Management and cash-flow reports

Each report answers a different question about the same set of books. Read together, they show whether the business made money, where that money went and what's coming up.

The comparison with earlier months matters as much as the figures themselves. A cost that's normal for the time of year can look alarming on its own. A slow drift, such as customers taking a little longer to pay each month, is much easier to see when the months sit side by side.

Start at the top and work down. Income is what the business earned from sales in the period. If you buy stock or materials to sell, the cost of those sales comes next, and income less that cost is gross profit. Then come the running costs, such as rent, software and insurance. What's left after them is net profit.

Your pack shows the month on its own and the year to date. The month tells you how this period went, from its own dates. The year to date evens out a lumpy month, such as one carrying a large one-off cost.

Then compare with earlier months. If gross profit drops while sales hold steady, it can mean the cost of what you sell has risen without prices keeping pace. A jump in a single expense line is often timing, such as a quarterly bill landing, but it's worth a question.

Our comparison of cash and accrual accounting explains when each method records a sale, and our guide on how to read a profit and loss statement goes through the report line by line.

A forecast starts with the cash in the bank today and steps forward a month at a time: money expected in, money expected out, and the balance left at the end of each month. The profit and loss looks back; the forecast looks ahead, and its main use is spotting a month where cash runs short before you reach it.

Some of what goes into it is already in your books: invoices customers haven't paid, bills you haven't paid, and regular costs such as rent and loan repayments. The rest has to come from you, because it isn't recorded anywhere yet:

• Sales you expect but haven't invoiced, and how soon those customers tend to pay
• Large one-off costs coming up, such as equipment or a yearly renewal
• Quiet or busy periods you know about
• Changed terms with a supplier or a large customer

In this example, December is the month to watch. Less comes in from customers while more goes out to suppliers, and the closing balance falls below what a month of rent, running costs and loan repayments takes. Seen a couple of months early, a dip like that is something to raise with your accountant while there's time to plan for it.

As each month's actual figures arrive, they replace that month's estimates and the months ahead are revised. A forecast is an estimate drawn from your numbers and what you tell us, not a promise of what will happen.

Whether or not a budget is part of your reports, setting actual figures beside one shows where the business is running ahead of its plan or behind it. A budget and a forecast do different jobs. business.gov.au treats the budget as the year's targets for income and spending, set out in advance, and the forecast as a running estimate of what comes next, built from recent results and trends. Its advice is to set the budget yearly, perhaps revisiting it halfway through, and to refresh the forecast monthly or quarterly.

business.gov.au names the profit and loss as where the actual figures come from, and suggests checking spending against the budget each month.

Sales came in below plan, and cost of sales fell with them, which fits fewer jobs being done. Advertising ran over. One month's gap may be timing, such as a campaign paid earlier than planned. A gap that repeats month after month is the one to look into.

The budget is yours, set by you, with your accountant if you like. Our guide on how to do a variance analysis covers reading the gaps in more detail.

The reports describe what's happening and leave the decisions with you, but some patterns in them are worth a conversation with your accountant. business.gov.au lists warning signs of financial trouble, and several of them can be seen in a monthly report pack:

• Customers often paying late, leaving too little cash for costs: more of the aged list of who owes you sitting in the older columns each month.
• Finding it hard to pay suppliers or other debts: bills on the aged list of what you owe staying past their due dates.
• Relying on borrowed money to keep the business going: a card or overdraft balance on the balance sheet that keeps climbing.
• Costs rising while profit doesn't: expense lines growing faster than sales in the profit and loss.
• Low profit margins: gross profit shrinking as a share of sales.
• Falling sales or the loss of a major customer: income dropping month on month, or a regular customer's sales stopping.

One of these on its own may mean little. A quiet month or one slow payer can explain a single report. A pattern across several months says more, which is why each pack sets this month beside earlier ones.

When the note with your reports points out a pattern like this, it says what the books show, not what to do about it. business.gov.au suggests acting early and getting advice before problems grow, and your accountant is a good first person to take it to.