sided chart with three components: the company’s assets are on the left side, while the shareholders’ equity and the company’s liabilities are on the right.

It highlights:

  • Assets: They are what your company owns and can provide future economic benefits. They can include cash, equipment, or furniture.
  • Liabilities: Refers to everything your company owes to others. Liabilities include long-term ones like a bank loan or lease of buildings, while short-term ones contain employee wages or credit card debt. 
  • Equity: It’s the shareholders’ stakes in your company. You calculate equity by getting the difference between total assets and liabilities based on the general accounting formula: Assets = Liabilities + Shareholders’ Equity

Balance sheets portray the financial health of a company during a particular time. Therefore, the columns of these financial statements should always balance; otherwise, it indicates an accounting error.

2. P&L Statement 

A profit and loss statement (income statement) portrays the company’s total revenues from sales and the operating expenses used to generate that income. Essentially, it represents how much you made vs. how much you spent during the previous month.

A balance sheet provides a snapshot of the company’s financial health at a particular moment, while a P&L statement shows the profitability over an accounting period (monthly, quarterly, or annually). Apart from tracking expenses, the P&L statement is presented to fiscal authorities for compliance purposes. 

The statement has four key elements:

  • Revenues: Companies divide their revenue into operating and non-operating revenue. The operating revenue includes income from primary activities like selling products and services. On the other hand, non-operating revenue relates to non-core activities like rental income from business property or interest earned on capital.
  • Gains: Gains measure the money you make from other non-business-related activities, such as selling land or old equipment. It’s usually a one-time-only thing.
  • Expenses: These costs incurred from core operations are divided into two. Primary expenses are directly linked to operating revenue, while secondary expenses are related to non-operating revenue.
  • Losses: These expenses cost the company assets and are usually one-time occurrences such as lawsuit expenses.

The income statement’s bottom line is the net income entry minus the profit observed for the period. Its formula is: Net Income = (Revenue + Gains) – (Expenses + Losses).

3. Churn Review

The churn (attrition) rate is a metric for calculating the percentage of customers businesses lose over time. Lost customers are those who:

  • Fail to renew their subscription
  • Cancel their subscription
  • Fail to revisit your service or buy your product

Businesses should track their churn rate, causes, and consequences to maintain a healthy or desired growth rate over time. Therefore, reviewing your churn rate should be part of your monthly financial analysis because it tends to compound over time.

For example, a monthly churn rate of 5% means the business loses 5% of its customers monthly. It results in an annual churn of 43%. 

Losing 43% of your customers yearly results in a loss of income and increased customer acquisition costs which is expensive. Research shows that acquiring a new customer costs five times more than retaining an existing one.

4. Expense Trends

You have a problem if your business is growing, but you don’t have money at the end of an accounting period. It means that your expenses grew faster than your revenue during that period, so you take less money home.

Tracking your expense trends allows you to identify and avoid this problem. Your profit and loss statement includes a line for total expenses that you can analyze further. Look at the total at the end of the previous month and for the last 12 months and compare it to the monthly and annual trend of your total revenue line.

Analyzing the expense trends allows you to make adjustments to ensure your expenses do not surpass your incoming revenue for the coming months. However, if you are making intentional long-term investments for the growth of your business, such as hiring employees or buying new equipment, your expenses might surpass your revenue.

5. Gross Margin Analysis

Gross profit is the amount your business has left over after paying direct expenses of manufacturing products or providing services. Simply put, it’s total revenue minus the cost of goods sold (COGS).

In contrast, gross profit margin shows the percentage of your revenue that exceeds production costs. Therefore, higher gross margins mean the business has more money left over to pay for operating expenses.

You should continually review both metrics monthly to ensure the business remains profitable.

6. Client Projections

A boom and bust cycle can occur when you’re too focused on serving current clients and slow down efforts to attract new business. Tracking the number of prospective clients every month allows you to avoid a bust cycle.

Your monthly client projections analysis should include how many potential customers you approach and the success of your cold pitching efforts and other approaches. If the number of conversions is small, you need to increase your marketing and sales efforts to attract more business.

Always keep your client prospect list current even when busy with existing clients, and focus your marketing and sales efforts to ensure sustained growth.

7. Cash Flow Statement 

It shows how much money entered and left the company or business during a particular period. A monthly cash flow statement measures how well the company generates cash to cover operating expenses and pay debt obligations.

Unlike the income statement, which shows whether a business made a profit, the cash flow statement reveals if you made cash. It’s a fundamental statement for investors since it helps them understand the company’s liquidity and make informed investment decisions.

The cash flow statement has three sections, as discussed below:

  • Operating activities: These are cash uses or sources from regular business activities like sales of products and services, employee salaries, interest payments, or tax payments.
  • Financing activities: These are cash uses or sources from investors and banks. They include loans, dividends, and payments for stock repurchases.
  • Investing activities: These are cash uses or sources from investments such as vendor loans or the purchase and sale of assets.

Get a Bird’s Eye View of Finances

A monthly financial analysis should analyze numbers and not just present them. It gives a panoramic view of the business’ economic affairs and financial outlook to help make informed decisions. Companies also use monthly financial analysis to provide effective updates, improve profitability, drive better expense control, and support business growth.

The monthly financial reports and statistics to analyze include the balance sheet, income (profit and loss) statement, cash flow statement, expense trends, churn review, gross profit analysis, and client projections. These financial statements are also critical for business stakeholders like investors and credit providers because they reveal whether the business is managed correctly.

At hiline, we help businesses handle their accounting and financial reporting services online while they focus on other operations. As a tech-enabled accounting company specializing in providing top-tier accounting services to different-sized enterprises, our outsourced accounting and financial services help the growth of your company.

We have a dynamic team of finance, accounting, tax, and HR professionals backed by the latest technology. Outsource our financial services at a fraction of the cost of an in-house team. 

Learn more about our financial, accounting, and tax services today!

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