Essential Financial Oversight Guide for Manufacturing Business Owners

Key Points

• Manufacturing business owners should regularly review key financial reports, even without a financial background.
• Monthly reports should include the income statement, balance sheet, cash flow, KPIs, and reconciliations.
• Quarterly and annual reports should cover inventory checks, tax filings, and CPA-prepared statements when applicable.
• Watch for red flags like unexplained changes, negative balances, or outdated receivables.
• Consistent oversight helps prevent errors, detect fraud, and support better decision-making.

What to Require from Your Finance Department

1. Income Statement (Profit & Loss)

• Monthly
• The income statement should be for the current month and should include the same month last year, year-to-date, and last year’s year-to-date. For example, if your business runs on a calendar year, and you’re looking at May’s packet, you should see May of the current year, May of the prior year, January-May (YTD) of the current year, and January through May (YTD) of the prior year. This way, you can compare the month to the same month last year, and you can compare the year-to-date to the prior year.
• Also consider income statements by location or by product line. This can help identify specific areas of strength or weakness and provide insight to help make strategic decisions.

2. Balance Sheet 

• Monthly
• Similar to the income statement, you should request the balance sheet compared to the end of the last fiscal year and the balance sheet as of the same month last year. Again, if you’re looking at May, you’d request May of this year, May of last year, and December of the prior year.

3. Cash Flow Statement 

• Monthly
• This should include the current month and year-to-date of the current year.

4. KPIs Specific to Your Industry

• Monthly, although some software allows for getting certain KPIs daily, and in real time

5. Bank Reconciliation Reports 

• Monthly, although some software allows for getting certain KPIs daily, and in real time

6. Accounts Receivable and Payable Aging Reports

• Monthly, as of the current month-end

7. Inventory Reports

• Monthly

8. Budget vs. Actual Report 

• Monthly

9. Tax Filings and Payments 

• Quarterly and annually

10. Inventory Physical Count Reconciliation  

• Quarterly and annually

11. Fixed Asset Register or Depreciation Schedule 

• Annually

12. Audited, Reviewed, or Compiled Financial Statements 

• Annually
• From your outside CPA, if applicable.
  • If you receive prepared financial statements from an outside party, also ask for the journal entries made in preparing the financial statements.

High-Level Red Flags for Each Report

1. Income Statement (Profit & Loss)

• Sudden spikes or drops in revenue or expenses without clear explanations
• Unusually high or low profit margins compared to prior periods
• Large or unexpected “miscellaneous” expense categories
• Costs of goods sold that are not in line with related revenues
• Operating expenses that are not in line with prior periods

2. Balance Sheet

• Significant changes in asset, liability, or equity accounts without proper documentation
• Negative balances in accounts that shouldn’t be negative
  • Negative balances on the balance sheet can indicate errors or sloppy accounting.
• Large “suspense”, “other”, or new account balances
• Inconsistencies between reported assets and actual physical assets

3. Cash Flow Statement

• Operating cash flow is consistently negative, especially if the income statement shows profits
• Large unexplained fluctuations in cash inflows or outflows
• Frequent or large transfers between unrelated accounts
• Cash flow from investing or financing activities that don’t match known business activities

4. Bank Reconciliation Reports

• Outstanding checks or deposits that remain unreconciled for several periods
• Unexplained or recurring discrepancies between bank and book balances
• Alterations to reconciliation reports or missing supporting documents
• Multiple adjustments without clear justifications

5. KPIs

• Sudden spikes or drops compared to prior periods

6. Accounts Receivable Aging Report

• High volume of overdue invoices beyond normal collection periods
• Large or increasing balances in old receivable accounts
• Credits or write-offs without documented approval
• Frequent changes to customer account details

7. Accounts Payable Aging Report

• Payables are consistently overdue, exposing company to late fees or supply disruptions
• Unknown or unapproved vendors appearing on reports
• Duplicate payments or invoices
• Unusual increases in payments to specific vendors

8. Inventory Reports

• Significant differences between reported and physical inventory counts
• Inventory levels not aligning with sales trends or production records
• Obsolete, slow-moving, or excessive inventory not addressed
• Frequent write-offs or adjustments without explanation

9. Budget vs. Actual Report

• Consistent, unexplained variances between budgeted and actual results
• Failure to meet sales, cost, or profit targets without a clear cause
• Repeated budget overruns in particular departments or accounts
• Unusual “catch-up” entries at period end

10. Tax Filings and Payments

• Late, missing, or amended filings without supporting documentation
• Unusual tax penalties or interest assessed
• Tax expenses not matching reported profits or payroll levels
• Mismatches between tax returns and financial statements

11. Inventory Physical Count Reconciliation

• Unexplained inventory shortages or overages
• Discrepancies between physical counts and system records
• Lack of documentation for adjustments made after counts
• Counts performed without oversight or independent verification

12. Fixed Asset Register or Depreciation Schedule

• Missing, unrecorded, or duplicated assets
• Assets listed that are no longer in use or missing physical verification
• Depreciation not matching company policy or industry practices
• Significant changes in asset values without a clear reason
• Assets with negative balances or not being depreciation

13. Audited, Reviewed, or Compiled Financial Statements

• Auditor notes or findings that are unresolved from prior years
• Resistance from staff to address internal control weaknesses or book recommended journal entries
• Lack of updated internal control documentation
• Significant adjustments or restatements

Tips for Reviewing Financial Packets

• Check for Completeness: Ensure all expected reports are present. Missing documents can indicate deeper issues.
• Look for Consistency: Compare current and prior periods and ask questions about significant changes.
• Ask for Explanations: Request written explanations for anything unusual or unclear.
• Spot-Check Transactions: Randomly trace transactions from source to report to confirm accuracy.
• Monitor for Patterns: Recurring errors, unexplained adjustments, or reluctance to answer questions can be warning signs.

By consistently requiring these reports and understanding the red flags within each, you can better safeguard your manufacturing business from mistakes or fraud, even if you don’t have a financial background. If you encounter something unusual or confusing, seek clarification and consider outside expertise.

How Trout CPA Can Help

At Trout CPA, we understand the unique financial challenges manufacturing business owners face. Our team provides tailored accounting, audit, and advisory services to help you strengthen internal controls, interpret key financial reports, and identify potential risks before they become costly issues. Whether you need assistance setting up a reliable monthly reporting system or want expert insights into red flags you’ve identified, we can help you make confident, informed decisions. Visit our manufacturing & distribution services page to learn how our accounting experience can support the financial health of your manufacturing business.

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