Why Your Business Needs Interim Financial Statements

Business owner reviewing his interim financial documents

As you’re running your small business, you’ve likely heard about interim financial statements – you may have even needed them for a business loan application or a new business opportunity. Interim financial statements give you a snapshot of how your business is doing. You can use them to compare against your financial projections for that fiscal year and track your progress toward your goals.

Interim financial statements can be easily generated using bookkeeping software but many business owners don’t create them or review them regularly. That’s a missed opportunity to get insights on your business!

Here, you’ll learn how to create interim financial statements and what they can show you about your business.

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

Interim financial statements are financial reports that show the financial state of your business for a period of less than one year.

Reviewing interim financial statements shows where your business is financially and where you need to make corrections before you run into issues. Your interim financial statements provide a more nuanced and detailed view of your business’s financial trends, like seasonality and expense changes. They can also help you identify and leverage opportunities to grow! For example, you’ll get insights into potential revenue lines that can be expanded when you have accurate interim financial statements.

When you’re applying for funding or seeking out investors you’ll likely need to produce these reports. The numbers will show that your business can take 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. Make sure that you understand and can interpret the numbers in these reports so that you can discuss them with potential lenders and funding partners. This goes a long way in showing that you know how to manage your finances in a responsible manner and are in tune with your business’s financial health.

When your business provides accurate and timely interim financial statements, as well as your historical tax returns, you can increase your approval chances for funding, too!

Which interim financial statements are the most important?

The most commonly used interim financial statements are the profit and loss statement (P&L), 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 can lose track of how their business’s expenses compare to their income, but you can avoid this by regularly reviewing your interim financial statements. A P&L can also reveal opportunities to build your business.

The balance sheet gives you a snapshot of what your business owns and owes at a particular point in time rather than over a period of time. This is different from a P&L, which covers a period of time rather than one point.

Regularly reviewing your P&L and your balance sheet allows you to compare two different points in time. You can 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 to create and the date range.

How can I create interim financial statements without bookkeeping software?

If you’re not using bookkeeping software, 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.

Creating a profit and loss statement

Search online or in your spreadsheet software’s template library for a P&L or income statement template that works for your needs. 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. 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.

How to create a balance sheet

Find a balance-sheet template that meets your needs, 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 assets, 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.
  • 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.
  • The balance of key current liability categories, such as accounts payable, accrued taxes and short-term debt.
  • The balance of key long-term liabilities, including principal balance of long-term debt.

Record all of 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’ve transferred out of the business to owners over time. List this under the equity category labeled “Dividends/Distributions.” If your business operates as a 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 adjust the numbers you’ve reported to ensure your total equity is equal to your total assets minus your total liabilities.

Reviewing your interim financial statements

Your interim financial statements rely on the accuracy of your books, so you’ll need to update your books in a timely manner to ensure you always have the latest data available.

As mentioned earlier, interim financial statements should be reviewed at least once every quarter, but your business can also benefit from more frequent check-ins. For example, checking in on your interim financial statements on a monthly basis will help you identify trends quicker, and act on them faster.

Here are some important items to look for in your review:

  • When you’re reviewing your balance sheet, make sure all your active accounts are entered accurately.
  • On your P&L, pay attention to each line item and look at changes from month to month. If a cost changes, look into what caused that change and if it will be recurring.
  • You might find signs in your interim financial statements that your business is ready to grow! Look for:
    • Excess cash flow that can be used in other areas of your business
    • Revenue lines that are outperforming others
    • Costs that are leveling off or decreasing

For additional help producing and reviewing interim financial statements, get in touch with your CPA or local SBDC.

Pursuit has small business resources that can help

When you can produce interim financial 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, like a business 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 work together.

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