By: Ruth King
An estimated 75% of all small business financial statements have errors. As you know, good financial statements are critical for spotting and resolving impending issues such as a cash flow crunch. Over the next few months I’ll write about the 12 most common financial statement errors.
Mistake #1: Date on P&L doesn’t match the date on the balance sheet.
The dates must match so you know all the data is the same month. You can’t make a good business decision when one statement shows one date and another statement, for the same period of time, shows another date.
This error generally occurs when a bookkeeper prints out financial statements after the end of the month. February’s financial statements are finished on March 14th and the bookkeeper is printing them out for you. She changes the date for the profit and loss statement to February 29, 2024 and prints the statement. She then clicks on the balance sheet which comes up at March 14, 2024 and forgets to change the date.
Mistake #2: Cash basis accounting
You can pay your taxes on a cash basis. You should run your company on an accrual basis. In accrual basis accounting your company has accounts receivable and accounts payable. You account for revenue when the invoice is sent to the customer, not when she pays as in cash basis accounting. In cash basis accounting your company is almost always profitable because you don’t knowingly bounce checks!
In QuickBooks® this is a simple button at the top left of the screen. It should say accrual based accounting. In other accounting software packages just set up the company on an accrual basis.
Mistake #3: Balance sheet doesn’t balance
If your balance sheet doesn’t balance something is very wrong. The definition of a balance sheet is that assets equals liabilities plus net worth. And, in most accounting software packages, you can’t enter a debit without a matching credit. Discover who probably put in a single sided entry and why that person did it!
Mistake #4: Negative gross profit
This happens when you have more costs of goods sold than revenue. Often it is when large purchases are made for upcoming work. The materials/equipment expense is accounted for and there is no offsetting revenue. If this is the case, then the materials/equipment should go into inventory until the job is billed to the customer.
If you have a negative gross profit and it isn’t a large purchase for an upcoming project, your pricing is too low or your team members are taking longer to complete the project than the estimated labor on your proposals. Find out what the mistakes are and fix them!
Check out Part 2 of this Series Here
Check out Part 3 of this Series Here
For more great business content see here.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
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