The Review That Pays Off
Does your business complete financial statements to maintain bank compliance or to grow your business? While a business may need a review or compilation to meet bank or investor covenants, these tools offer more insight that helps leaders grow the business. While not a full audit, compilations and reviews offer powerful tools for performance insight.
What is the Difference Between Audit, Compilation, and Review
An audit is the most in-depth look of a company’s financial statements and internal controls. An independent Certified Public Accountant (CPA) evaluates internal controls, examines third parties like bank accounts, and provides a “reasonable assurance” level of financial accuracy. It is the most expensive financial evaluation.
However, sometimes reviews and compilations satisfy banks, investors, and executives. Reviews offer limited assurance, lower than an audit, but higher than a compilation. A review produces financial statements with a statement that the CPA did not find material issues. A review requires an analytical analysis of budgets, comparison to industry averages, and involves interviewing internal personnel. For many small and medium businesses, a review satisfies banks and investors. They also meet the needs for many that needs bonds, such as construction companies.
Compilation involves the CPA arranging the financial statements in the proper format, typically by Generally Accepted Accounting Principles (GAAP). A compilation offers no assurance as it typically does not require testing of the data. Therefore, a compilation costs less than a review and is used for internal purposes or basic lending needs.
Unlocking Better Business Decisions
Reviews and compilations provide clean, accurate, and timely financial statements. With these tools, business owners and the C-suite better understand their financial position, including cash flow patterns. And cash flow is the top reason that businesses fail. Businesses may earn a profit; however, a lack of cash leads to starvation. Reviews and compilations also lend insight into not only overall profitability, but also individual job or division profitability. This information allows decision makers to shape the business offerings to profitable products/services and to eliminate those that offer low or no profit. Additionally, clean accurate financial statements inform decision makers about hiring timing, as the true cost and productivity of each employee type becomes visible as well as capacity constraints. It also illuminates when the business should expand, as facility and equipment capacity constraints combined with cash flow planning appear. Even equipment purchase opportunities become an easier decision when current financial statements and a future forecast exist.
Industry Focus: Construction, Manufacturing, Trucking
Certain industries have specific needs for reviews and compilations. In construction these tools help job costing accuracy as they break down each job and job component determining cost and
profit. Often bonds require reviews for renewal as do bank lines of credit. As well, reviews help with work-in-progress schedules.
For the manufacturing industry reviews and compilations help track accurate inventory management, overhead absorption, and capital budgeting. This becomes critical in making purchasing decisions, determining profit, and satisfying customer needs.
In Trucking, these tools analyze fleet cost, maintenance budgeting, and fuel efficiency reporting. All important areas for cash flow management, equipment purchases/replacement and for accurate pricing/profit calculations.
Strengthens Relationships with Lenders and Bonding Agents
Often, when we are contacted for reviewed financial statements, our client has a request from their lender. The request comes to keep their line of credit open or perhaps expand it to fuel their business. Lenders typically prefer reviewed financial statements over internally prepared ones. Bonding agents for construction firms may require reviews to set appropriate limits. Often, reviewed financial statements secure better loan terms and larger bond options.
Builds Confidence for Internal and External Stakeholders
Internally, both tools provide accurate information for internal key stakeholders to make better decisions. The old phrase garbage in garbage out applies. Clean information leads to better planning, improved profitability and growth.
Externally, a review or a compilation attracts investors and satisfies lenders as it helps to remove questions about financial accuracy and even fraud. Starting several years out helps prepare for a future sale or merger. The CPA may identify areas that need improvement relative to the competition that will command a better premium when sale times arrives. Knowing this in advance allows a time to act versus finding out at the time of sale.
A Scalable Solution for Growing Businesses
Need something that gets results in a timely fashion? Reviews and compilations are more cost-effective and faster than audits. And in many situations, they achieve the desired outcome. This allows for an annual update.
The information and insight is ideal for businesses hitting new growth milestones and needing next-level financial clarity. Often the discussion and analysis leads to prune less profitable areas, investing in profitable ones and accelerating growth.
Not Just Compliance—A Competitive Edge
Business owners and executives often think of compliance when they think of reviews and compilations. And while they are needed for loans and bonds, these tools offer proactive views into the business health with insights that allow for better decision making and investments.
If your business has not had a review nor compilation, then schedule a complimentary discovery call to explore if one would benefit your business. Schedule by calling us at (336) 765-2817 or email us at info@sdallp.com
