Key Financial Management Reports

In addition to the monthly financial statements such as the Balance Sheet and Income Statement (Profit & Loss), small businesses often rely on a variety of other financial management reports. Although some of the reports, such as the aged accounts receivable summary report, are routinely generated by accounting software, others are tailored to the company's particular needs. Ensuring that the reports focus on the company's critical aspects is crucial.

Although management often decide on the type and content of the reports, accounting personnel in smaller companies are often asked to provide input and prepare the reports. This section provides guidance on preparing the following key financial management reports that apply to many small businesses:

• Owner's weekly flash report. This report recaps key financial information for the business owner or top management. It is typically prepared weekly.
• Weekly cash flow report. Most small businesses operate on a tight cash budget, with minimal access to outside credit lines. This weekly report helps small businesses forecast and monitor their future cash flows.
• Accounts receivable monthly management report. Tying up excess cash in accounts receivable can cripple small businesses that routinely offer trade credit to their customers. This monthly report helps management monitor credit and collection activities.

Owner's Weekly Flash Report
Most small business owners have an entrepreneurial or sales background, but not necessarily strong business management, financial, or accounting skills. Thus, monthly financial statements and other detailed financial reports often leave them dissatisfied and confused. The reports tend to provide a wealth of information, but do not highlight or focus on the company's critical financial information. Also, the typical monthly report preparation time frame is too infrequent to address business problems, such as sales declines or cash flow shortages, in a timely manner.

Instead, owners are often better served if presented with a concise report that summarizes only the company's key financial and management information on a weekly basis. Although some information considered critical will vary from one company to the next, much will be the same. The information that top management is interested in on a weekly basis generally falls into the following broad categories:

• Sales activities. Information includes total sales dollars and units, the dollar amount of orders received, outstanding customer backorders, sales returns, etc.
• Cash flow activities. Information includes cash balance, accounts receivable amounts that are over 60 days old, past due accounts payable, the outstanding balance on the company's line of credit, the available line of credit balance if it changes regularly, etc.
• Production activities. Information includes units produced, rejected units, overtime hours worked, total hours worked (if they fluctuate weekly), idle time (both machine time and employee time), scrap amount, raw material and finished goods inventory levels, etc.

The specific information that management tracks weekly has two characteristics, It is usually critical to the company and volatile. Information that is important to the company's success, but not subject to constant change, is normally monitored monthly or on some other less frequent basis.

Management typically also has a few additional areas that they wish to monitor on a weekly basis. These areas usually vary from industry to industry and company to company depending on their volatility and importance to the company.

Exhibit 8-4 of NACPB's Accounting for Small Businesses Guide presents an example of a flash report that presents key information to owners through the third week of a four-week period. It includes the three broad categories previously mentioned, plus a fourth category that may be used for tracking any other key financial data. In addition, it includes blank lines after each category to add any additional areas management wishes to track weekly. Before adding any areas, however, management should ensure the new areas are both important and volatile. Finally, the last column of the report allows targeted (planned or budgeted) amounts for the month to be entered to allow the company to better monitor its progress. Appendix 8B of NACPB's Accounting for Small Businesses Guide includes a blank copy of the report form that accounting personnel may use to prepare a weekly flash report.

Weekly Cash Flow Report
Maintaining adequate cash is vital to the success of any small business. For many small businesses, cash flows must be closely monitored to ensure that adequate cash is on hand to pay bills. In these situations, a weekly cash flow forecast report is often necessary. In situations where cash flows are not so tight, a monthly cash flow forecast report is generally sufficient. Monthly cash flow forecasts are typically prepared by the controller, whereas the accounting staff often assists in preparing the weekly cash flow forecasts.

Weekly cash forecasts are essentially a refinement of monthly forecasts. In contrast to monthly forecasts, which often cover a 12-month period, weekly forecasts typically cover four weeks. Because the covered period is brief, a weekly forecast often uses existing or known data, such as actual accounts receivable and accounts payable. Thus, weekly forecasts are more precise than monthly forecasts. However, obtaining the added precision and timeliness (typically updating every week) is more time consuming. Thus, accounting personnel should generally prepare weekly forecasts only when the company's cash situation requires tighter monitoring. Since staff accounting personnel are more involved with weekly forecasts, the following paragraphs focus on preparing a weekly cash flow forecast report.

