Key takeaways
- The income statement tells you whether the month was profitable, and the balance sheet tells you whether the company is healthy.
- Read the statements in the same order every month and compare to the prior month, the budget and the same month last year.
- The balance sheet is where problems hide, so give it as much attention as the P&L.
- Every month, write three questions for the bookkeeper or controller and expect answers before the next close.
Many owners receive a set of monthly statements, glance at the bottom line and file them. The statements can tell you far more than whether the month was profitable, if you read them in a consistent way. This guide walks through the income statement and balance sheet the way we read them with owners in a monthly review.
You do not need an accounting background. You need a routine, a few comparisons and the habit of asking why.
The income statement, top to bottom
Start with revenue and compare it to last month, to budget and to the same month last year. Ask whether the change came from price, volume or mix. Then look at cost of sales and gross margin as a percentage of revenue. Gross margin percentage is the most important line on the page, because it tells you whether the work you are selling is still priced correctly and delivered efficiently.
Below gross margin, read operating expenses by category rather than by line. People, occupancy, vehicles, marketing, administration, professional fees. Look for lines that moved unexpectedly and for lines that should have moved and did not. The operating profit that remains is the number that tells you whether the business model works at this size.
Below operating profit sit interest, depreciation and tax. Interest tells you what the debt is costing. Depreciation is the cost of the equipment and vehicles spread over their life, and it is a reminder that the trucks will need replacing with real cash one day. Read these lines once, then focus your monthly attention on the lines above them, where your decisions have the most effect.
Accrual versus cash on the income statement
Ask your bookkeeper whether the statements are prepared on an accrual basis, where revenue is recorded when earned and costs when incurred, or on a cash basis. For a growing company, accrual statements are the ones worth reading, because they match revenue to the costs of producing it. If a large job was invoiced this month but most of the cost landed last month, a cash-basis statement will mislead you in both months.
Your CPA sets the accounting policies for year end. Ask them to confirm that the monthly statements follow the same policies so there are no surprises at year end.
The balance sheet, where the problems hide
The balance sheet is a photograph of what the company owns and owes on the last day of the month. Read the current assets first: cash, receivables, inventory and prepaid expenses. Receivables rising faster than revenue means collections are slipping. Inventory rising faster than sales means cash is sitting on shelves. Then read current liabilities: payables, credit cards, the operating line, remittances owing and the current portion of loans.
Compare current assets to current liabilities. If the company could not pay what is due in the next year from what it will collect in the next year, you have a working capital problem that the income statement will never show you.
Lines on the balance sheet to question every month
- Receivables: how much is past due, and which customers
- Inventory: is it counted and valued, and how much is slow moving
- Remittances owing: are sales tax and payroll deductions current
- Shareholder loans and owner draws: are they reconciled and understood by your CPA
- Suspense or uncategorised accounts: anything parked here is a question nobody has answered
- Retained earnings: does the change match this year's profit less distributions
Build the monthly routine
Read the statements in the same order each month, with the prior month, the budget and the prior year beside them. Spend half the time on the balance sheet. Write down three questions and send them to your bookkeeper or controller with a deadline before the next close. Keep the questions and the answers, because over a year they become the company's own operating manual.
Bring the same statements to a quarterly conversation with your CPA. They will see things in the balance sheet that a monthly reader misses, and the conversation keeps tax and year end planning connected to what is actually happening in the business rather than arriving as a surprise in the spring.
If the statements arrive more than a few weeks after month end, that is the first thing to fix. Late numbers are old news, and old news does not change decisions.