Compiled, Reviewed, or Audited Financial Statements: Which One is Right for Your Growing Business?
Every successful entrepreneur remembers the day — probably the moment — that the lightbulb switched on and the business gears in their head started turning. It was the realization that a passion could be turned into a profitable business, or a new idea could help people and make the world a better place.
The cherry on top of the dream is that it could also become a thriving business. As your business grows, new orders come pouring in, bank accounts begin to swell, and you start feeling like you might be living in a dream. It’s hard to contain the excitement of where your new venture might potentially take you.
Then the reality of starting a business sets in, along with some of the mundane details that go hand in hand with running a business.
When you make the brave leap from passionate hobby or innovative idea to a fully operational business, you have to actually run the business. Growing demand begins to require significant changes to the business, like bringing on people to help you and expanding from a home office to a dedicated warehouse or building. You’re no longer a one-man team, and as the business grows, so do the costs.
As costs begin to mount and the cash account in the bank starts to stall or even shrink, you may start asking yourself some questions: Where is my cash going? Will I have enough cash to purchase more inventory? What about rent? Payroll? Fulfilling new orders? Will this delayed order result in a lost customer? How do I get more cash to fund next month’s operations? This is usually the humbling moment when you realize that you’re in over your head and maybe you need some help figuring out the nuts and bolts so you can get your runaway business back under control. After all, this was your passion, and you hadn’t actually ever learned how to properly run and manage a business.
The common scenario described above is a double-edged sword. On one hand, you should be excited about business growth, something many entrepreneurs only dream of happening with their business. On the other hand, it’s quite sobering to wake up to the realization that not accounting for the short-term and long-term factors of the business might be the bomb that implodes the business.
Running a business properly means understanding that gauging financial performance solely on the cash balance in the bank account is a recipe for disaster. A company’s cash balance does not represent the true picture of a company’s financial situation.
Any business, whether new or mature, needs to have timely and accurate financial statements. This usually means an income statement, balance sheet, and statement of cash flows. All three play crucial roles in the planning and forecasting processes; managing cash flow; securing loans or raising capital; and assessing the overall ability of the company to continue running as a business. Most importantly, if you plan to eventually sell your business, then reviewed or audited financial statements mostly certainly will be part of that exit strategy. All of these situations require either compiled, reviewed, or audited financial statements, depending at what point in the life cycle your business is in. Startups, businesses in growth mode, and mature businesses all require different types of service, level of scrutiny, and pricing. Lastly, the type of financial statements and reporting requirements are determined by client needs, creditors’ or investors’ requirements, business size, and complexity.
To guide you through the right level of financial reporting, some help from an experienced and independent Certified Public Accountant (CPA) goes a long way to getting your business back in control so you can stop stressing about the uncertainties and get back to what you love doing. In the meantime, to help you get acquainted with financial statement lingo, below is a quick summary and breakdown of the three types of statements.
Audited Financial Statements
Audited financial statements represent the highest level of assurance that can be provided by an independent CPA. They encompass unbiased and objective examination of supporting or source documents, sending third-party confirmations to confirm significant and key account balances and legal matters, perform analytical procedures, review board minutes, inspect contracts, and get an understanding of and document internal controls.
Upon the completion of the above by the independent CPA, a company can, with assurance, present its financial statements with the audit report as proof of compliance with generally accepted accounting principles, and that the financial statements present fairly, are complete and accurate, and are free from material misstatement.
Reviewed Financial Statements
Reviewed financial statements encompass an evaluation of the entity’s financial statements, performing inquiry and analytical procedures, and obtaining moderate assurance that no relevant changes are necessary to the financial statements. Typically, reviewed financial statements are prepared for management of the company; outside and prospect investors with minimal stakes in the business; lenders and creditors where a small credit facility is being sought after; regulatory requirements; and as a stepping stone for a first-year audit.
Additionally, to complete a review, the independent CPA is not required to examine supporting or source documents, sending third-party confirmations and getting an understanding of internal controls. In addition, the CPA will request all relevant contracts and agreements, board minutes, and any other sources of documentation to help assist with the preparation of complete and accurate financial statements and related footnotes.
Compiled Financial Statements
Compiled financial statements are the basic of most accounting services and do not include any analysis, testing, or assurance on the validity of the information provided. Unlike a review, a compilation is a process in which an independent CPA collects or receives financial records from a company and organizes them in the correct financial statement format in accordance with generally accepted accounting principles.
