Why Must you Strive to Ensure your Financial Statements are Correct?
Imprecise or outright inaccurate statements in a Financial Statements are likely to occur from a number of reasons ranging all the way from human error or gross negligence to malicious interference on part of an outsider, or even a disgruntled employee. It may seem like a small thing, but an error such as this may have potentially devastating consequences for your company and its future. Those who remain vigilant in face of such errors and work actively for their prevention; whether by being a hard taskmaster over their own employees, or outsourcing the task to a specializing company; indeed, go a long way to ensure a prosperous future.
Here is a brief look at some common components of financial statements and the cautions that must be exercised when examining them;
The Balance Sheet
A Balance Sheet is a good way to provide a brief overview of company’s overall health and progress. Most people and supervisors usually just skim to the end and view the final calculations in a balance sheet. This is not a good way if you wish to examine or eliminate any intended or unintended discrepancies. It takes but a moment of your time to give a review. It also ensures you know what is going on in your company outside of the reports that you usually get from your managers and employees. You should give it more than just a cursory look and look for balances that don’t make sense.
Here are some revealing aspects that you might see to check if your calculations are out of balance;
- Negative Balances. You must ensure that any asset you had sold off has also been depreciated from your books. Otherwise you will see negative balances on your books. This kind of error is a common one.
- Misapplied Payments. A customer’s payment, which has already been received, is misappropriated towards a separate account. This error unbalances your balance sheet. It is mostly a human or a processing error which can be easily remedied by vigilant eyes, but can also have serious repercussions if not found and dealt with in time. It makes it hard to determine which client has paid already and who still owes the money.
- Rising Debt to Credit Ratios. Improper allocation of monetary resources and funds causes a major increment, as well as a discrepancy, in Debt to Credit Ratio. The delicate balance which determines the health of a company is shattered and the company is liable to enter into the red. The higher the debt, the lesser will be the opportunities to grow and expand. Building of a revenue is stymied by such frivolous ‘extra expenses’ on your part, on company payroll.
- Opening Balance Equity. Whenever there are numbers left over from calculations, they are usually put under this heading. In truth, this is no real category, because the left-over numbers should not exist in the first place. They only exist if your balances have wrong entries, calculations or perhaps both. You must ensure to re-examine the whole balance sheet if you are left with it because you are sure to have missed something.
The Income Statement
Where a Balance Sheet has the information about financial balance of a company on a given time, an Income Statement on the other hand carries the complete details of all the income and expenses over a period of time, be it a week, a month, or even a year. The income statement shows how profitable a business is, in a given period of time.
Things to watch out in an Income Statement
- Big Profit, Small Cash Flow. It represents a Red Flag in an income statement if the Profit calculated is big, but the cash flow is smaller than the calculated profit. You must ensure that the profit you are seeing is supported by the cash coming in.
- Decreasing Non-operating Income. An income statements usually has an easy to identify non-operating segment from the operating segment. This makes it easy to analyze. You must ensure the relative proportion of operating income to non-operating income year over year is balanced. If its decreasing, you may need to refocus your efforts into revenue sources that won’t disappear.
- Unpredictability. Unpredictability is always a bad thing in any kind of a formal business. Always remember, successful businesses are those who can successfully predict a scenario and have properly prepared for it. They will not only counter it, but also profit from it. An uneven income trend line is a clear indication of a failing business.
You Financial Statements
When looking at financial statements, it is crucial that accountants understand the difference between Cash Basis and Accrual Basis methods of accounting.
Cash Basis is an accounting method which is based on your company’s cash activity.
Accrual Basis is an accounting method which matches revenue with the expenses relative to time period in which the revenue was originally earned.
Cash Basis and Accrual Basis represent only half the picture each, that’s why it’s really important to look at both to comprehend what is up with your company.
SG Financials employs a team of expert accountants who have vast experience in dealing with all kinds of financial problems no matter what the issue. Please contact us and do not hesitate to ask for help.