Modern-day businesses rely on financial reporting to stay compliant and make efficient decisions. Evidence-based reporting benefits small businesses by enhancing the timeliness and accuracy of financial data. But no accounting system is infallible, and the occasional mistake can slip through the cracks.
Fortunately, you can protect your business by knowing what mistakes to look out for and implementing appropriate safeguarding practices. Keep reading to learn more.
A functional accounting system should be able to smooth out any financial reporting issue. However, even the most skilled accountants can struggle to overcome the pitfalls of financial reporting.
Consider the following questions to find out if your financial reporting practices have a problem:
If you’ve answered “no” to one or more of the above questions, it might be time to upgrade your reporting processes.
Let’s look at the most common financial reporting mistakes and the best strategies to avoid them.
Single-column reports contain less information than multi-column reports and won’t help you anticipate market trends or secure new business opportunities.
On the other hand, multi-column reports include comparative data, from budget amounts to prior-year revenue and expenses. This information allows you to determine if your business has reached its financial goals and identify where it fell short.
Make sure that your informational reports and financial statements contain comparative data. Trying to cram multiple comparative figures into a single document can be overwhelming, so consider organizing the data into several reports.
Instead of issuing one hard-to-interpret income statement, you could put together two. The first may compare budget amounts to actual amounts, while the second can display data from prior years or quarters.
While including comparison columns is an excellent first step, a lack of calculated differences can also throw a wrench into your reporting processes. Instead of finding relevant information quickly, you’ll have to calculate the differences on your own. You’ll waste valuable time relying on a calculator to complete the task. Besides, an accidental finger slip could throw the calculations off and produce an inaccurate figure.
It’s better to incorporate calculated column differences so that you can focus on studying the information without wasting time working out the numbers. Moreover, this approach makes the data more digestible. You’ll quickly identify where you can implement the bite-sized insights to boost your business.
Depending on your needs, percentage differences can be more valuable than calculated differences.
With calculated differences, it can be challenging to determine when you’ve gone over budget. For example, salaries may exceed the budget by a few thousand dollars. At first glance, the issue seems urgent; without the percentage difference, you’re unsure how grave the situation is. However, this calculated difference may translate to a below 10 percent discrepancy, only requiring a quick administrative fix.
But sometimes, the lack of percentages masks a more significant financial disparity. Although the gap between the expenditure and the budgeted amount appears small, it hides a large percentage difference. When the documents display percentage calculations, it’s easier to catch these inconsistencies. Overruns are hard to detect if you’re only working with calculated differences.
Manual bookkeeping is prone to errors, especially if the discrepancy doesn’t immediately seem like a threat to the business. Unfortunately, it’s not uncommon for these inconsistencies to slide for too long, and soon your small business is struggling to stay afloat.
It’s essential to hire staff who are familiar with the complexities of bookkeeping to ensure your documents accurately reflect your business’s financial standing. Without proper training and auditing awareness, staff might cut corners to balance the books and skew the numbers even further.
The good news is that automation gives business owners peace of mind and nips these issues in the bud. Third-party service providers like Swyft Books have developed reliable software that collects and analyzes transaction data, leaving no room for data errors.
Plus, a comprehensive audit trail contains concise, current charts and transparent financial reports for government and industry auditors.
Tax audits call upon businesses to provide records to demonstrate the legitimacy of their expenses. But proper recordkeeping has implications that extend beyond tax ramifications. When owners decide to sell their business, potential buyers will likely demand an external financial audit or valuation. In such cases, documentation like receipts and reports verifies the business’s financial statements.
Putting together a detailed report is pointless if staff fail to study its contents. Also, those who read the reports and notice inconsistencies should know how to handle the situation to prevent revenue loss and impaired decision-making.
For this reason, those with access to informational reports and financial statements should receive training on reading and interpreting the documentation. They should take time to analyze and digest the data and spot inconsistencies that deviate from the expected amounts and balances. If possible, they should identify what caused the discrepancy and propose an optimal solution. Unless they can find the root of the issue, it’s best to transfer the anomalies to a more experienced colleague to interpret.
Unfortunately, it’s not uncommon for some businesses to task one employee with handling financial matters. Without checks and balances, the employee might not grasp the importance of accurate data interpretation. Additionally, they may not know who to turn to when problems arise and could try to sweep inconsistencies under the rug. This failure in interpretation and communication may mean big trouble for small businesses.
