Interim review of financial statements

A client in the service industry was routinely providing their year-end to our firm late, usually around 4-5 months after their year-end date.  This was an issue specific to the controller of the company and was fortunately resolved in future years.  As a result of the delays in receiving their year-end to us, management would not review the prior year’s financial statements until 5 or 6 months after year-end, and therefore almost half way through the current fiscal year.  By this point, it was almost too late for management to remedy any problems affecting their profits that would appear in the company’s financial statements.

We suggested, as we do with several of our clients, to allow us to perform an interim review of their financial statements.  Therefore, six months into their year-end, say June 30th for a December 31st year-end, we would obtain the internal financial statements of the company, and perform an interim review and analysis.  This would also include any bookkeeping clean up required, which would eventually reduce our work when reviewing the year-end statements.

In the first year of performing the interim review of the client, we noticed a $40,000 loss (in their first 6 months) in their operations.  Our analysis showed that they had a higher amount of labour costs, and lower labour efficiency than in previous years.  The client did not “feel any pain” yet, and this would have gone past the “point of no return” and no turning back.  Management agreed that they were in fact overstaffed but were not aware of what impact it was having on their profits.  The fact that the company was experiencing a slower year due to economic reasons made the problem even worse.

Subsequent to the interim review, together with the client, the following strategy was developed. the client let go some of their part time and contract staff that were deemed excessive to the operations.  When the year-end was completed, the company ended up turning a small profit rather than a large loss.  Given the economic conditions affecting their industry and their competitors, management was very happy with the results and even happier with the amount of labour costs saved in the last six months of the year.

The timely understanding and use of relevant financial information is a key success factor for any management.