Simply put, a financial statement analysis provides you an appraisal of your company’s previous financial performance – and its future potential. And whether you use accounting software or manual processes to create your financial statements, mistakes can – and often do – happen and just one tiny mistake can prove costly as you rely on your numbers to make sound financial decisions.
But if you’ve made mistakes, you’re not alone. Even Bank of America, Nike Inc., and Alphabet Inc. were among the 663 U.S. companies that had to file financial revisions or restatements in 2016 according to Audit Analytics.
So here are three of the most common financial statement mistakes – and what you can do to avoid them.
Classifying assets and liabilities is easily one of the biggest mistakes made on balance sheets. Admittedly, it can even prove challenging for financial professionals since assets and liabilities fall into different categories: current liabilities and long-term liabilities, current assets and long-term assets, and owner’s equity. You could unwittingly put a long-term liability in the wrong column which could increase the amount of debt to repay the coming year, and potentially cause you to lose clients or investor capital as you’ll appear less stable on paper.
BEST PRACTICE TIP: It’s often helpful to preserve your previous years’ balance sheets as historical reference documents or get in the habit of regularly checking your balance to make sure it hasn’t changed.
This is another easy mistake to make as an accurate reflection means recording every single dollar of sales – and just one missed sale can throw off your profitability ratios since your profit margins will be lower than your statement will show.
Another income statement mistake involves accurately accounting for every single operating expense which can often be easy to miss including salaries, benefits, meals, bank fees, and the cost of goods sold.
BEST PRACTICE TIP: A good accounting system – using a minimum of five digits for each account number – will allow you to document the level of detail necessary for accurate income reporting.
Cash Flow Statement
Misclassifications on your cash flow statement are another common mistake since cash flows are usually divided into operating activities, investing activities and financing activities – and you have to know which items go into which category. Operating activity, for example, is generated through your company’s core business while investing activity comes from what you spend on your business or buying and selling investments, and financing activity includes items specific to your creditors such as taking out or repaying a loan.
BEST PRACTICE TIP: It’s important to understand the difference between operational, investment and financing activities and classify them accordingly.
Financial statements help you create a financial roadmap for your company to help guide major decisions or seek business partnerships. But when you take preventative measures to avoid even the smallest mistakes, your business can protect its bottom line. So for help with your financial statements, contact Bedinghaus & Co. today.