The Language of Business: Sniffing out Your Firm’s Financial Reporting Requirements

Completing this month’s special segment on the Language of Business, we address the types of financial reporting your firm needs to produce.  Tax Returns, Compilations, Reviews , and Audits are the most common forms of financial statements.

As a small business owner, particularly if your training is in a professional or particular background and without much, if any, business acumen, it is important to understand what type of financial statement your company is required to produce, most notably at the end of your year end.  Each level comes with an increasing amount of complexity and, therefore, likely more expensive.  ‘You get what you pay for’ is certainly relevant here.

We are all required to complete a tax return, both state and federal, unless your state does not require it.  That is the simplest form of annual reporting on your business.  

Some savvy business owners may attempt to complete this form on their own, just as many individuals do with their personal returns.  Depending on the structure and tax reporting choice made at the onset of your company’s legal formation, a Schedule C or K or a full separate tax return may be required for your company.  Your circle of trust accounting advisor will guide you on this choice.  

If you have a line of credit or some form of lending with a financial institution, particularly a traditional Commercial Bank, you may be required to provide a CPA prepared statement.  They usually come in one of the following forms: Compilation, Review, or Audit.  The bank’s reporting requirement usually increases with the amount of debt you have with them.  

A Compilation is the simplest form of CPA financial reporting a bank may require.  It does not include any detailed testing of your internal records.  A Review and an Audit are usually in the thousands of dollars, cost-wise, and require the CPA firm to take on more liability for the condition and reporting of your financial record keeping.  You will often see these requirements as your debt approaches a million dollars or more or, at times, with certain government backed loans or grants.  

Be prepared to discuss the level of financial reporting with your accountant -and your banker, if applicable.  The more complicated your business becomes, the more revenue you make, and the types of funding you acquire as you grow are all factors in the determination of your required financial reporting.

The sooner you sniff out your firm’s reporting requirements and understand the terminology, the better your efforts will be at flushing out your year end reporting.  This is truly an area where you need to be ‘pointed’ in the right direction early on in your business preparation!

Be well.