Your financial statements are one way to know how well your business is doing. However, some things are just inevitable, such as errors. Whether you make financial statements manually or generate them through accounting software, there's always a window for mistakes. That's why preparing financial statements should be handled with extra care.
A small mistake in financial statements can have enormous consequences. However, understanding how things go wrong can help business owners fix and prevent these errors. Let's look into the common mistakes with business reports, so you know what to do when your numbers don't match.
Questions You Need To Ask
Before we start discussing the pitfalls of financial statements, it is also crucial that you know when a problem occurs. Here are some questions you need to ask to help you determine inconsistencies and errors in your business statements.
- Does your accounting planning system generate timely and accurate financial reports?
- Do all financial reports come in on a daily, weekly, and monthly basis?
- Are all business reports distributed to the appropriate personnel on time?
- Do the people that receive the financial statements know how to read them and use the information in the report?
- Do people in your business take the time to read and analyze these reports and utilize the insights to make better business decisions?
If you answered no to one or more of these questions, there might be something wrong in the process or the reports themselves, and you should start addressing them.
Common Mistakes in Financial Reporting
Sometimes, no matter how carefully small business owners prepare their reports, mistakes still seep in. Here are mistakes you should look for in different financial statements.
Data Entry Errors
Data entry is the most common and frequent error that could happen in financial statements. Among the most typical mistakes made when entering data are:
- Declaring input in the wrong account or table. (e.g., putting sales in the expense table).
- Forgetting or adding a number or a decimal place.
- Deleting or duplicating an entry.
It's always best to have two copies of your important financial statements to compare them side by side. Furthermore, you can assign personnel to double-check the entries to guarantee that there are no inconsistencies.
Lacking Comparative Data
Some businesses choose to produce single-columned reports, which are short in comparative data. Including the company's current assets and previous vital data points will give a better insight into the business's financial position.
Financial reports such as income statements and expense reports should contain comparative data. It will help you see if your business generated more sales than in other months so you can adjust your strategies. It goes the same for your expenses. It always helps to compare your current and previous expenses to see if you're going overboard to look for ways to save your resources.
Error of Commission
An error of commission happens when you mishandle data and enter it in the wrong place. In this error, you still enter the correct amount. The inconsistency happens when you put it in the wrong category. For example, you make a sale of $100 from your products, and you accidentally put this in your expense column.
You will see a decrease in your inventory but not an increase in your sales which can confuse you when the report comes out. It will also make your expense report higher than usual. Small amounts may seem insignificant, but they may turn your finances into chaos when it's consistently happening.
Failure To Inspect Business Financial Statements Closely
Making financial statements will be pointless if no one takes the time to read and study them. Aside from understanding what the numbers mean for your financial performance, inspecting them to look for suspected errors is also crucial.
To help spot errors in profit and loss statements, balance sheets, and other important business reports, every person that receives the reports should:
- Possess the knowledge necessary how to make a business financial statement and comprehend the primary financial accounts of a company.
- Dedicate time to read the statements on a schedule.
- Identify discrepancies that deviate from your usual outcomes.
- Immediately find a solution for the discrepancies and address them with people of authority.
If the administration can’t find solutions to the errors in the report, it's best to hire someone who can help you sort out and correct the errors in your financial statements.
Neglecting To Change Procedures To Prevent Errors
Errors in your financial statements will be ever-present if you don't look for the root cause of the errors. Revising some of your accounting procedures can help decrease and eliminate these errors.
For example, most data entry errors, such as omission or mishandling, stems from doing them manually. If you have a small business, manually recording income and expenses or making cash flow statements are a piece of cake. But regular and accurate recording will prove much more challenging as your business grows.
In its place, you can invest in accounting software to eliminate errors in your data entry. Revisit all your accounting procedures and make adjustments to ensure recurring errors in your reports can be eliminated.
Forgetting To Analyze Financial Ratios
Financial ratios are essential to assess your business activity. It will help you pinpoint potential problems before it does considerable damage to your business. For example, suppose your account receivables grow from 25 days to 30 and 35 days over a specific period. In that case, it can signify that some of your customers still have pending cash payments or you must catch up on collection responsibilities.
Calculating financial ratios should be done with the three main financial statements— income statements, balance sheets, and cash flow statements. By doing this, you can spot discrepancies and address potential problems.
How Mistakes Affect Small Businesses
Some mistakes are small and easy to remedy, but some are harder to spot and significantly damage businesses. Here are some consequences that come with erroneous reporting.
- Incorrect Income Statements: Wrong data in income statements can distort your company's financial position. Under-computing your profit margins can give you the impression your business is performing poorly, while over-computing can mislead you that you are generating your desired profit margin.
- Incorrect Expense Tracking: Failing to include all your business expenses will mean you miss things under deductible expenses, which will lead to overpaying your taxes.
- Indication of Fraud: When inconsistencies happen after all your efforts, one thing is sure: it is caused by fraud. Fraud often happens in small businesses since it's not easily detected. However, if it persists for a long time, it can cause the downfall of a business.
Get Accurate Financial Statements for Small Businesses
Proper bookkeeping is critical to creating accurate financial statements. Fortunately, there is an expert ecommerce accounting service that can help small businesses like yours. Unloop offers all-around accounting services for ecommerce businesses.
For your financial statement needs, Unloop's bookkeeping services have got you covered. Our bookkeeping services include the following:
- Preparing three primary financial statements: income statements, balance sheets,, and cash flow statements, on a monthly basis.
- Accrual accounting method for key financial statements.
- A subscription to accounting software such as QuickBooks and Xero.
- Filing your taxes and ensuring you pay taxes correctly and on time.
Financial statements say a lot about the overall financial health of your business. Ensuring they are accurate and complete with all essential data points is a top priority. We hope this list of common mistakes helps you be more careful of your errors.
In addition, if you need professional accounting help, Unloop offers other services such as accounts payables, forecasting, payroll, and taxation. Book a call with us today!