Time flies when you are busy running a business, but it is important to occasionally pause and assess interim performance. Otherwise, you are likely to be surprised by the year-end results. When reviewing mid-year 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 mid-year 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 is not 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 also can review your gross margin [(revenue – cost of sales) ÷ revenue]. If your margin is slipping compared to 2017 or industry benchmarks, find out what is going wrong and take corrective actions.
Do not 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, do not 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 mid-year 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.