FOREX Magazine

Common Mistakes Businesses
Make on Financial Statements
A financial statement
provides an overview of the
financial activities of a
business or individual. In
business, these statements
can be crucial to helping a
business owner quickly
identify areas of concern. It
can also prove helpful in
determining whether a
business has the finances in
place to grow. When seeking
financing or partnerships,
businesses will often pull
financial statements to give
concrete evidence of the
company’s value.
Whether a business uses
accounting software or
manual processes to create
financial statements,
mistakes can be difficult to
avoid. Yet even one small
error can lead to costly issues
for any company that relies
on its numbers to make
decisions. Here are a few
common errors that tend to
appear regularly on businessbased
financial statements.
Balance Sheets
The biggest mistake made on
balance sheets applies to
classifying assets and
liabilities. It can be confusing,
even for financial
professionals, since assets
and liabilities fall into different
categories.
There are current liabilities
and long-term liabilities,
current assets and long-term
assets, and owner’s equity. A
business could accidentally
put a long-term liability into
the current liability column,
effectively increasing the
amount of debt that will
need to be repaid within the
coming year. This small
mistake could cause a
business to lose clients or
even investor capital, since
its finances may look less
stable on paper.
At one time, it was common
practice to “close the books”
at the end of the year and
refuse to reopen them, since
that information isn’t
expected to change.
However, the software
solutions many businesses rely
on don’t always have a
feature that locks books at
the end of each year. This
leaves previous balance
sheets open to accidental
entries after the fact,
changing a business’
balance.
Businesses should try to put
tools in place that will
preserve previous years’
balance sheets as historical
documents. If this isn’t
possible, business owners
should regularly check the
balance
balance to make sure it
hasn’t changed.
Income Statements
It can be easy to make an
error on an income
statement, since accurate
reflection means recording
every dollar of sales that
comes in. One missed sale
can throw off a business’
profitability ratios, since its
profit margins will be lower
than statements show. Since
this information is used to
value a company, repeated
instances of missed sales can
lower a business’ numbers,
potentially keeping it from
getting the bank loan or
funding it needs to move
forward.
In addition to recording
every single sale, businesses
must also accurately
account for each operating
expense. It’s easy to miss
even the most obvious
expense, especially if a
business is putting an income
statement together quickly.
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