Reviewing financial statements is a critical aspect of proper business management, but how often should you be reviewing your financial statements? Which financial statements are the most critical for the success of your business?

In this breakdown, we will discuss the necessity of financial statement reviews, how to determine how often you should be reviewing, and what to look for during your reviews.

Understanding Financial Statements

Financial statements are written records that convey the business activities and the financial performance of an entity_1. The three most commonly seen financial statements are Balance Sheets, Income Statements, and Cash Flow Statements.  Each of these financial statements has particular uses and showcases an aspect of your business’s financial health.  We will briefly break each one down.  You can skip ahead if you are already familiar with these three financial statements.

Balance Sheet

The balance sheet shows a summary of your company’s assets, liabilities, and owner’s equity at a particular moment in time.  On a balance sheet, the total assets must equal the total liabilities plus the owner’s equity.  The balance sheet is a good place to look for information on debts, to see how much owners have invested in the business, to determine how much in assets the company owns, or how much a business has in its inventory.

Income Statement

The income statement covers a range of time (such as yearly or quarterly) and provides information on revenue, expenses, and profit.  The income statement is probably the most well-known and utilized of the three statements we are discussing today.  The income statement holds the key to a lot of valuable information that is useful for decision-making.

For example, the income statement will show the Cost of Goods Sold (COGS), which is the amount of money you spent in order to “make” your product or service and get it to the customer.  This number can be used to find your Gross Profit Margin, a very valuable metric in determining your pricing and product costs.  Your income statement can also be used to monitor your expenses, find your net profit, and compare the profitability of different product lines.

Cash Flow Statement

A cash flow helps owners and investors understand where a business’s money is coming from and how that money is being spent.  It can show a reader how much cash is being generated by different activities, and what the cash standing is at the end of the year.  A cash flow statement is separated out into three different elements: operating activities, investing activities, and financing activities.  Reviewing your Cash Flow Statement can help keep you from drifting into “cash-poor” territory, and find areas for improvement in cash generation.

How Do The Statements Work Together?

Each of the three main financial statements complements each other and provides a comprehensive view of the financial health of your business.  By knowing where to look and how to read these statements, your business is empowered to make optimal financial decisions.  We will sum up the basic role of each of these statements in the overall view of your business here.

Income statements show you how much you earn and your related expenses as well as provide information needed to calculate a lot of valuable ratios.  The profit on your income statement passes over to the balance sheet, which shows you the value of things your company owns and the liabilities that must be considered in your decisions.

Several other valuable ratios are gained from the balance sheet and income statements together.  The cash flow statement breaks down where your cash is coming from and where it is leaving the business.  It is critical to understand your cash flow and sales cycles and can be combined with information in both the income statement and balance sheet to form an understanding of what your business can actually afford.

Determining The Frequency Of Financial Statement Reviews

According to the Small Business Association (SBA), the three biggest causes of failure for small businesses include failure to collect on cash owed to them, failure to manage their inventory, and managing based on how much a business has in the bank rather than their financial reporting₃.  Frequent reviews of your financial statements clearly help with the third, but it also provides a check on the first two causes of failure as well.

It’s clear that reviewing your financial statements is important, but how frequently should you be checking them?  There are a lot of factors that can help set your minimum required checks per year, but the maximum frequency you would benefit from reviewing your financial statements is unlimited.  Let’s break down the success rate of businesses using data from the Small Business Development Center:⁴

1. When Financial Statements Analyzed Annually
   1. 25% – 35% business success rate
2. When Financial Statements Analyzed Monthly
   1. 75%-80% business success rate
3. When Analyzed Weekly Without Fail
   1. 95%+ business success rate

Factors That Influence Minimum Necessary Reviews

You should review your financial statements as frequently as possible, This is clearly evidenced above by the data from the SBDC, but maybe you do not have the capacity for weekly financial statement generation and review.  Here are some factors that might influence the minimum necessary times you should try to review your financial statements.

Company Size

For larger companies, your cash tends to move in larger and more frequent bursts, which can lead to increased risk and make planning ahead more challenging.  We recommend clients that who see less than $500,000 in yearly revenue review their Income Statement at least quarterly, their balance sheet yearly, and their cash flow statement at least quarterly.

For our clients that see between $500,000 and $5m in yearly revenue we suggest a minimum of reviewing your income statement monthly, your balance sheet quarterly, and your statement of cash flow monthly.  For our clients seeing revenue higher than $5m/year, we suggest reviewing each statement a minimum of one time per month.

Industry And Market Dynamics

Certain industries have a higher propensity towards uncertainty than others.  They move faster, they have more stringent regulations, are significantly more competitive, and have constant market disruptions.  If your business is in an industry like that, you need to consider increasing your minimum review schedule.

Macroeconomic Factors

You also can not forget about macroeconomic factors such as broad economic uncertainty, high unemployment, or recessions and booms.  When times are uncertain, your vigilance towards your own financial well-being needs to increase.

Regulatory Reviews

It goes almost without saying that some businesses or industries may have a specific amount of regulated reviews required by law.  It might be smart for companies in industries similar to those that require reviews by law to increase the frequency of their reviews.

How Can An Accountant Help?

The primary role of managerial accountants is to prepare frequent financial statements and assist in the analysis of these powerful tools.  You should discuss with your accounting firm the necessary frequency and detail of your financial statements necessary for the success of your business.

Your accountant should be familiar with many of the useful ratios and comparisons that can help you identify trends, both good and bad before decisions need to be made. Vertices Accounting and Tax can help keep you on track by providing updated, timely financials and expert consultations.

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