What Might You Be Missing When You Look at Your Financial Statements?
Financial statements provide business owners and management teams with valuable insights into their business’s financial health. The frequency of financial statements and the level of information included varies depending on a company’s specific needs and reporting requirements. Typically, companies prepare financial statements based on specific accounting periods, such as monthly, quarterly, and annually. They generally include a balance sheet, income statement, cash flow statement, and statement of owners' equity.
What information do financial statements provide?
A balance sheet gives the viewer a snapshot of your company's assets and liabilities. By comparing your total assets and total debt, you can evaluate your need and capacity to borrow. By comparing your current assets and current liabilities, you can gauge your company’s liquidity and ability to cover short-term debt. An income statement shows the relationship between gross, operating, and net profits and revenue, which can help you make decisions on pricing adjustments or cost negotiations. A cash flow statement shows the changes in cash coming in and going out for operating, financing, and investment activities. A statement of owners’ equity shows the company’s value based on the stock held by owners and the amount of retained earnings. That’s a wealth of information, but your financial statements may not be providing you, your investors, shareholders, potential buyers, and lenders with a complete and accurate picture of your company’s financial health.
What information might you be missing?
Internally prepared financial statements provide a static view of your company’s finances from a singular point in time. They don’t consider past or future environmental factors, such as changes in market demand for the products or services you offer, the effects of the COVID-19 crisis, or changes in consumer perceptions and behavior. Here’s what else your financial statements may not account for or reflect:
Changes in regulatory requirements, such as revenue recognition, that can change financial statement presentation as you adopt and implement them.
An accurate market or fair value of your assets or account for the nature of one-time expenses.
How a large buy or sell contract at the end of the accounting period accounts for a significant increase in inventory, accounts receivable, or accounts payable.
Any and all of these factors can affect your company’s finances, so excluding their effects can cause your financial statements to misrepresent your company’s financial health.
How can an independent audit, review, or compilation help?
Independent auditors and accountants help fill in the gaps and develop a comprehensive and accurate view of your company’s financial standing and health. These services can add the value of financial statement disclosure, or notes that address industry matters, regulatory and economic concerns, and environmental and other factors affecting your financial health.
A financial statement audit delivers the highest level of financial statement services. The term “audit” has a tendency to evoke negative connotations. In actuality, it’s just a word with a bad rap. The word “audit” comes from the Latin word “audire,” which simply means “to hear.” Think of auditors as professionals who listen to what your financial systems and reporting are saying to ensure the message is reliable. Your auditors evaluate your entity’s risk for fraud and help detect deficiencies in your internal controls. They perform testing and examination procedures, help uncover opportunities to improve efficiency, and issue an auditors’ report stating their opinion based on reasonable assurance. An auditors’ report can add significant value because you are able to present your investors, shareholders, potential buyers, and lenders with information that is backed by professional opinion.
If your company doesn’t require a full audit, you can also get many of the same benefits with a review. A financial statement review also offers valuable insights and recommendations. Your CPA will communicate more with management and perform less testing and examination than is required for an audit. Your review will include an accountants’ report that provides limited assurance on the financial statements. A financial statement compilation helps management and owners ensure their financial statements can be presented with confidence. Your CPA compiles your internally prepared financial statements and, depending on the level of assurance your business requires, may also include disclosures.
Contact Livingston & Haynes
L&H’s Accounting & Attest Service Group combines strategy, innovative ideas, technical skills, and industry knowledge to help businesses and nonprofits maintain strong internal accounting and financial practices. My team performs high-quality financial statement audits, reviews, and compilations, helps management and owners understand and leverage the data their financial statements provide, and advises them on other potential factors that could affect their financial health. Contact me today to learn more.
by Steven J. Haynes, MBA
Steven J. Haynes, MBA, is an administrative partner at Livingston & Haynes and specializes in bookkeeping, payroll, and business advisory services for privately-held businesses. Steve founded Emerging Business Partners (EBPI) in September 1992, and his firm became an affiliate of L&H in 2007. Today, EBPI broadens the bookkeeping, payroll, and tax consulting services available to L&H clients.