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Why You Need Financial Reports More Than Once Per Year

When faced with the phrase “financial reports,” most business owners think of year-end statements presented to owners and shareholders, summarizing how the business performed over the last year. These annual reports are frequently scrutinized very carefully before they are released as final statements – and for good reason: year-end reports are often considered the baseline for investing decisions, expansion options, and as part of plans for subsequent year operations. But a proactive business owner needs to get a pulse on operating results more than once per year, in order to make effective decisions during the year. You need interim financial statements.

What are interim statements? 

Interim financial statements are the standard financial reports prepared and presented for a period less than one year. The most common periods are monthly, quarterly, or semi-annually. Some industries even evaluate revenues and expenses as frequently as weekly or bi-weekly. Generally, we recommend reviewing your financials on a monthly or quarterly basis.

Interim statements can be set up to report a single period, or provide a comparison across periods. For example, it may be helpful for you to evaluate the last three months’ of activity by month, your year-to-date activity, or compare the latest month in the current fiscal year to the same month in the prior fiscal year. How these comparisons are best set up depends on your business and how your industry typically cycles. Comparing a highly seasonal business’ last six months may not be as helpful as comparing the latest month to the same month in prior year. Comparing a very flat business’ last six months may not be as helpful as comparing the current year-to-date data to the prior year’s year-to-date data.

Why should I get interim statements? 

Besides keeping your books up to date in order to produce them, interim statements can help you in four major ways:

1. Identify Trends over Time

Interim statements identify trends and predict where changes need to be implemented. They can also provide the opportunity to spot potential problems within the business. This is especially important for new businesses, and businesses that are very cash-lean. By analyzing fluctuations in income and expenses at the appropriate level, you can identify the need for pricing adjustments, spending changes, or even adjustments to operation hours. Analyzing this information requires a little bit of expertise and experience, which we can provide.

2. Budget Analysis

Interim statements are also important budgeting tools. Depending on how you set up your budget, you can compare interim reporting to your budget to determine where you are over- or under-spending, and make changes to your strategy before it’s too late. This comparison of budget to actuals also allows you to identify where strategies are or are not working. This provides the opportunity to update your strategy or even adjust the budget to something more effective or appropriate.

3. Fraud Detection

Nobody wants to be the victim of fraud. Reviewing interim statements can help you minimize the potential damage if there is fraud or misappropriation in your business. By comparing financial results across periods, you may be able to spot a fraudulently-added vendor, a vendor who is over-charging, cover-ups for fictitious transactions, and indications of theft/misappropriation.

4. Financial Health Indicators

Your balance sheet deserves an analysis as well. Keeping an eye on changes in your assets and liabilities allows you to identify potential problems. You can have problems with cash flow, problems in operation activity like collecting revenue, and management indicators like inventory use. For example, if business is slower than anticipated and inventory is not managed properly, stock will build up, consuming cash that could be used elsewhere. If inventory is not managed properly when business picks up, you run the risk of running out. This can lead to lost sales.

How often should I get finanical statements?

How often you should evaluate your financials depends on your business cycle, and how quickly you need to make decisions. If your revenue and accounts payable cycles are relatively short, monthly statements will help you identify trends and forecast your next move. This works well for businesses that tend to collect receivables and satisfy payables within 30 days of when they were earned or incurred. If your business cycles tend to run a little longer, you might be able to get away with quarterly statements. This works for businesses who tend to collect revenue from single customers over the course of a year, and have very few or very long-term payables.

When to exercise caution with interim statements:

Just as not every business day is exactly the same as the last, not every reporting period looks identical to the comparison period. When analyzing trends and fluctuations in your statements, keep in mind that not every trend or fluctuation indicates a problem. Ideally, your accounting department makes period-level adjustments to reflect the most accurate financials, but some adjustments like PTO accruals, bad debt write-offs, or allowances for doubtful account adjustments, are typically recorded once per year when closing the year-end financials. Some information is simply not available but once per year. For example, some large inventory counts only happen once per year and bonuses could be based on year-end results. Your business may also experience an unexpected but completely calculable change. A common example of this is a higher salary to replace an employee whom you didn’t expect to replace. All of these things can cause big fluctuations when comparing year-over-year statements. Be sure to keep these things in mind during your analysis.

Barriers to Interim Statements – and How We Resolve Them

Typically, the biggest barrier to using interim statements is actually getting your hands on them! Interim reporting means that the books stay up to date and regularly reviewed by an accountant or bookkeeper. But most business owners and purchasing/accounts payable departments aren’t quite up to the task. That’s where we come in. Our scalable solutions allow even the smallest business or nonprofit organization access to interim financial statements. We can help determine what frequency is best for you. We have the expertise to support you no matter the industry or degree of operational complexity. By partnering with OneSource, you’ll have the same access to real time, accurate decision-making data as the large corporations and nonprofits, providing you with level footing to compete for funding, loans, and market share. 

Schedule a call with us to discuss your accounting and reporting needs! 

Author: Anna Baumgardner, CPA

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