Financial statements look at historical performance. But there are times when you want forward-looking reports to help your business make strategic investment decisions, evaluate the viability of a turnaround plan or apply for a loan. Your accountant can help ensure the assumptions underlying prospective financial statements make sense in today’s volatile marketplace.

Key definitions

When creating forward-looking financials, you generally have two options under AICPA Attestation Standards Section 301, Financial Forecasts and Projections:

1. Forecast. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations and cash flows. A financial forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take.

2. Projection. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as, “What would happen if … ?”

Subtle difference

The terms “forecast” and “projection” are sometimes used interchangeably. But there’s a noteworthy distinction, a forecast represents expected results based on the expected course of action. These are the most common type of prospective reports for companies with steady historical performance that plan to maintain the status quo.

On the flip side, a projection estimates the company’s expected results based on various hypothetical situations that may or may not occur. These statements are typically used when management is uncertain whether performance targets will be met. So, they may be appropriate for start-ups or when evaluating results over a longer period because there’s a good chance that customer demand or market conditions could change over time.

Critical components

Regardless of whether you opt for a forecast or projection, the report will generally be organized using the same format as your financial statements with an income statement, balance sheet and cash flow statement. Most prospective statements conclude with a statement of key assumptions that underlie the numbers. Many assumptions are driven by your company’s historical financial statements, along with a detailed sales budget for the year.

Instead of relying on static forecasts or projections — which can quickly become outdated in a volatile marketplace — some companies now use rolling 12-month versions that are adaptable and look beyond year end. This helps you identify and respond to weaknesses in your assumptions, as well as unexpected changes in the marketplace. For example, a manufacturer that experiences a shortage of raw materials could experience an unexpected drop in sales until conditions improve. If the company maintains a rolling forecast, it would be able to revise its plans for such a temporary disruption.

Contact us

Planning for the future is an important part of running a successful business. While no forecast or projection will be 100% accurate in these uncertain times, we can help you evaluate the alternatives for issuing prospective financial statements and offer fresh, objective insights about what may lie ahead for your business.

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Taking care of an elderly parent or grandparent may provide more than just personal satisfaction. You could also be eligible for tax breaks. Here’s a rundown of some of them.

1. Medical expenses. If the individual qualifies as your “medical dependent,” and you itemize deductions on your tax return, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. The test for determining whether an individual qualifies as your “medical dependent” is less stringent than that used to determine whether an individual is your “dependent,” which is discussed below. In general, an individual qualifies as a medical dependent if you provide over 50% of his or her support, including medical costs.

However, bear in mind that medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI).

The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There’s an annual cap on the amount of premiums that can be deducted. The cap is based on age, going as high as $5,640 for 2022 for an individual over 70.

2. Filing status. If you aren’t married, you may qualify for “head of household” status by virtue of the individual you’re caring for. You can claim this status if:

• The person you’re caring for lives in your household,
• You cover more than half the household costs,
• The person qualifies as your “dependent,” and
• The person is a relative.

If the person you’re caring for is your parent, the person doesn’t need to live with you, so long as you provide more than half of the person’s household costs and the person qualifies as your dependent. A head of household has a higher standard deduction and lower tax rates than a single filer.

3. Tests for determining whether your loved one is a “dependent.” Dependency exemptions are suspended (or disallowed) for 2018–2025. Even though the dependency exemption is currently suspended, the dependencytests still apply when it comes to determining whether a taxpayer is entitled to various other tax benefits, such as head-of-household filing status.

For an individual to qualify as your “dependent,” the following must be true for the tax year at issue:

• You must provide more than 50% of the individual’s support costs,
• The individual must either live with you or be related,
• The individual must not have gross income in excess of an inflation-adjusted exemption amount,
• The individual can’t file a joint return for the year, and
• The individual must be a U.S. citizen or a resident of the U.S., Canada or Mexico.

4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally can’t take care of him- or herself, you may qualify for the dependent care credit for costs you incur for the individual’s care to enable you and your spouse to go to work.

Contact us if you’d like to further discuss the tax aspects of financially supporting and caring for an elderly relative.

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Maintaining the status quo in today’s volatile marketplace can be risky. To succeed, businesses need to “level up” by being proactive and adaptable. But some managers may be unsure where to start or they’re simply out of new ideas.

Fortunately, when audited financial statements are delivered, they’re accompanied by a management letter that suggests ways to maximize your company’s efficiency and minimize its risk. These letters may contain fresh, external perspectives and creative solutions to manage supply chain shortages, inflationary pressures and other current developments.

Auditing standards

Under Generally Accepted Auditing Standards, auditors must communicate in writing about material weaknesses or significant deficiencies in internal controls that are discovered during audit fieldwork. A material weakness is defined as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.”

Significant deficiencies are generally considered less severe than material weaknesses. A significant deficiency is “a deficiency, or a combination of deficiencies, in internal control that is … important enough to merit attention by those charged with governance.”

Auditors may unearth less severe weaknesses and operating inefficiencies during the course of an audit. Although reporting these items is optional, they’re often included in the management letter. The write-up for each deficiency includes an observation (including a cause, if observed), financial and qualitative impacts, and a recommended course of action.

From compliance to business improvement

Audits should be more than just an exercise in compliance. Management letters summarize lessons learned during audit fieldwork on how to improve various aspects of the company’s operations.

For example, a management letter might report a significant increase in the average accounts receivable collection period from the prior year. Then the letter might provide cost-effective suggestions on how to expedite collections, such as implementing early-bird discounts and using electronic payment systems to enable real-time invoices and online payment. Finally, the letter might explain how improved collections would potentially boost operating cash flow and decrease write-offs for bad debts.

When you review the management letter, remember that your auditor isn’t grading your performance. The letter is designed to provide advice based on best practices that the audit team has learned over the years from working with other clients.

Observant auditors may comment on a wide range of issues they encounter during the course of an audit. Examples — beyond internal controls — include cash management, operating workflow, control of production schedules, capacity issues, defects and waste, employee benefits, safety, website management, technology improvements and energy consumption.

Take your audit to the next level

Always take the time to review the management letter that’s delivered with your audited financial statements — don’t just file it away for a later date. Too often, the same talking points are repeated year after year. Proactive managers recognize the valuable insights these letters contain, and they contact us to discuss how to implement changes as soon as possible.

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