I have been a CPA for close to 40 years. Over that time, I have read, reviewed, analyzed and examined countless financial statements of privately held, family or individually owned companies. And yet, I’m still not sure I’m doing everything I should be doing.

Are you?

When a client, particularly a new client, sends me their internally prepared financial statements, this is generally what I do.

I look at two numbers before anything else: year-to-date sales and profits, compared to the prior year. This gives me an immediate sense of how things are going with the client and sets my mind to dig into the details.

I then start with the balance sheet. Maybe that’s because of my big-firm audit training. One thing that’s been ingrained in my head is that if the balance sheet is correct, then the profits shown on the P&L have to be correct; otherwise, the balance sheet wouldn’t balance.

On the balance sheet, I start with the obvious: Does it actually balance? Does everything add up? Believe it or not, sometimes it doesn’t! I also want to make sure there are prior period balances showing—either from the end of the last fiscal year or the same month-end from the year before—because how do I know if a balance makes sense unless I have something else to compare it to? Without prior balances, I’m operating in a vacuum.

I then look at how liquid the company is. Do they have enough cash and receivables to cover their current payables and liabilities? I look at how much money is sitting in checking accounts or invested. Payroll and clearing accounts should be near zero. Larger balances in investment accounts earning interest indicate a healthier company. I confirm that cash has been reconciled.

I ask about the collectability of receivables. I check if a company is calculating their depreciation monthly rather than waiting for a year-end adjustment, because this, to me, indicates a higher level of financial maturity. I look for any unusual or intangible assets. I question asset balances that are credits and liabilities that are debits. I confirm that outstanding debt balances tie out the lender’s statement.

Once I’m comfortable that a balance sheet is relatively clean, I then turn to the P&L.

You can argue this with me, but I tend to ignore monthly income statements. No offense on my clients, but they’re usually not developed enough to truly take into consideration all the accruals and adjustments needed to properly close out a monthly report. They’re not publicly held, they’re generally under-resourced and their accounting team isn’t always trained to do so. Most of that stuff is done at year’s end. So instead, I turn right to the year-to-date amounts, because any timing differences for most of the preceding months would have shaken out by then.

Like the balance sheet, I need prior year, cumulative amounts to be shown on a P&L for comparison. How do I know if sales are up or profits are down? How do I know if certain expenses are higher or lower? I need a benchmark.

The other thing I need is the percentage of sales columns. Cost of materials, labor and other expenses may have increased, but if the amounts are consistent with last year, as a percentage of sales, then I’m less concerned. Percentage of sales is a valuable column for me. Some larger companies I know don’t report actual dollars and instead just show the percentage of sales for their P&L, and I understand why. It can be more relevant, particularly as numbers grow.

Also important: a variance column. That way, I can just focus on the revenues and expenses that are significantly higher and lower than the prior period shown.

Analyzing sales is always more challenging. That’s because sales are sales. I can ask generally why sales have gone up or down overall or even focus on a specific product line of sales (hopefully this is broken out on the P&L). But, as an accountant, I have little advice for my client when it comes to generating more revenue. That’s their sales team’s job. My advice to “sell more” wouldn’t exactly go very far!

Expenses, however, is an area where I can provide value. So I zero in on those.

Here, I want to make sure gross margins are consistent, and if not, I want to understand why not. Higher material costs? More labor? Is the client allocating overhead correctly? Understanding one's margin drives pricing, which drives overall profitability. For most businesses, it's the core of their financials.

For the rest—selling, general, administrative, operating, other—I compare variances. Are there large fluctuations period-to-period? Are the percentages out of whack? Are there significant expenses from the last period that no longer exist, and vice versa? Why? I like to focus on the larger expense categories, such as health insurance, payroll, utilities and freight, and and ask how they’re controlling these costs. Maybe I have some advice. I look at “other costs,” interest, fees and unusual items to make sure I understand them.

I’m not afraid to repeat myself every time I review a client’s financials. Asking the same questions sometimes brings up new issues. It keeps everyone—including me—on our toes.

Sometimes a general P&L isn’t sufficient. Depending on the size and complexity of a company, I may recommend that we report on a product line basis. Or by division or by company that consolidates. I’ve learned that the more details I have, the better analysis I can give. Sometimes, a combined financial statement hides issues that a more detailed breakout reveals.

Also, it’s great to have thumbnail metrics outside of the financials. Payroll and labor. Machine hours. Overtime. Backlog. Pipeline. I suggest these things to my clients and use them in my analysis.

One thing I’d like to do better: Compare my client’s financials to similar companies in their industry. That’s really what my clients want to know: Am I doing better than the other person? I haven’t done a good job of this, mainly because I don’t have enough data. Buying this information—if available—can be expensive. My firm isn’t big enough that we have a representative sample of similar companies in any one industry. Perhaps AI platforms will be able to help solve this problem for me. It’s definitely a great client advisory service to offer.

That’s what I do to review a client’s financial statement. It’s certainly not an audit and definitely not a review. If there’s one thing I’ve learned, it’s that reviewing a financial statement is more art than science. There’s no right or wrong way. But the more familiar I get, the better advice I can provide and the more valuable my services are.

Am I missing something? Do you do anything different with your clients?