Why Your Small Business Needs Interim Financial Statements

Business owner reviewing his interim financial documents

What are interim financial statements? Why does your small business need them, and how do you create them? These financial reports serve as a road map to let you know how your business is doing throughout the year and are compared against your financial projections for that fiscal year.

You can easily generate them using bookkeeping software but, many business owners don’t produce and review them regularly. If you’re not producing interim financial statements or reviewing them, then you’re missing out on essential insights for your business and opportunities for business growth.

Read on to learn how you can create interim financial statements and what they can show you.

What are interim financial statements and why does your business need them?

Interim financial statements are financial reports and statements that show the financial state of your business during a period of time, less than one year.

Reviewing interim financial statements is essential because it shows where your business is financially and where corrections are needed before you run into trouble. They can also help you identify and leverage growth opportunities by providing you insights into potential revenue lines that can be expanded.

You’ll likely need to produce these reports to show that your business is financially capable of taking on new debt or will benefit from a cash infusion. This is especially important when you’re applying for a business loan, special funding opportunities, and grants.

In our experience, businesses that provided accurate and timely interim financial statements, in addition to their historical tax returns, were more successful in obtaining pandemic-relief funding and have better access to growth capital as they move forward.

Which interim financial statements are the most important?

The most commonly used interim financial statements are the profit and loss statement, or P&L (also sometimes referred to as an “income statement”) and the balance sheet.

A P&L shows your net profit or net losses over a period of time. Many business owners lose track of how their business’s expenses compare to their income. Regularly reviewing your interim financial statements can help relieve this. A P&L can also reveal opportunities for you to build your business.

The balance sheet is a snapshot of what your business owns and what your business owes at a particular point in time rather than over a period of time, like a P&L.

Regularly reviewing your P&L and your balance sheet will enable you to compare two different points in time. This allows you to see positive or negative changes in important business measures such as working capital, accounts receivables and payables, inventory, cash, retained earnings, and total equity.

These reports should be reviewed at least every quarter, but your business can benefit from more frequent checks as well.

Use bookkeeping software to track your financials for easy reporting

Ideally, your business should use online bookkeeping software, such as QuickBooks or Wave, to track your revenue, operating expenses, inventory, and assets, loans, business credit cards, lines of credit, and more. When you want to create interim financial statements, whichever program you use will automatically generate your report – all you have to do is specify which report you want and the date range.

What to do if you don’t use bookkeeping software

If you’re not yet using bookkeeping software, make sure you take the time to explore what’s available before opting out. QuickBooks is a proven system with reasonable rates, while Wave has free packages for small businesses. There are many other options available online too. If you want to use your own system, here are some tips for creating these reports yourself. The steps are essentially the same whether you use a Microsoft Excel template or find a different template online.

Profit and Loss (P&L)

Search online or in your spreadsheet software’s template library for a P&L or income statement template that you like. Name it for your business and save it to your computer. Gather your most recent business tax return. Then:

  • Use all the revenue and expense detail lines as reported on your most-recent tax return to customize your template. 
  • Identify your systems and records for bringing in revenue, such as your point-of-sale systems and your business checking account, and record this data in your template under the correct rows.
  • Identify your systems and checking accounts through which all your expenses are paid and record this data in the appropriate categories under the correct rows.
  • If you make loan payments, use a loan statement that breaks out principal and interest, and record interest in the appropriate category of the P&L template.

Balance Sheet

After you find a balance-sheet template you like, download it, name it for your business, and save it to your computer. Then, go back to your most recent tax return: If you file Form 1120 or 1120S or 1065, your accountant may have prepared a Schedule L/Balance Sheet. If so, copy the detailed categories for the asset, liabilities, and equity line items to customize your balance sheet. Then, identify your systems and records that show:

  • The balance of key current asset categories, such as bank cash balances, accounts receivable and inventory. Record this data in your balance-sheet spreadsheet under the proper categories.
  • The depreciated value of key long-term asset categories, such as equipment, furniture and fixtures. If it wasn’t necessary for your accountant to provide this information in your business tax filings, you can do some research to create a calculate a best estimate of depreciating value of these assets. Record this data in your balance-sheet spreadsheet under the proper categories.
  • The balance of key current liability categories, such as accounts payable, accrued taxes and short-term debt. Record this data in your balance-sheet spreadsheet under the proper categories.
  • The balance of key long-term liabilities, including principal balance of long-term debt. Record this data in your balance-sheet spreadsheet under the proper categories.

Next,  create an equity section for your balance sheet with the following steps:

  • Using the interim P&L that you created, use the number reported as net profit (or net loss) for the equity category labeled “Year to Date Earnings/Net Income.”
  • Use your records to capture the value of any equity that owners have invested in the business over time for the equity category labeled “Paid-In Capital.”
  • Use your records, including personal tax returns, to capture the value of any profits you have transferred out of the business to owners over time. List this under the equity category labeled “Dividends/Distributions.” If your business operates as sole proprietors and files under Schedule C of Form 1040, all profits earned are assumed to have been distributed to you, the owner, each year.
  • You may need to make some adjustments to the numbers you have reported to ensure that you total assets less your total liabilities equals your total equity.

Pursuit has small business resources that can help

When you’re able to produce P&Ls and balance sheet statements quickly, you’ll have a much better sense of your business’s financial picture. You’ll also have the information you need to seek additional funding, such as a loan through Pursuit. Whether you need additional business resources to help your business grow, or funding to help you take that next step, contact us today to see how we can help.

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