Basic Steps in Preparing a Weekly Cash Forecast. In contrast to monthly cash flow reports, fewer assumptions usually are required when preparing weekly cash forecasts, since both the amount and the timing of cash receipts and disbursements are more determinable. Preparing a weekly cash forecast involves estimating the following amounts for each week that the forecast covers:

1. Collections of existing trade receivables.
2. Collections of forecasted new credit sales and any cash sales.
3. Collections of other scheduled amounts, such as notes receivable and interest income.
4. Payments of amounts other than existing accounts payable, such as payroll, debt payments, equipment purchases, and taxes.
5. Payments of existing accounts payable.
6. Payments or draws made on the company's line of credit, if any.

The weekly cash forecast preparation process is relatively straightforward, with fewer unknowns than the monthly forecast. Because the weekly forecast uses actual data, accounting personnel must dig into the detailed records and thoroughly understand collection and payment practices. The most subjective and difficult task—estimating credit sales collections—is discussed in more depth below.

Exhibit 8-5 of NACPB's Accounting for Small Businesses Guide presents a sample weekly cash forecast. Since the weekly cash forecast is primarily used by companies in a tight cash situation, the forecast segregates estimated vendor payments from other payments, such as payroll and taxes, that may require more discretion regarding timing. Thus, if available cash is insufficient to cover vendor payables, the company's controller can decide whether to draw down the company's line of credit or delay certain vendor payments. The last line of the forecast shows the expected ending weekly balance of the company's line of credit. Appendix 8C-1 of NACPB's Accounting for Small Businesses Guide includes a blank copy of the weekly cash forecast worksheet. The following paragraphs provide guidance on estimating collections from customers.

Estimating Customer Collections. Typically, the most subjective issue encountered when preparing a weekly cash forecast is estimating cash receipts from customers. The process involves estimating weekly collections of existing accounts receivable amounts, as well as new credit and cash sales. If customers typically pay according to terms, weekly cash collections of existing unpaid receivables can sometimes be estimated by using the accounts receivable software module to print out an expected collection schedule based on invoice due dates. Since most customers do not pay according to terms, however, a more detailed analysis is usually needed, as discussed in the following paragraphs.

Accounting personnel generally combine past collection experience and an analysis of major unpaid accounts to estimate collections of existing accounts receivable. Forecasted new sales and related collections during the forecasted period often can be taken from the company's monthly forecast prepared by the controller.

Exhibit 8-6 of NACPB's Accounting for Small Businesses Guide presents a sample weekly schedule of estimated collections. The schedule has been divided into three major sections: major unpaid accounts, other unpaid accounts, and the next four weeks' forecasted sales. The first three columns indicate how much will be collected during the four-week period, and the remaining columns allocate the collections by week. The cash receipt totals for each week can then be carried to the weekly cash forecast. The schedule would typically be updated each week by adding the new week and deleting the past week.

The following items discuss each major section of the exhibit.

• Section I: Major Unpaid Accounts. This section analyzes any individually significant past due accounts to estimate how much will be collected by week. Monthly estimated collection amounts and weekly allocations usually can be obtained by discussing account details with the person responsible for credit. In some cases, the customer may have to be called.
• Section II: Other Unpaid Accounts. This section lists remaining trade receivables by aging category. The estimated collection percentage for each aging category typically reflects historical collection patterns. Typically, the controller provides accounting personnel with the appropriate percentages determined by analyzing past collection experience. The percentages estimate how much will be collected in the four-week period. To compute the percentages, the controller simply tracks the aging categories from one month to the next to determine the percentage of each category that is historically collected in the following month (i.e., four-week period). The percentages can then be applied to each aging category to determine total expected collections for that month.

After determining the estimated collection amounts for each aging category, accounting personnel should allocate them to each week using historical weekly collection patterns. For example, the company may find that a greater percentage of cash is collected in the first week than in the last week of the month because customers frequently mail payments around month end. Collection patterns are typically determined by scheduling out weekly collections of accounts receivable for at least three months and computing the percentage of each month's collections by week.

• Section Ill: Next Four Weeks' Forecasted Sales. Accounting personnel typically obtain the next four weeks' forecasted sales and expected collections from the company's monthly cash forecast. The allocation of monthly collections to each week is usually based on historical collection patterns (expected collections will often concentrate in the latter weeks of the month).