Another potential danger of designating financial reporting to one person is fraud. When one person handles all financial affairs, there’s a higher chance they may manipulate the system. Even if the staff is reliable, managing business funds should always come with oversight.
Implementing checks and balances ensures that several people sift through the same reports, increasing the chance of accurate reports and minimizing the risk of fraud and error.
Often businesses that catch discrepancies and errors on time do so because they invest a lot of effort in updating their books. However, they may forget to upgrade their accounting procedures to prevent recurring issues. For example, if improper customer deposit handling leads to an error, the accounting system should rectify the situation while a second party monitors future transactions. This vigilant approach could determine whether the error was a one-time thing or whether the business has deep-rooted accounting issues.
Accurate balance sheet ratio analysis helps spot market upheavals that could otherwise fly under the radar. It’s also an effective method for determining if the accounts receivable employees have been slacking and falling behind on their responsibilities.
Furthermore, if the inventory shows more calculated days than expected, it may indicate staff has ordered too much merchandise or that production operations have hit a standstill.
A business operating without cash flow is unimaginable, and corporations should prepare and update their forecasts periodically.
Solid insight into current, projected, and historical cash flow is the lifeblood of fund expansions, managing capital investment, and large-scale spending.
Without cash flow reports and real-time forecasting, you might be exposing your business to needless risk and writing checks your financial holdings can’t back.
Internal and external stakeholders rely on financial reporting for decision-making for multiple reasons. It gives investors a clear picture of the business’s financial health and helps them decide whether to put their money into the business. Moreover, creditors like banks, credit card companies, and the Small Business Association (SBA) use accurate reporting to analyze the business’s creditworthiness.
Internal reporting influences day-to-day operations, such as setting up product prices or buying inventory. Owners and executives use reports and financial statements to devise more effective business strategies.
Financial reporting is only helpful if it’s both precise and timely. Accurate information is pointless when it’s unavailable or out of date.
Inaccurate reporting can leave a long-lasting mark on the business and negatively impact investors or external stakeholders.
Tracking down and fixing reporting errors is a time-consuming process. When you factor in the time necessary to mitigate damages, the task can stretch for weeks or months and distract you from growing your business. It can strain relationships with investors and collaborators and lead to job dissatisfaction.
Inaccurate data often results in bad business decisions. In particular, internal reporting should always remain sharp as it affects all operational decisions, from product pricing to workforce hiring and layoffs.
The last thing you want your business to be is short on cash due to exaggerating cash flow. On the other hand, underreporting can lead to missed investment opportunities.
With late or skewed reporting, owners risk the local authorities or the IRS knocking on their business’s door. The penalties can be severe if the IRS determines a corporation has underpaid taxes. The company must settle the tax bill with interest, even if the inaccuracy was accidental.
A business’s credibility rests on accurate financial reports. Unintentional errors could undermine your trustworthiness and discourage lenders from offering a better deal. Sometimes, they view the company as a risk and refuse to provide their services. Investors might distrust the financial information and choose to take away their support. It takes time to correct inaccurate reports, and the company could miss major deadlines, so its stock may plummet.
One of the simplest ways to ensure accuracy is by implementing strict controls. These practices minimize the probability of error, but that doesn’t mean they’re always effective. They don’t guarantee protection. Instead, they bolster protection levels and combat financial misstatements.
Controls are typically classified as detect and prevent.
As the name suggests, preventive controls intercept mistakes before they occur. They aim to keep financial information clean before you plug it into statements. Standard preventive controls are access restrictions, task segregation, employee screening, and more.
Detect controls come into play after an error occurs. They usually compare cash accounts to bank statements and internal and external audits.
After establishing a functional control system, your reports should align with legal regulations and industry standards. Another benefit of streamlining your reporting is illustrating the business’s financial standing and growth potential.
Small businesses or those just starting might think hiring an accountant is enough. But accounting is tricky, and even experienced accountants can struggle to keep up with the numbers. Employees come and go, products hit the shelves, clients continuously reach out, and the figures can get lost in the shuffle.
Lucky, high-performing bookkeeping software can help bring your small business to the next level. The latest programs are affordable and provide on-demand access to reports and financials to guarantee all operations run smoothly.
Accurate and up-to-date reporting provides valuable insight for wise decision-making. It makes the difference between financial success and revenue loss.
The Swyft Books software offers all the tools a small business needs to improve operations, reduce expenses, and increase income. Give it a chance and sign up for a free trial to see how we can help your business prosper.