With a new year fast approaching many of businesses are starting to work on their financial reports and future projections.
Businesses of all sizes produce annual financial reports for informing directors, shareholders and customers of their progress, the current state of the firm and its financial position. While these reports are great for estimating the size of your business and positioning it in the market, they can take a lot of time and work and they can be wrong. So here are 10 common mistakes people make in their annual financial reports.
Mix up assets and liabilities
The biggest mistake made on balance sheets applies to assets and liabilities. Since assets and liabilities are two different categories it is easy to get mixed up.
If long-term liabilities, current and long-term assets and owners’ equity are accidentally put in a wrong column you could lose clients or even investor capital since your business might look less stable on paper.
Mistakes in sales reports
Income statement can be hard to make an accurate reflection of your business state. One missed sale can throw off a business’ profitability ratios since its profit margins will be lower than statements show. Because this information is to value a company missed sales can lower a business’ numbers and their credibility.
In addition to recording every single sale, businesses must also accurately account for each operating expense. And this section is where a lot of people leave mistakes. Shoebox receipt system is hard to account for, and if you have a bigger business there is more space for errors. Small expenses can add up really quick and end of a year report will be a pain if there is no system place.
Last quarter inventory
Some companies tend to re-order products for their inventories and use figures from previous quarter’s, based on the cost of goods sold listed for that quarter. Firstly, an error here is not taking in account market changes and changes in cost, while changes in market demand will lead to inadequate inventory and either lack or overflow of stock.
Multiple revenue streams
Operating activity cash flows are generated through the company’s core business. Inflow from operating activities includes revenue from selling products and/or services, interest and dividends that the business receives, and other cash receipts. When doing your financial report, it can become more complicated when you have outstanding debt and a lot of revenue streams.
Confusing investing activities
Investing activity comes from money spent on the business or buying and selling investments. Investing activities, such as purchases of capital equipment and loans that the company makes can be missed out or confused.
Confusing cash flow and non-cash flow financing activities
Cash flows from financing activities include items specific to a business and its creditors, such as taking out or repaying a loan. These may or may not involve the use of cash.
Many companies run financial forecasts based on the last year’s results and do not account for the future. Run a number of what-if financial scenarios to secure yourself against changes in the market and potentially prevent the crisis. (See what we can help with here)
Financial items differ from company to company and it can be difficult even for financial professionals to understand all of the abbreviations. So, make sure to make notes of any financial items that may require explanations. Always include the reason for deferring any amounts to the following year, whether income, expenditures or taxes. Provide details of the accounting practices you use, such as your policy for procurement or levels of payment authorization.
Post-balance sheet events
Easy to get neglected. Consider both options for this section, where events that give you additional information about conditions in existence as of the balance sheet date, including estimates used to prepare the financial statements for that period and events that provide new information about conditions that did not exist as of the balance sheet date.
Let us know if we missed anything out, and we shall talk about it more!
Happy financial reporting season!