What Are Interim Financial Statements?
The term “internal financial statements” refers to the same reports that you find in a company’s annual financial statements. These are:
- The balance sheet
- The income statement
- The statement of cash flows
The primary difference is that interim financial statements are prepared for a period that is less than a year. Typically, interim financial statements are made each quarter.
So, in a nutshell, interim financial statements are similar to annual statements, but for a shorter period.
Interim Financial Statements: All You Need to Know
As we said, interim financial statements contain the balance sheet, income statement, and the statement of cash flows. Here’s the information that each of these reports provides and why these details are essential for small business owners:
A company’s balance sheet tells you its financial position on a specific date. It includes particulars of the business’s assets, liabilities, and owner’s equity.
At this stage, it’s useful to know the Balance Sheet Formula:
Assets = Liabilities + Owner’s Equity
Why is this important? It tells you that everything that a company owns (Assets) is paid for by the owner (Owner’s Equity) or by borrowing money from an external source (Liabilities).
An income statement is different from a balance sheet. While your company’s balance sheet tells you your business’s financial position on a specific date, the income statement contains the revenues and expenses for a certain period.
The income statement also tells you how much of a profit (or loss) your company has made in the specified period. That’s why this statement is also called profit and loss statement.
Statement of cash flows
This is the third critical financial report that every company prepares. The cash flow statement contains details of all cash inflows and outflows during a specific period.
Remember that the statement of cash flows contains cash flows from operations as well as flows from non-operational activities.
You should know that interim financial statements are also referred to as an interim report or as management reports. These serve a useful purpose. Instead of waiting for the year-end, you can obtain information about how your business is doing every quarter.
How Can Interim Financial Statements Help Your Business?
Here are several ways in which these statements can be useful:
- How much profit is your business making? It’s hard to keep track of your revenues and expenses as your business grows. This is especially true if you sell on credit, and your suppliers allow you to pay after 30 or 60 days. Interim financial statements can help you to monitor your performance regularly.
- Is there a specific area that needs extra attention? When you review your interim financial statements, you may notice that a particular product is providing the bulk of your profits. This information may prompt you to focus on this product. Your interim financial statements could also help you to spot loss-making activities.
- A lender may request them: If you apply for a small business loan, the lender would probably like to know about your recent business performance. Your annual financial statements are a good source of information. But they could have been prepared many months ago. Interim financial statements can give the latest picture.
- Reviewing your statement of cash flows regularly is crucial: The adage “Cash Is King” is especially relevant for a small business. You could get by for some time without making a profit, but you can’t afford to run out of cash. If you do, how will you pay your employees and your suppliers?
You should analyze your company’s cash flow statement at least every three months. Every month is better. Preparing interim financial statements will allow you to do this.
If you are facing a shortage of funds or would like to invest in a new project, consider applying to Camino Financial for a loan. We offer collateral-free small business loans for up to $400,000 to enterprises that have been operating for at least 9 months and have a minimum of $30,000 in annual sales.
Steps to Prepare Your Interim Financial Statements
Interim financial statements are prepared in the same manner as your annual financial statements. So, you would probably use an accounting software package for the exercise. But there are some crucial points of difference.
Firstly, they aren’t made as carefully as annual financial statements. That’s because the idea is to prepare them quickly so that they can be used for reviewing the progress that has been made during the year.
Speed is more important than accuracy when preparing interim financial statements. So it is perfectly all right to skip some of the steps that are taken when making annual statements. For example, you may not want to go to the trouble of carrying out a physical inventory count. That could remain as a yearly exercise.
However, you have to be careful when preparing interim statements. You don’t want them to give you the wrong information.
How will you know whether the data in your interim financial statements is reasonably accurate?
Here are some steps that you can take to help you prepare your interim financial statements accurately:
Step 1: Account for all your purchases and sales.
This exercise could be tedious and time-consuming, but it’s essential.
Why is it important?
There are probably several ways in which your business makes purchases. You could buy raw materials with cash or use your credit card. The supplier may extend credit. When you are preparing your interim financial statements, ensure that all purchases have been accounted for. If you don’t take this step, you could overstate your profits.
Similarly, make sure that accounting entries have been made for each sale in the period for which the interim statements are being prepared.
Step 2: Check for commingling.
It’s important to differentiate between personal and business expenses. Commingling your own funds with those of your company will present an inaccurate picture in your interim financial statements.
Bank reconciliation is often viewed as a boring exercise that has little relevance for anyone but the accountant. However, it’s a crucial task that should be completed quickly and accurately.
Here’s one of the reasons why bank reconciliation is important. Your bank could have debited some charges that you are unaware of. When you carry out the reconciliation, you will realize that you need to account for these expenses.
Similarly, a customer’s check that you had deposited could have bounced. When you get to know about this, you would need to pass the relevant accounting entry in your books.
Step 4: Store all your receipts carefully.
You’ll need these at the year-end, so it’s a good idea to keep track of them every quarter. It’s far easier to find a receipt for a transaction that is a few months old than look for it after a year.
Step 5: Carry out a comparison of your interim financial statements with last year’s report.
When your interim statements are ready, carry out one final check. Compare them with the statements for the same quarter last year.
Why the same quarter and not the previous three months? Most businesses have seasonal sales. Consequently, sales may be higher in one quarter and lower in another. Expenses, especially those that are variable, may also fluctuate similarly. So, it’s better to compare the current quarter’s financial performance with the same quarter of the earlier year.
If this exercise reveals a wide variation, you may want to find out why. The difference could be explained by a rise in costs or an improvement in sales. Or it may be an error. Carrying out this comparison will allow you to identify the error (if there is one) and correct it.
The Bottom Line
Interim financial statements can serve as an excellent way to monitor your company’s progress. Preparing them diligently could give you the information you need to take corrective action during the year.
At Camino Financial, we do our best to provide small business owners with the resources they need to manage their companies efficiently and profitably. Our motto, “No business left behind,” guides us in this endeavor. We go beyond financing businesses, offering you free learning materials and giving you access to workshops and events.
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