Consistent financial reporting is critical for business management. These reports are the backbone of evaluating business performance – crucial for making informed decisions, attracting investors, and securing loans. But cleaning up bad statements can feel daunting, tedious, and wasteful to small business owners and managers.
If you’ve recently faced hurdles or missed opportunities due to disorganized financials, you need to clean up your statements. This guide will provide you with financial reporting help and actionable steps to get accounting back in order and working for you.
What is a Financial Statement?
A financial statement is a report of the financial activities and position of a business, person, or other entity. The standard structure of business financial statements makes them easy to understand for both managers and investors.
Small businesses have three key financial reports:
- the balance sheet
- the income statement (aka profit and loss statement)
- the cash flow statement
A statement of retained earnings is a fourth report common for large, public corporations, but isn’t as useful for small businesses. These documents provide insights into a company’s performance, financial position, and cash flows, helping stakeholders make better decisions.
What Can Happen if My Financial Statements Are a Mess?
Some lucky business owners can neglect their financial statements for years, but the long-term consequences are inescapable. The main consequences of messy business financial statements are:
- You won’t know how to manage your business. Without clear financial statements, it’s challenging to understand your business’s financial health, forecast cash flows, and manage expenses effectively.
- Investors won’t have confidence in your business. Both lenders and equity investors consider messy financials a red flag, signaling poor management and high risk. Messy financials routinely scare off potential financial support, endangering your cash flow.
- You won’t be able to sell your business. Unclear or messy financials decrease the value of your business or completely deter buyers.
Check out our blog for other accounting tips that help you avoid losses and missed opportunities.
Common Mistakes When Cleaning Up Financial Statements
There are several common pitfalls you should know and avoid before wasting time and money on cleanup.
Mistake 1: Playing whack-a-mole with errors.
Inexperienced bookkeepers find an error and fix it, then find another and fix it. However, the order of operations is critical in accounting, so this non-strategic approach results in dead-ends, doubling back, rework, and wasted time.
Instead, use a checklist to exhaustively check all potential problems, identify issues to fix, and plan the correct order to address them.
Mistake 2. Ignoring the system setup.
Incorrect system setup is one of the most common reporting mistakes. Take the time to examine your item masters, product codes, general ledger mappings, and the structure of your chart of accounts. Addressing these root causes can prevent future errors.
Mistake 3: Procrastinating cleanup.
Like compound interest on a loan, accounting errors grow and become more complex over time. That’s why proactive financial reporting help is better than occasional: maintaining good books is less expensive than performing sporadic massive cleanup projects.
How to Clean Up Financial Statements
Every clean-up is unique, but generally follows the same pattern of steps.
Step 1: Team up with an accounting professional.
Experience is invaluable, especially if you’re not well-versed in financial management. Ask an accountant for financial reporting help to save you hours of spinning wheels.
Step 2: Examine the Chart of Accounts (COA) for reasonableness.
Ensure your COA is not too cluttered (too many accounts) or too simplified (too few accounts), which can lead to overly detailed or overly generalized financial reports. Ideal categorization allows you to see revenue by product or channel and matches COGS with revenue buckets.
Remove any unused accounts and condense sparsely used accounts to reduce clutter.
Step 3. Check the last reconciliation date for all cash and credit card accounts.
Financial reporting standards require cash and credit card accounts to be reconciled monthly, at minimum. If yours have not been reconciled for some time, all additional accounting adjustments will be built on a faulty foundation.
Step 4. Run a ruler check and highlight potential issues.
A ruler check is performed by comparing GL balances over a 12-month period. Accountants used to do this by printing out 12 months of financials, putting a 12” ruler on the paper, and going line-by-line to look for trends. (Today, the UX of your accounting software makes this paperless.)
When performing a ruler check, look for irregularities like:
- Large month-to-month fluctuations
- Balance sheet balances that grow disproportionately to sales
- Negative balance sheet amounts
These can indicate accounting errors or omissions that need addressing.
Step 5. Develop and execute a clean-up plan.
Work with your accountant to prioritize the cleanup of findings from steps 2-4. The priority should be based on materiality – large issues should be addressed in detail, while small errors may be ignored or written off.
Step 6. Verify Statement of Cash Flows (SCF) mapping.
The statement of cash flows is often overlooked but provides business managers useful insights. This must be set up in your accounting system correctly and requires manual mapping of balance sheet GLs to operating, investing, and financing uses of cash.
Depending on your software, it might be easier to construct an external SCF in Excel to gain a clearer understanding of cash movements.
Leveraging Clean Financial Reports
Cleaning up your financial statements can feel overwhelming, but the reward is worth the journey. Financial reports not only help in managing your business more effectively but also build credibility with lenders and investors. Regular maintenance and a systematic approach can prevent the chaos of last-minute cleanups and provide ongoing clarity about your business’s financial health.
This article was written by a CFOshare employee with assistance from generative AI for rhetoric, grammar, and editing. The ideas presented are a combination of the author’s expertise, original ideas, and industry best practices.
