Like any good small business owner, you likely want to know how your business is performing on a regular basis. You can use interim financial statements for exactly this purpose. Interim financial statements help you keep spending on track with your earnings and avoid costly mistakes along the way. Below, find an interim reporting definition, comparisons of interim and annual financial statements, and a guide to crafting interim financial statements.
What are interim financial statements?
An interim financial statement is any financial report that covers a timeframe of less than one year. The most common form of an interim financial statement is a quarterly report.
Interim financials can be crucial for your small business since they provide a timely glimpse into your company’s operations well before your annual statements become available. Additionally, annual statements may not be ready until long after the year in question ends, making interim financials all the more important. Interim financial reporting is also vital for streamlining communication between your small business, its customers, and its investors.
What are annual financial statements?
Annual statements are useful not just for financial purposes, but as marketing tools. It is common practice for businesses to work extensively on creating and presenting annual financial statements that are as visually appealing as they are informative. Annual statements may be issued to employees, customers, vendors, investors, and suppliers.
Comparing interim and annual statements
It may seem like the interim reporting definition outlined here only differs slightly from the annual financial statement definition. In reality, there are many ways in which interim and annual statements differ. Among them are:
- Auditing. An interim income statement does not need to be audited, whereas an annual statement must be audited to ensure that all information presented is correct and fair. Often, a certified public accountant (CPA) will conduct this audit.
- Accrual basis. On an interim income statement, the entirety of an expense can be added to the balance sheet, or it can be spread among many interim statements. An expense reflected on an annual financial statement must be contained entirely within that year.
- Seasonality. If your small business generates a significantly larger number of sales during one season than another (an example might be a Christmas or Halloween shop), interim financial reporting can better display how much loss or profit occurs in a certain period. An annual financial report is unable to display this level of detail.
- Disclosures. Many of the disclosures required in annual statements are not needed in an interim financial statement. These disclosures can include promotional materials, management discussion and analysis, and financial information divided by business segment.
The eight steps for creating interim financial statements
To create interim financial statements, follow these eight steps:
1. Enter your expenses
To begin making your interim financial statement, be sure that all your expenses are properly entered into your accounting software. Even if your software integrates with your bank and automatically updates your records to include your expenses, you should double-check that past-due expenses and vendor bills have been properly entered.
2. Record all your sales
An accurate picture of your small business’s financial status is incomplete without a full detailing of all your sales. Make sure that your accounting software reflects all sales – including open invoices on sales made during the period in question – before continuing your interim financial statement creation.
3. Calculate all debt interest
All debt interest can be tabulated as separate expenses. However, since interest tends to be included directly alongside all payments on loans you have taken for your small business, interest can accidentally become buried in your spending records. You can separate your interest from your loan repayments by checking that your loan statement’s principal balance matches the value recorded on your balance sheet.
4. Reconcile all of your accounts
Reconciling your loans and interest is only one step in the process of creating an interim financial statement. You should also reconcile all your accounts, including your checking account and credit lines. In doing so, you may discover transactions you would have otherwise accidentally excluded or duplicated.
5. Decide which basis to use
When preparing an interim financial statement, you can do so on a cash basis or an accrual basis. Most experts recommend using the latter option (even if you use the former option for tax purposes) since an accrual basis reflects revenue earned and expenses incurred instead of cash flow. In other words, an accrual basis reflects business activity more accurately and specifically than the movement of cash in or out of your small business can.
6. Review your balance sheet
Although your accounting software should automatically make sure that your balance sheet is in proper form, problems such as negative balances, uncategorized assets and liabilities, payroll liabilities, and opening balance equity can still slip through the cracks. You should thus manually check that your liability, equity, and asset totals all balance.
7. Check your dates
An interim financial report with inconsistent dates will present a misleading picture of your small business’s financial standing. Be sure that your statements for profit, loss, and cash flow are all for the exact same date range and that your balance sheet reflects your finances for the final day of this period.
8. Finalize your interim financial statement
After completing the previous steps, you can finalize your interim financial statement. If you plan to present your statement digitally, save it in an appropriate, non-editable file format before sharing it with your intended audience. If you plan to present physical copies, now is the time to print a test copy, and if everything looks as you want it to, print as many copies as you need.
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