Financial statements are crucial for any business since it gives them an overview of their financial status. It allows business owners to immediately pinpoint areas of concern and determine if they have the capacity to expand and grow their business. It is also vital when seeking funding or partnerships to prove the company’s overall value.
Businesses who use finance dashboards or manual reporting processes to prepare their financial statements must know that a simple mistake in a financial report can be costly and can even close down an entire organization.
Here are some of the most common financial report errors businesses make:
Balance sheets are a must for every organization. Sometimes, bookkeepers and business owners commit the mistake of incorrectly classifying assets and liabilities. Since assets and liabilities have more than one category, it can be confusing to sort. Some of the categories are current assets, long-term assets, current liabilities, long-term liabilities and owner’s equity.
For example, a bookkeeper can erroneously place a long-term liability into their current liability column. This report shows that the company has a large sum of debt it has to repay within the fiscal year. This simple mistake can mean a big difference for a business because it could make it harder for them to secure capital investment or they could even lose some of their significant investors because their finances appear weak on paper.
Given this, businesses need to use tools that will help them keep previous balance sheets as historical data and ensure it does not undergo any changes as the financial year closes.
Businesses can easily make errors in reporting income statements. Failing to input one sale can alter a business’s profitability ratio. While one mistake may not matter much, repeated failure to report sales can significantly change a company’s values. Since profitability is often used to gauge a company’s ability to pay, poor profitability ratios can make it harder for them to secure a bank loan when necessary.
Businesses must also ensure that they are reporting accurate operating expenses. Often, they miss items like petty cash spending. While these omissions may seem small, it can cause a business to overspend. Failing to report the cost of goods for a quarter accurately can cause the company to have inadequate inventory and failure to adequately handle the next quarter’s demand.
Cash Flow Statements
If there is one thing that gives businesses an overall picture of their financial standing, it is their cash flow statements. Like in balance sheets, finance professionals can make the mistake of classifying cash and cash equivalents. In general, cash flows fall into three categories: financing, investing, and operating activities. It is vital for businesses to know which items should go into what category. Simply putting figures into cash flow statements is not enough. It must be accurate. Many of the cash flow statement mistakes are basic accounting, such as erroneously accounting for capital expenditures, any items bought on credit.
Given this, it is essential for businesses to know the main differences of operational, investment, and financial cash flows for them to classify these statements accordingly.
Financial reports are regarded as a company’s backbone. It is a guide for business owners to know if they are making the right corporate decisions or if they are on the right track in achieving their goals as a company. Financial reporting errors can severely impact a company’s competitive power. Businesses have to have proactive measures in place to avoid these minute errors before they become a big problem. Taking proactive measures will ensure a more accurate picture of their business operations.