Appendix 8C-2 of NACPB's Accounting for Small Businesses Guide includes a blank worksheet that accounting personnel may use to estimate weekly collections.

Accounts Receivable Monthly Management Report
Most small businesses regularly monitor the accounts receivable function to help ensure that policies and procedures are being followed and are achieving the desired results, and that the system is operating as expected. This section discusses the following key information that accounting personnel often assemble when assisting the controller in preparing an accounts receivable monthly management report. Key aspects of the report include:

• Accounts receivable aging analysis.
• Accounts receivable turnover analysis.
• Bad debt analysis.

Exhibit 8-7 of NACPB's Accounting for Small Businesses Guide presents a sample report that presents key data for the current month, the corresponding month of the preceding year, and the moving average for the preceding 12 months. The report also includes a column for illustrating targeted or budgeted amounts, or percentages for comparison to actual results. Finally, a section for any comments or explanations appears at the end of the report. Appendix 8D of NACPB's Accounting for Small Businesses Guide includes a blank copy of the report.

Accounts Receivable Aging Analysis. Accounts receivable aging schedules are often the key measure of accounts receivable performance. Aging schedules typically show the amounts and percentages of outstanding accounts receivable in each aging category. The monthly report includes both the amounts and percentages in each aging category for the current month, the corresponding month of the preceding year, and the moving monthly average for the preceding year.

Accounts Receivable Turnover Analysis. Accounts receivable turnover analysis is a method accountants use to measure how effectively accounts receivable are being managed. The two most commonly used turnover methods are the turnover ratio and days sales outstanding ratio.

1. Turnover ratio. The turnover ratio indicates how many times accounts receivable turns over during a period compared to sales. This ratio is typically computed by dividing sales (monthly, quarterly, etc.) by ending or average accounts receivable. For example, monthly credit sales of $50,000 and a receivable balance of $75,000 produce a turnover ratio of .667. On an annualized basis, the ratio would equal 8 (.667 x 360/30).
2. Days sales outstanding ratio. The days' sales outstanding (DSO) ratio converts the turnover ratio into days. For example, an annual turnover ratio of 8 would convert to approximately 45 days sales outstanding (360/8). Alternatively, the same DSO figure can be obtained by dividing accounts receivable by average daily sales ($75,000/$1,667).

Accounting personnel may use either turnover method to measure monthly performance, although the DSO method is probably used most commonly. Whichever method accountants choose, setting a targeted or budgeted turnover or DSO ratio for comparison to the current period's actual ratio is often helpful. (If monthly sales fluctuate significantly, accounting personnel should consult with their controller or outside accountant to decide whether an alternative method should be used.)

Bad Debt Analysis. Besides monitoring past-due accounts and turnover statistics, companies also need to monitor bad debt statistics. Bad debts are generally compared to sales using the bad debt ratio. The bad debt ratio merely computes bad debt expense for a given period as a percentage of credit sales for the same period. Bad debts are also typically evaluated by comparing the allowance for doubtful accounts (bad debt reserve) as a percentage of accounts receivable for a given period. The monthly management report should include both percentages. If available, it should also include targeted percentages for comparison to actual percentages for the current period.

• Bad debt expense. A company's bad debt expense and related ratio (as a percentage of sales) will generally vary depending on its industry and the nature of its credit policies. The company's management should establish an acceptable bad debt percentage that is consistent with its credit policy. Once management determines an appropriate bad debt percentage, that percentage should be compared monthly to the actual percentage. However, unless the company analyzes and expenses bad debts throughout the year, monthly calculations of bad debt ratios can be misleading. In those situations, bad debt ratios based on annual data may be more meaningful. In any event, significant judgment and estimates are inherent when estimating bad debt expense in any given period.
• Bad debt reserve. When the reserve for bad debts as a percentage of total accounts receivable is compared to historical percentages, it can roughly indicate the reserve's overall adequacy. Management can obtain a more useful evaluation of the reserve's reasonableness, however, by computing the reserve as a percentage of delinquent accounts receivable, such as those that are 60 days or more past due. A significant change in the current period as compared to the corresponding month of the preceding year, or the moving average for the preceding 12 months, requires explanation. In some cases, however, comparing the current period percentage to one based on adjusted prior-year actual balances may be more meaningful.

For more information on these and other key financial management reports, order NACPB's Accounting for Small Businesses Guide.