What is a materiality threshold?

A materiality threshold is the size of change, or error, that is big enough to matter to the people reading the numbers. In a monthly review it is usually a dollar amount, often paired with a percentage, that a line has to exceed before it is flagged and explained.

How it is used

In monthly reporting, a line is usually flagged only when its change is over both a dollar threshold and a percentage threshold. A dollar threshold alone flags big lines that moved a little. A percentage alone flags tiny lines that doubled. Together they point at changes that are both large and unusual.

Audit materiality is a related but separate idea. Auditors set it for a whole set of financial statements using professional standards and judgement. This page is about thresholds for reviewing month-to-month changes.

Worked example

Thresholds: $2,500 and 20%, compared with last month.

LineLast monthThis monthChangeFlagged?
Advertising$8,000$11,000+$3,000 (+37.5%)Yes: over both
Wages$60,000$64,000+$4,000 (+6.7%)No: under 20%
Rent$10,000$12,000+$2,000 (+20.0%)No: under $2,500
Office supplies$300$900+$600 (+200.0%)No: under $2,500

Only advertising needs a note. Rent sits on the edge, so if it stays at $12,000 next month, that is worth a sentence anyway: a new lease is news to the client.

Common mistakes

  • One threshold for every client. $2,500 is noise for a business with $5 million in revenue and huge for one with $300,000. Scale it to the client.
  • Thresholds so low everything flags. If half the lines are flagged, nobody reads the notes.
  • Never revisiting them. Review thresholds when the business grows or changes.
  • Ignoring small items that matter for other reasons. A payment to a related party or a negative balance can be important at any size.

Related terms

  • Variance analysis: Variance analysis is the process of comparing actual results with a budget, forecast or prior period, measuring the difference and explaining why it happened.
  • Month over month (MoM): Month over month (MoM) compares a figure for one month with the same figure for the month before, as a dollar change and a percentage change.
  • Percentage points vs percent: A percentage point is the simple difference between two percentages, while a percent change is that difference relative to the starting value.

Further reading