Some business leaders do not take the time to review their financial information on a consistent basis. That could mean they’re making decisions on past data that is no longer relevant.
“I have seen leaders of businesses focusing solely on one financial statement line item — be it cash or the bottom line — instead of doing an in-depth look into other areas of their financial statements,” says Trevor Ray, ASD Manager at Corrigan Krause. “In taking this approach, the full picture of how the business is performing will not be obtained. This may lead to outdated systems and processes, which in turn leads to lost time and dollars.”
Having an accounting system that produces accurate and timely financial statements is especially relevant during times of economic uncertainty and volatility.
“With consistent news of change in today’s economic climate, this is especially pertinent,” he says.
Smart Business spoke with Ray about the importance of timely and accurate financial statement information in making informed business decisions.
What are the most important financial reports and financial reporting periods?
The most important financial reports for middle-market businesses are the balance sheet, income statement and statement of cash flows. The balance sheet shows businesses their overall financial position as of a point in time by presenting assets, liabilities and equity. The income statement presents the company’s activity (revenues and expenses) for the period that is being reported on — generally for one year but can be semiannual or quarterly. The statement of cash flows presents a company’s cash activity for the reporting period by showing cash generated or used in operating, investing and financing activities.
The most important financial reporting period is the current period the company is reporting on. Business leaders want to make decisions with the most recent and accurate financial data. However, having proper historical financial information is always important as it can reveal trends and possible efficiencies.
How might reporting delays or inaccuracies affect how business leaders make forecasts and decisions for their companies?
With delays of financial information, businesses must make assumptions and estimates when making decisions. Doing so can lead to unnecessary expenses and even improper allocation of funds. For example, if a company believes it’s going to have a positive cash flow at the end of the current reporting period and invests in capital equipment before the results of the period are obtained, cash shortages may present themselves. Inaccurate financial information only makes forecasts and decisions worse as decision makers may believe the company is in a strong financial position, when their current and quick ratios may be weak. This further increases the risk of improper fund allocation and investment, overspending, and false hope in the bottom-line.
What are some strategies business leaders can use to improve the timeliness and accuracy of their financial reporting?
Creating and reviewing semiannual and quarterly financials leads to business leaders having a further understanding of their company by giving them the opportunity to view the results of their business at a higher frequency. Many discoveries and realizations are made when reviewing quarterly or semiannual information, which often reveals efficiencies within a business. Also, review the business’s accounting system to see if leaders are happy with its reporting. The proper system can lead to discoveries previously unknown.
In today’s world where the economy fluctuates daily and can rapidly change, this information is of the utmost importance. Making decisions off lagging or inaccurate financial data may have severe consequences, so it’s a good idea to make sure accounting systems are producing correct data before making any significant decisions. Finally, consult with a CPA on a quarterly or semiannual basis to confirm that the financial data being presented is accurate so important decisions are made based on the most recent and precise information. ●
INSIGHTS Accounting is brought to you by Corrigan Krause.
