A sound financial statement helps a business make corrective decisions and concentrate on identifying its areas of concern. These statements are also used by the investors and creditors to evaluate its financial performance. Thus, it also helps a business to grow and develop in future. Financial statements usually include Income Statements, Balance Sheets, Cash Flows, Accounting Policies and Notes to Accounts. Therefore, financial reporting should be done in adherence to Generally Accepted Accounting Principles (GAAP).Listed below are just a few of the common financial reporting mistakes that every small business should aim to avoid:
1. Classifying Assets and Liabilities - It is important to correctly identify what should be listed as assets and liabilities to correctly evaluate a company’s financial position and future.
2. Differentiate Long Term and Short Term Liability - A long term liability put under current liabilities can increase the amount of debt to be paid in the coming year. This could make the finances look less stable on paper, which can cost a business its clients or even investor capital. It is necessary to clearly represent all loans and financial obligations to be able to repay them within the specified time period. If not, interest can grow, which could cause some serious financial losses.
3. Lack of Creditor Analysis - It is also necessary to know how much a company owes to its suppliers. This analysis indicates which suppliers are to be paid first so that there is no further interest issued and credibility of business is not affected.
4. Lack of Statutory Dues - It is highly necessary that state/federal dues and taxes must be reflected in the financials so that smooth payment follow up could be performed promptly to avoid non-payment/late payment fees, interest or penalties.
5. No Sales Forecasting - Missing out even one sale can throw off a business' profitability ratios. This information is used to value a company and its ability to gain users or clients. Missing this information can restrict a company from getting bank loans or receive the funding it needs to move forward.
6. No Expense Budget - If your company isn't keeping track of why it's spending money, then you are lacking serious financial responsibility. In addition to sales forecasting, it also very important to account for each operating expense. Errors in recording these expenses can lead a business to overspend, since these figures are used to set future budgets.
7. Incorrect Classification of Revenue - Revenue is taxed under income tax law as per their head of income. Therefore proper presentation of the revenue amount is important to avoid wrong treatment of taxation.
8. Incorrect Grouping of Expenses - It is necessary to classify the expenses in the financial reports in the appropriate head/group according to the nature of the expense so that the following objectives related to financial presentations could be meet out:Find the unusual variances by comparing with previous period comparative figures
9. Absence of Daily/Weekly Funds Reports - Daily/Weekly funds reports enables a business to manage its working capital requirements and also plan for emergency fund requirements.
10. Missing Accounts Receivable Payments - Getting paid is crucial for every business. Therefore, customers must be recorded in a timely manner to know how long it would take to get the funds owed.This is so a business can plan their funds position accordingly.
11. Lack of Ratio Analysis - Ratios are necessary to determine the areas which require a manager's attention and facilitate decision making in a more facilitative manner. Some of the important ratios are:Gross Profit Ratio