Small Business Owners’ Seven Costly Financial Statement Mistakes To Avoid
Preparing and analyzing financial statements is a daunting task. Accurate financial statements are essential for making informed business decisions and keeping track of your business’s financial health. However, there are several common mistakes that small business owners make when preparing or analyzing financial statements, which can lead to financial mismanagement and missed opportunities. Doing it wrong could potentially cost you more in the long run, so here is a beginner-friendly guide to help you avoid common financial statement mistakes when you prepare them.
1. Assets/Liabilities are inaccurately categorized:
Assets and liabilities are inaccurately categorized when they are not correctly classified as current or non-current. This can lead to errors in financial statements, inaccurate financial ratios, and incorrect decisions about the business’s financial health.
✅ To avoid this mistake, regularly review all assets (including accounts receivables) and liabilities accounts to ensure they are correctly categorized. Always determine whether it should be classified as a current or a non-current asset/liability.
|ASSETS||– short-term assets that can be liquidated within 12 months||– long-term assets whose value are not easily converted to cash or not expected to become cash within the year|
|LIABILITIES||– short-term obligations which are expected to be settled within 12 months||– long-term obligations that are not due within one year|
2. Failing to record all transactions:
Small business owners may miss recording transactions, record a receipt twice, or forget to include them at all in the financial statements. This can lead to inaccurate financial statements, resulting in poor decision-making.
✅ To avoid this mistake, keeping detailed records of all financial transactions, including receipts and invoices, and recording them in the accounting system is essential. Using accounting software or hiring a bookkeeper can help automate the process and ensure that all transactions are recorded accurately.
3. Not reconciling accounts:
It’s important to regularly reconcile bank statements and other financial accounts. This simply means making sure what you think your account balances should be matched to what your bank thinks your account balances should be. Skipping this can lead to not only errors in financial statements, but it can also make it incredibly difficult to identify discrepancies.
✅ To avoid this mistake, set up a regular schedule for reconciling all accounts (I highly recommend reconciling your financial accounts at least once a month to ensure accuracy). This can involve comparing bank statements to accounting software records or having your bookkeeper show you a report displaying that your accounts have been reconciled.
Pro Tip: Make sure all discrepancies are investigated and resolved promptly, the more time that pass before catching an error, the more challenging it becomes to be resolved in your favor.
4. Failing to classify expenses correctly:
Misclassifying expenses can distort the accuracy of financial statements and make it difficult to track the financial performance of the business. It is also a common mistake for small business owners to underestimate their business expenses.
✅ To avoid this mistake, establish clear and consistent categories for expenses and record all expenses in the correct bucket (cost of goods sold, other operating expenses, or non-operating expenses).
5. Not understanding financial statements:
Small business owners should have a basic understanding of accounting principles, such as the difference between revenue and profit and how to calculate cash flow. Without this knowledge, it can be difficult to prepare accurate financial statements or make informed business decisions.
✅ You should invest time in learning basic accounting concepts and financial statement analysis through a course or a workshop. Alternatively, you can hire a financial coach to help with understanding your financial statements and provide guidance on accounting and financial principles.
6. Not analyzing financial statements regularly:
Small business owners should analyze financial statements regularly to track performance, identify trends, and make informed business decisions. Failing to do so can lead to missed opportunities, financial mismanagement, running out of cash, or worse, business closure.
✅ You should make a habit of reviewing your financial statements at least once a month. This can involve comparing current performance to historical data or industry benchmarks to identify trends or areas that need improvement.
7. Not seeking help from a professional:
While it may seem cost-effective to handle financial management on your own, it can be challenging for small business owners without a strong background in accounting to accurately prepare their financial statements and understand what those financial statements are communicating.
✅ To avoid this mistake, you should consider hiring both a bookkeeper and a fractional CFO. These professionals can provide expert advice, help prepare and analyze financial statements, and, most importantly, strategize with you based on the results.
If hiring a professional is not feasible for the business, you can seek out resources such as accounting software or attend workshops and programs to improve your financial management skills.
You, a small business owner, face various challenges when it comes to managing your finances. However, by avoiding common yet costly financial statement mistakes such as inaccurately categorizing your assets or liabilities, failing to record transactions, not reconciling accounts, failing to classify your expenses, not understanding your financial statements, not analyzing them regularly, and not seeking help from a professional when you need one, you can set yourself up for financial success. By following the tips outlined in this article, you can avoid the pitfalls and prepare accurate financial statements, analyze your financial health, and make informed decisions to help grow your business. If you want to seek support to improve your business’ health or to have a second eye and brain to run your business, a finance coach is your key! Remember, managing finances can be overwhelming, but with the right tools and strategies, you can overcome any challenge and achieve financial success.
BONUS: Download this checklist as your reminder not to commit these mistakes, and if you do commit them, how you should solve them.