Annual financial statements show how a business performed over the year, but they may hide important changes in revenue and expenses. Monthly financial statements provide a closer look at these changes, helping analysts assess the quality of a company’s earnings. This level of detail is especially important under the SBA’s SOP 50 10 8.1, which took effect on October 1, 2026. Under the updated rules, certain SBA business acquisition loans with a purchase price of $3 million or more require an SBA Quality of Earnings report. This article explains how monthly financial statements support the review and help analysts evaluate a company’s financial performance.
Peak Business Valuation regularly works with SBA lenders on Quality of Earnings reviews. We can review monthly records, build the trailing twelve-month period, and test the earnings behind a deal. If you have questions about an SBA Quality of Earnings, schedule a free consultation below.
How Monthly Financial Statements Reveal Business Trends
Monthly financial statements help an SBA Quality of Earnings analyst understand how a business performs throughout the year. A year-end income statement combines 12 months of results into one number, which can hide important changes. For example, two companies may report the same revenue for the year, even if their results tell very different stories. One may have grown at a steady pace. The other may have lost a major customer late in the year, after a strong first quarter made up for the drop.
Monthly reports reveal when those shifts took place. They also help the analyst see how each change affected revenue, gross margin, payroll, rent, and other costs. The analyst can then look for the cause, such as a price change, a new hire, a lost customer, or a delay in construction. These monthly results also provide the basis for building the trailing twelve-month (TTM) period, which shows how the business performed over its most recent 12 months.
Building the TTM Period for an SBA Quality of Earnings
The trailing twelve-month (TTM) period in an SBA Quality of Earnings is built from monthly results. Under SOP 50 10 8.1, the required SBA Quality of Earnings Cash Proof covers the TTM period and the two most recent fiscal years. This means the monthly records must be complete enough to support both.
A reliable TTM period needs 12 full months of results, with sales and costs tracked the same way each month. The analyst then compares those results with prior years. Sometimes the latest months are still drafts or use a different accounting basis. In these cases, the analyst should understand that limitation before treating the TTM as the current run rate. Once the analyst has a reliable TTM period, the next step is to review monthly trends and determine whether changes in revenue and expenses reflect normal seasonal patterns.
Evaluating Seasonal Trends in Monthly Financial Statements
Many businesses earn more in some months than in others. To judge these swings, the analyst compares the same months across several years. This way, a normal busy season is not treated as a problem. For instance, landscapers, tax firms, and retail shops often have seasonal peaks they can predict. The key question is whether the latest year matches past patterns or shows a real change in the business.
Monthly balance sheets matter here as well. In a busy season, a company may need to buy stock or wait on customer payments. The income statement alone does not show that need for cash. These trends also feed into an SBA QoE revenue quality analysis. That analysis tests whether sales will likely hold up after the sale.
While these comparisons help the analyst identify normal seasonal patterns, they also raise another question: Were revenue and expenses recorded in the correct months? To answer this question, the analyst uses a process known as cutoff testing.
Using Monthly Records for SBA QoE Cutoff Testing
Cutoff testing checks whether a business recorded sales and costs in the right month. As part of this process, an SBA Quality of Earnings analyst reviews invoices, job records, bills, and payments when monthly results show large changes.
For example, a contractor may report steady annual sales despite a sharp increase in December. The spike could reflect a normal busy season, or it could include bills for work not yet done. By checking job records, the analyst can move any early sales to the right month. This gives the lender a clearer view of year-end earnings and whether the business can keep them up.
If you are unsure whether a company’s monthly records are ready for review, Peak Business Valuation is happy to help. We often review monthly statements early to spot cutoff and trend questions before the review begins. Schedule a free consultation below!
What If the Business Does Not Close Its Books Monthly?
While monthly records are important for identifying trends and testing financial results, not every business closes its books each month. Many small businesses have their CPA make final entries at year-end. An SBA Quality of Earnings analyst can still use monthly reports, but must check later changes and compare the figures with final year-end statements.
A monthly trial balance or general ledger report helps track those changes. It shows which monthly figures were drafts and how they tie to the final records. Year-end entries and changes made for tax reporting can also cause gaps between monthly reports and tax returns. The analyst reviews these gaps to make sure the records agree.
To help the analyst review these differences, the business should provide supporting records along with its monthly financial statements.
What Records Should Accompany Monthly Statements?
Monthly statements are most useful when other records explain the numbers. Sellers and lenders can gather these SBA Quality of Earnings documents along with the monthly reports:
- Monthly Balance Sheets: Provide monthly balance sheets with the income statements for each business in the deal. Balance sheets show how earnings turn into cash.
- General Ledger Detail: Provide the general ledger or monthly trial balance that ties to each statement.
- Operating Reports: Include data such as units sold, jobs done, billable hours, customer counts, or payroll hours. These reports help explain why the numbers moved.
- Accounting Changes: Note any changes in software, fiscal year, chart of accounts, or closing steps. Otherwise, a coding change can look like a real shift in margins or costs.
Once the analyst has reviewed these records, the findings can help the lender assess the business’s earnings and identify risks that may affect SBA loan underwriting.
How Do Monthly Findings Affect SBA Loan Underwriting?
In an SBA Quality of Earnings, monthly findings may lead to an earnings change, a noted risk, or no change at all. Before making any change, the analyst first finds out why a month looks different. The cause may repeat, be short-term, or come from a bookkeeping issue. For instance, a short-term margin drop with a clear cause may be treated differently than a lost customer. That loss may have already cut later sales.
The analyst reports the supported finding. The lender then applies it in underwriting, including the SBA Quality of Earnings debt service coverage calculation.
Conclusion
Monthly financial statements help an SBA Quality of Earnings analyst understand how a business performs throughout the year. By reviewing these records, the analyst can build a reliable TTM period, identify seasonal trends, and test whether sales and costs were recorded in the right months. These findings help lenders assess the quality of a company’s earnings and make more informed SBA loan decisions.
Peak Business Valuation provides Quality of Earnings reviews for SBA lenders across the country. If you have any questions about how we can assist, schedule your free consultation with Peak Business Valuation below.
