With small businesses, resources are often in shortage. Reducing the time and effort, you spend operationally on accounting and financial management processes can help you save time and money in the long run. To save time and conserve resources, small business proprietors frequently overlook little things that can significantly impact their company.
One such area is managing the business’ bookkeeping finances. If done right, it can give you the financial flexibility you need; done wrong, and can drain the company operationally. Here are five common accounting mistakes that analysts make.
Using Generalized Financial Statements
If analysts read the finances, they likely digest them through a third-party provider.
The problem with this approach is that each of these services modifies each company’s unique financial statements to fit into a pre-created template. These services do this to ensure comparability across companies, industries, and nations.
Not Understanding the Reflexivity/Interactivity of the Three Major Financial Statements
Few analysts take the time to trace the dollar of capital raised within a company through the income statement to the bottom line and then back to the balance sheet again. Nor do they relate changes in the balance sheet accounts to the cash-flow statement to identify huge inconsistencies in either amounts or categorizations. Instead, most analysts investigate the statements in isolation from one another.
Not Creating Apples-to-Apples Comparisons in Time
This particular accounting secret is one that people rarely discuss publicly. Specifically, have you ever noticed that the temporal dimension of the income statement, balance sheet, and cash-flow statement are all altered? The income statement is stated quarterly for the first three quarters of the year and then annually. However, the balance sheet is always reported as a quarterly snapshot, even in the fourth quarter.
Last, the cash-flow statement is always shown as an accretion of cumulative cash for the year. Each of these is hugely different from one another, and they only align in the first quarter for any company. Companies usually play games with these time dimension mismatches. Consequently, analysts must put all financial statements on the same temporal dimension.
Not Adjusting Statements for Distortions
Not adjusting statements for distortions is a classic problem in financial statement analysis. Despite this fact, most analysts do not amend financial statements to adjust for one-time items, including write-offs, sales of divisions, accounting revisions, and so forth. Precisely what to look for is outside the scope of this article, but most analysts do not take the time to do this.
As a quick tip, if you ever see a write-off number that is a bit too round, such as $500 million or $75 million, you can bet that the amount is management’s estimate of a loss and not the actual loss. Consequently, you can expect future corrections to this initial write-off estimate.
Not Reading the Footnotes
Lastly, despite all warnings to pay attention to the information contained in footnotes, most analysts do not read them. Nor do most analysts take the numbers from the footnotes and put them into the main three bookkeeping financial statements.
An example of this would be to take the exact property, plant, and equipment figures reported in the footnotes and incorporate these into the analysis of the entire balance sheet. It was once taught that a company was playing games with its useful expected lives figure because when looked at the standard size over assets financial ratios.
It could see that one of their property, plant, and equipment numbers had gone down massively on a relative basis. This distortion, in turn, had significant ramifications for the reported depreciation and hence net income, operating cash flow, and free cash flow.
Conclusion
While there are many other accounting mistakes that analysts can make, if you correct those highlighted above, it is believed that you will successfully separate yourself from your analyst peers and improve your returns.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
