How to Review Financial Reports with Your Bookkeeper or Accountant

Are you working with a bookkeeper or accountant and wondering if the financial information reported to you is accurate and correct?  Maybe you are too busy or don't have all the information on hand to double-check if the information is correct?  Numbers, financials, and money can be a personal, confusing, and stressful aspect of the business for many business owners and managers, many of whom rely on a third-party accountant to help them navigate these complexities.  However, being as complex as they are, with sufficient education, business owners can learn the financial information they need to make informed decisions for their business.  That is where working with a good accountant can make a difference.  If an external CPA audits your business, there is significantly more assurance that the financial statements reported are accurate, but this is not common for small businesses.  However, if you are a business owner or manager overseeing the business and working with an internal or external bookkeeper or accountant to prepare monthly financial reports, read on, as this is for you.

Here are some tips and steps that we recommend when working with a bookkeeper or accountant when reviewing the financial reports:

1. Review the information and Ask Questions

   • As a business owner, you should have a curious mind and use it to learn about things you never knew before, and the best way to do that is by asking questions.  When you are reviewing the financials and you see sales or expenses that you want to know more about, ask questions like "What is that expense line item for?", "Why is that expense amount so high?", or "Why is that revenue so low?".  By asking questions, you open up discussions about parts of the business that may have issues you were not aware of, which can lead to more questions as you drill down further.

     
     

2. Ask to see the Supporting Details

   • As you review the financial information and ask questions, the accountant should be able to provide supporting details on what makes up the numbers in the financial report.  For example, if you ask, "What is in the office expense for $1,500 for July?", the accountant should be able to provide detailed support, such as "The office expenses of purchases from Amazon for small supplies, a large order of paper from Office Depot, etc."  Good accountants, will reconcile the balance sheet accounts as well, which means if you are reviewing bank, credit card, loans, etc., on the balance sheet, there should be a reconciliation of the amount reported to either a 3rd party document to support it, like a bank statement or credit card statement, or a detailed list of transactions that make up the amount, such as list of individual fixed assets (computers, desks, equipment, vehicle, etc.).  Any number reported on the financial reports should have a clear reason for being reported in that manner.

     
     

3. Ask How the Calculations were made

   • If you are reviewing financial forecasting, estimates, projects, budgets, analysis, or modeling, and you see numbers reported that don't quite make sense in your head, don't be afraid to ask how the numbers were calculated.  An accountant should be able to explain the process and variables used to calculate a number, whether it's financial metrics like % of revenue, % of expense, % change from prior year, or if it's using non-financial metrics such as # of customers, number of units sold, total labor hours worked, etc.  As the reviewer of the financials, it is essential to understand how the calculations were made to provide feedback or adjust the process or variables as needed.

     
     

4. Ask Why the Calculations were made

   • Continuing from step 3, once you understand how the calculations were made, it's essential to understand the reasons behind the process and the variables used to calculate the numbers.  For example, if you are reviewing a financial forecast, and payroll expenses are expected to increase 10% next year, ask why they're expected to increase next year.  The accountant may answer, "We have two new hires starting at the beginning of the year that are expected to be paid XX for the year…", or they answer, "Based on our previous meetings, you mentioned that you wanted to give every employee a pay raise by XX% starting February and increase the yearly bonus by XX%."  But whatever the answer is from the accountant, it should be based on assumptions that have either been discussed by you or that make sense based on your business model.  Suppose you see a number in a budget or forecast that doesn't make sense, for example, revenue increasing by 200% for the year, when over the last 5 years it has only been growing by 15%-20%. In that case, red flags should be going off in your mind to ask why we are using those calculations.

     
     

5. The accountant should be asking questions

   • A good accountant knows that the numbers from bank statements, credit card statements, transaction reports, and other financial documents only tell half the story; the other half comes from the people working in the day-to-day operations of the business, whether it’s the business owner, manager, or staff member.  It is only by combining that information that you get the complete picture of the story behind the numbers.  For example, when we work with our clients on month-end accounting and encounter new transactions we have never seen before, we email or call our clients to confirm the purpose of those transactions.  This process helps us accurately report financial information and also allows us to identify any changes in the business that we may not have been aware of.  There is always a constant two-way communication between the accountant and the business, which helps ensure accurate and consistent financial data.

We work with many business owners and have a recurring process of meeting with our clients monthly to review their financials together and address any questions they may have regarding the numbers.  This process leaves our clients with a better sense of what is going on with the business, a peace of mind knowing that they have a financial partner they can rely on, and better confidence in making more informed decisions because they have that financial information and knowledge.  As a business owner or manager, it is essential to delegate responsibility over the business finances and not abdicate it. Staying constantly engaged and informed about business finances is a crucial part of managing the business. Contact us to learn how we can support your business, walk you through the numbers, and ensure you have clarity and confidence.