As a small business owner, you rely on accurate financial statements to make informed decisions and drive your business forward. You’re not alone if you’re feeling suspicious or frustrated with your current business reporting. Many business owners encounter reporting errors, even when they work with a bookkeeper or fractional CFO. Recognizing common financial reporting mistakes will help you identify if your business is suffering from reporting errors.
What are 4 common errors in accounting?
As a fractional CFO, I get the privilege of inheriting the mistakes of other accountants when onboarding new small business clients. While there are hundreds of potential errors in business finance, I tend to see just four repeated in most situations:
- Failure to reconcile accounts
- Failure to accrue revenue and costs (cash basis books)
- Irregular financial statement publication
- Bad inventory accounting
Failing to Reconcile Accounts
The failure to reconcile accounts properly is the simplest yet most common small business reporting error. Some bookkeepers code transactions but neglect to perform reconciliations. Others only reconcile the cash accounts but overlook other critical balance sheet accounts like prepaid assets, deferred revenue, or undeposited funds.
Regularly reconciling all accounts, not just cash, is crucial to accurate business reporting. This process verifies that the balances in your accounting records match external support schedules, so you do not misstate profit, assets, or liabilities.
As a rule of thumb, your accountant or CFO should reconcile every balance sheet account to an external schedule.
Failure to accrue revenue and costs (cash basis books)
The second most common small business finance mistake is publishing cash-basis statements rather than accrual-basis statements. I mostly see this when a bookkeeper without an accounting degree runs unsupervised, or when an income tax CPA provides bookkeeping services. In both cases, their focus often leans towards tax compliance rather than providing insightful management reports.
While cash-basis is simple to understand, it obscures your business’s true profitability and, ironically, makes cash flow forecasting impossible. Business finance school may tell you to accrue dozens of obscure things, like payroll and rent, but revenues and costs are the most critical.
Accrual-basis revenue and cost recognition makes a more accurate picture of your financial health.
Irregular Publication of Financial Statements
Though not an error in themselves, late and irregular publication of financial statements is a symptom of systemic financial errors. An inaccurate and undisciplined month-close process creates these errors, resulting in late statements that are old and useless to you as a business manager.
Fast and reliable financial statements empower you to manage your business effectively. To achieve this, your team must have an error-free process executed excellently.
A comprehensive checklist, complete with sign-offs, dates, and QA verifications, should drive your team’s month-close process.
Bad Inventory Accounting
Inventory is a notorious source of errors in financial reporting. Your operations team is focused on fast, efficient production and distribution of goods rather than excellent record keeping. As a result, poor inventory management is endemic across small businesses.
Inaccurate inventory can severely distort your financial statements, making your business appear more profitable than it is.
Overstated inventory is the most common error and results from a lack of physical inventory counts, over-accrued asset values (due to cost variances), improper ERP system setup, or negligent accounting practices. If you are lucky, your overstated inventory will be embarrassingly discovered during Quality of Earnings when you sell your business. If you are unlucky, overstated inventory will be discovered when your business unexpectedly runs out of cash despite months or years of “profit.”
How do I avoid making errors in my financial reports?
Avoiding errors in financial reports is not rocket science – there are time-tested, proven business processes to ensure quality accounting every month. This includes:
- A well-designed month-close process with thorough reconciliations
- Proper accruals, including revenue and cost recognition
- Regularly scheduled accounting processes executed with discipline
- Proper inventory accounting and reconciliation.
Separation of duties and checks and balances are also best practices in accounting departments (although this is more to prevent fraud than errors.)
If you want help eliminating errors from your financial statements, partnering with CFOshare will help get your accounting processes on track. Contact us today for more information.
