Financial Reporting Mistakes Every Small Business Should Avoid

A financial statement provides an overview of financial activities of a business. Hence, financial reporting is considered an important function for every business and management.

A sound financial statement helps a business to take its own correct decisions and concentrate on identifying its areas of concern. These statements are also used by company’s 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 and Accounting Policies and Notes to Accounts. Therefore, financial reporting should be done in adherence to Generally Accepted Accounting Principles (GAAP).

Financial Statement

Few of the common financial reporting mistakes that every small business should avoid are:

Balance Sheet Related Errors

  • Classifying assets and liabilities- It is important to correctly identify what should come under assets and liabilities to correctly evaluate company’s financial position.
  • Differentiate between long term liability and current liability- A long term liability put under current liability can increase the amount of debt to be paid in the coming year. This could make the finances look less stable on paper making a business lose its clients or even investor capital.
  • Non preview of short/long term liability- It is necessary to clearly represent all loans and financial obligations to be able to repay them within the specified period, or else interest factor could come into effect causing financial losses.
  • 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.
  • Nonpreview of Statutory Dues- It is highly necessary that the government 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.

Income Statement Related Errors

  • No sales forecasting- Missing out even one sale can throw off a business’ profitability ratios. This information is used to value a company. Missing this information can restrict a company from getting bank loans or funding it needs to move forward.
  •  No expense budget- 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.
  •  Wrong classification of Revenue- It is very necessary to treat the revenue as per its nature. Revenue is taxed under income tax Law as per their head of income. Therefore proper presentation of revenue figures is important to avoid wrong treatment of taxation.
  •  Wrong grouping of expenses- It is necessary to classify the expenses in the financials in correct head/group according to the nature of expenses so that the following objectives related to financials presentation could be meet out-
    • To find out the unusual variancesby comparing with previous period comparative figures.
    • To analyze the actual expenses figures with budget.

Cash Flow Statement Related Errors

  • Absence of daily funds report- Daily funds report enables a business to manage its working capital requirements and also plan for emergency fund requirements.
  •  Missing debtor’s ageing- Getting paid is crucial for every business. Therefore, debtors must be recorded in a timely manner to know how long it would take to get funds realized so that a business can plan his funds position accordingly.
  • Lack of ratio analysis- Ratios are necessary to determine the areas which require management’s attention and facilitate decision making in a more facilitative manner. Some of the important ratios are:
    • Gross Profit Ratio
    • EBITDA
    • Net Profit Ratio
    • Receivables and Payable Ageing Ratio
    • Net Working Capital Ratio

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