Tuesday, July 5, 2011

Are you paying attention to your financials?

With over 15 years of experience preparing, reviewing and analyzing financial statements for owner-managed clients, I can tell you unequivocally that 90% of the time, financial statements are not reviewed effectively.

Reviewing financial statements is like getting a physical at the doctor – it can point out ‘issues’ that you may not have been aware of so that you can address them before they get worse. To continue the analogy, just as a doctor assesses one system at a time looking for anything out of the ordinary, when reviewing your statements, it is important that you know what normal should be so you can identify and follow up on irregularities.

As part of the year-end audit for one of my auto dealership clients, I met the owner for a morning coffee meeting and we reviewed the dealership’s interim financial statements. After looking at the financial statements, I noticed that the margins on used vehicles were up significantly year-over-year. When I questioned the owner about this he said the used car manager must have been doing his job, however it appeared irregular to me, and after a little investigation I found that there were some accounting irregularities and the profits on used vehicles were not at all what the owner had thought.

As part of the month-end review of the financial statements, there should be a set checklist that you go through so that you know what you are looking for. Staring at the numbers and stating that everything is in line with expectations is just not enough. Comparing to prior month, prior month last year and budget are only some of the overall checklist items that should be investigated, but this is a good starting point because this review of fluctuations can raise some ‘red flags.’

The financial statement review is not just meant to find accounting irregularities. Much like an investor reviewing an initial public company offering or a banker reviewing annual compliance; financial statements can uncover so much more. It can help identify liquidity issues, operational issues and potentially fraud. 

Don’t rely on others to do your dirty work, pay attention to your financial statements because they tell the story of how your business is performing. If you find something that seems out of the ordinary, keeping digging until you are satisfied.

I will be focusing on specific financial statement line items and ratios in upcoming blogs. 

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