As a business owner, you make a lot of decisions based on your financial statements. You track revenue and plan expenses, often to decide how much take-home pay makes sense for you or whether you can afford more inventory or equipment upgrades.
Your financial statements must be accurate to rely on them. How can you ensure that your financial statements are correct?
Keep Up with Your Financial Statements
One of the best ways to ensure your financial statements are accurate is to keep up with them regularly. While creating an annual balance sheet or income statement is a good start, developing monthly updates to your financial statements is much better.
Creating and reviewing financial statements will help you pinpoint concern areas before they cause problems. Being familiar with your balance sheet, for example, will help you determine if something looks a little off. Without that familiarity, you might not realize when something has been misapplied or forgotten altogether.
Review Your Balance Sheet for Red Flags
Your balance sheet provides a snapshot of your business at a specific point in time. Being familiar with your balance sheet will help you spot red flags. Some of the most common concern areas include the following:
- Misapplied Payments. If you received a payment from a customer but applied it to the wrong account (or something similar), your balance sheet on an individual customer account is going to look a little off. Look at individual customer accounts for negative balances to help correct this type of error.
- Increasing Debt-to-Credit Ratios. A debt-to-credit ratio shows how much debt you have compared to the amount of assets you have. While a rising debt-to-credit ratio might not always signify a mistake, it can give you an indication of the health of your overall company. Huge fluctuations in this ratio can indicate something was not recorded correctly.
- The Balance Sheet Doesn’t Balance. Perhaps the biggest red flag is that the balance sheet simply doesn’t balance. In fact, that is the purpose of the balance sheet—to ensure that assets equal liabilities plus net worth.
Review Your Income Statement With Your Cash Flow Statement
While your income statement and cash flow statement report different information, they can and should be reviewed together. Having a high-profit number on your income statement with a low cash flow statement doesn’t really make sense. When these numbers are not in sync, that could indicate a problem with the earnings that are being reported.
Your reports really should be somewhat similar from month to month. When there are huge, unexplainable swings from month to month, there are likely errors that you need to address. Finding them can be difficult, but having month-sized portions to review rather than entire years can be very helpful to start this process.
Get an Accountant and Work With Them Regularly
Having a third party review your books and records can be extremely valuable. An accountant will be able to take a hard look at patterns and reported numbers to determine where there might be concerns. In addition, if you have your own in-house bookkeeping, having an outside accountant review everything provides a valuable second set of eyes to help spot mistakes.
Need help ensuring your financial statement are accurate? Speak with an Avisar advisor or consider one of our packages with coaching. Learn more about how to read and understand financial statements in How to Read Financial Statements: A Guide for Business Owners.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.