Time flies when you’re busy running a business. But it’s important to occasionally pause and assess interim performance — otherwise you’re likely to be surprised by the year-end results. When reviewing midyear financial reports, however, recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts.
Diagnostic benefits
Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that were struggling at the end of 2017.
For example, you might compare year-to-date revenue for 2018 against 1) the same time period for 2017, or 2) your annual budget for 2018. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing.
You can also review your gross margin [(revenue – cost of sales) ÷ revenue]. If your margin is slipping compared to 2017 or industry benchmarks, find out what’s going wrong — and take corrective actions.
Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. Or, if your company is drawing heavily on its line of credit, operations might not be generating sufficient cash flow.
Potential shortcomings
When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might be caused by informal accounting practices that are common midyear (but are corrected by your CPA at year end).
For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, generally paint a rosier picture of a company’s performance than its year-end report potentially may.
Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, the controller’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked controllers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.
Proceed with caution
Contact us for help interpreting your midyear results, as well as detecting and correcting potential problems. Unlike year-end financials, interim reports are seldom subject to external audit or rigorous internal accounting scrutiny. We can remedy any shortcomings by performing additional testing procedures on your interim financials — or preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.
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