When many business owners see the term “financial reporting,” they immediately think of their year-end financial statements. And, indeed, properly prepared financial statements generated at least once a year are critical. But engaging in other types of financial reporting more frequently may help your company stay better attuned to the nuances of running a business in today’s inflationary and competitive environment.
Spot Trends and Trouble
Just how often your company should engage in what’s often referred to as “interim” financial reporting depends on factors such as its size, industry and operational complexity. Nevertheless, monthly, quarterly and midyear financial reports can enable you to spot trends and get early warnings of potential trouble. For example, you might compare year-to-date revenue for 2023 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you'll need to provide additional sales incentives or change your marketing strategy.
It’s also important to more closely track costs in light of the current level of inflation. If your business is starting to lose money, you might need to consider raising prices or cutting discretionary spending. You could, for instance, temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze. Your balance sheet is important as well. Reviewing major categories of assets and liabilities can help you detect working capital problems before they spiral out of control. For example, a buildup of accounts receivable could signal troubles with collections. A low stock of key inventory items may foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.
Understand your Interim Financial Reports
If interim financial reports do uncover inconsistencies, they may not indicate a major crisis. Some anomalies might be attributable to more informal accounting practices that are common during the calendar year. Typically, either your accounting staff or CPA can correct these items before year-end financial statements are issued, so once identified, be sure to contact your VAAS CPA. For instance, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. Also, interim financial reports typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. The interim reports, therefore, tend to paint a rosier picture of a company’s performance than its full year-end financial statements.
Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. So, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, management’s estimate using historic gross margins.
Similarly, accounts receivable may be overstated because overworked finance managers might lack the time or personnel to adequately evaluate whether the interim balance contains any bad debts.
Many business owners have had an “aha moment” or two when studying their year-end financial statements. Why not lean into those insights more often? Your VAAS CPA can help you decide how frequently to engage in interim financial reporting and assist you in designing the reports that provide the information you need. So when you're ready, contact us!