Quite often, we obtain a new client relationship because the users (e.g. owner, lender, potential investor) of that company’s historical financial statements continue to have unanswered questions, which ultimately leads to a lack of confidence in those financials. In that scenario, there could be many causes ranging from their internal accounting department’s basic lack of experience to the other extreme which involves intentional deceit, and possible fraud/theft. To try and avoid this situation, here are some bases you need to cover:
Proper presentation of financial statements and related information goes a long way towards the user’s confidence in what they’ve been provided. Something as simple as the balance sheet not balancing due to a rounding error, can cause a reader to start wondering about the accuracy and reliability of that entire set of financials. On a higher level, a business’s financial statements need to be presented in a comparable manner to others within their industry. Whether that means the cash or GAAP (accrual) basis, or an industry specialized accounting method such as the percentage of completion for recognizing revenue in the construction industry. Furthermore, when presenting financials (internally or externally) it is also very important to know the users/readers to make sure the format and content is familiar and complete to serve their purpose. For example, internal and external users of financial statements have different needs:
External Users (e.g. lender or potential buyer/investor)
In addition to the proper presentation points discussed above, company financials provided should be in a condensed format, with disclosures as needed. (i.e. sending a detailed account format generated from QuickBooks to your banker or a potential investor is not going to impress them and will most likely cause them to ask more questions than they would have otherwise) More often than not, an accrual presentation is preferred by these users. If your internal accounting staff is not experienced in presenting financials on the accrual/GAAP basis, it is imperative you/they consult with your CPA firm to assist with that process. Additionally, if comparative historical financials are provided, it is important that their presentation is consistent and that any material variances can be quickly explained. Regardless of how “pretty” or “ugly” a company’s financials are, the last thing you want is for one of these users to ask questions to which the company’s representative doesn’t already know the answer.
Internal Users (e.g. owner, management team)
In order to make effective daily operational and “big picture” decisions, a company’s owner and its management team need more detailed financial information than what is provided to the external users. For example, the operational results of each department are necessary in order to properly assess performance and make changes, including future capital expenditures for expansion opportunities. The Company’s accounting system must contain sufficient account detail by department or job, that will permit the ability for management to drill down as needed in order to address any questions that arise. Of course, this underlying detail is what “pulls up” to what is presented in the company’s financial statements at the highest level. Confidence the detailed accounting records are being maintained properly start with the owner, or someone representing the owner other than the chief financial officer, reviewing the timely issued financials on a monthly basis. That review should include taking a look at material balance sheet account reconciliations/schedules along with obtaining explanations for any variances versus historical results.
As many business owners do not have an accounting or financial background, it’s helpful when an executive summary report accompanies the internal monthly financials. Such a summary report can provide a narrative of the highlights along with explanations for variances, and typically some type of current and forecasted cash position. Companies maintaining this level of regular internal financial reporting for its decision makers are in a much better position to feel confident about their financial statements.
From our experience, a combination of maintaining properly presented and accurate financials in a meaningful format for a company’s internal users, along with utilizing the services of a reputable CPA firm, establishes the foundation of confidence when it’s time to share those financials with an outside user of them. That confidence becomes evident to a lender or potential investor when proper financials are presented, and all questions are answered quickly and completely. Price CPAs provides assistance and guidance on this topic for many of our clients, including being “in the room” with third parties as a company’s financials are being discussed. For more information on how we can help you, please call 615-385-0686, or email Shayna at firstname.lastname@example.org.