It is imperative for entrepreneurs to understand financial statements, as it involves more than just analyzing data; it involves making well-informed choices. Regular financial reports act as a trustworthy compass for business owners. With the clarity they provide, you can make proactive decisions to maintain your business’s financial well-being. Reviewing financial reports enhances long-term profitability and ensures a healthy cash position.
Think of it as a roadmap to help you make business decisions. Financial literacy powers your company like a superhero, guiding it toward success, whether you’re managing cash flow or calculating your profits.
7 Steps to Check the Accounting Completeness before reviewing financial statements
1. By Checking Transaction Capturing for the Period Ending
Verify financial records by carefully reviewing the transactions that were captured during the designated time frame. Cross-verify whether all sales invoices and purchase bills, including all bank and credit card account transactions, have been captured. Cross-reference all reported revenue and spending with source documents, such as bank statements and invoices, to ensure accuracy. Promptly resolve any inconsistencies that are discovered to ensure data integrity. This step alone can remove the majority of data entry errors.
2. Steps to Check Reconciliations for All Bank, Credit Card, and Loan Accounts
In the next step, carefully go over the bank, credit card, and loan account reconciliations. Check if the statement ending balances and each payment or deposit on those statements match with the recorded transactions and closing balances in the books of account. Review any differences and ensure to correct inaccuracies in the balance sheet. These reconciliations are now way easier to do in software like QuickBooks or Xero.
3. Steps to Review Additional Schedules like Prepaid, Accrual, Deferred, Undeposited Funds, and Other Assets and Liabilities Account
Next, review the schedules of accruals, undeposited funds, prepaid expenses, deferred revenue/expenses, uncategorized items, and other assets and liabilities. Cross-verify the periodic amortization, consistency for missing expenses/incomes, incorrect categorization, and undeposited funds for uncleared deposits/cheques, along with other assets and liabilities accounts. By verifying the outstanding balances of current assets and liabilities accounts, you can understand the implications of the accrual accounting method and ensure the overall accuracy of financial statements.
4. Steps to Review AR Aging and AP Aging
To efficiently manage cash flow, assess aging reports for accounts payable (AP) and accounts receivable (AR). Determine unpaid supplier invoices and past-due customer invoices. Correct the errors promptly if you notice discrepancies, such as a paid supplier invoice appearing in AP Aging or an expected outstanding supplier invoice missing. Similarly, investigate any unusual outstanding customer invoices or missing invoices in AR Aging to ensure the accuracy of financial statements and maintain good relationships with suppliers and customers.
5. How to Review Tax Liabilities Balances
Periodically scan tax liabilities carefully to ensure that financial statements accurately depict GST/HST, sales tax, payroll tax, corporate tax, or any other tax balances, matching with government agency tax accounts. It is imperative to resolve inaccuracies in tax obligations to avert legal and financial consequences. If you notice any discrepancies, discuss them with your bookkeeper and tax accountant to resolve the variances. If the differences persist on the tax agency’s account, contact them to rectify the errors — tax agencies can also make mistakes, and they are generally cooperative in correcting them. If you find the terminology difficult to understand, ask your bookkeeper or tax accountant for assistance; in most cases, they can help. It’s advisable to schedule monthly or quarterly payments for all types of taxes to stay on track for annual tax filings. Ensure that monthly and quarterly tax reporting is paid promptly to avoid interest charges and late payment penalties.
6. How to Review Inventory and COGS Recognition
Pay close attention to periodical Inventory closing units & value and Cost of Goods Sold (COGS) recognition for companies that deal with physical products. Ensure that the procedures used for unit cost pricing of each product and the combined cost of total goods sold during a certain period are accurate and verified. The physical count of closing inventory balance should match with books along with any inventory in transit and advances paid to suppliers to ensure the accuracy of financial statements. For businesses whose inventory is a major asset, this stage is essential.
7. How to Review Revenue Recognition
Examine revenue recognition procedures to make sure they adhere to accounting rules (IFRS or GAAP). Verify that contracts are in line with the timing of revenue recognition and that related expenses are properly recorded. For a business’s genuine financial performance to be reflected, accurate revenue recognition is essential. Especially if your billing period is more than 1 month, the shipping duration is more than 24 hours, the payment processing and deposit in the bank is more than 24 hours, the project will be delivered in multiple phases/stages etc.
5 Steps to Review Financial Statements
Review Expense Analysis for Further Correction and Analyzing Patterns.
Check your spending trends and anomalies in your expenditure analysis closely. This stage entails a thorough analysis of every category of expenses to guarantee accurate financial reporting. Fast corrections may be made, and trends can offer insightful information for future spending optimization.
Follow the PNE Approach to Cut Down Your Monthly Cost.
To reduce monthly expenses, use the PNE method (Prioritize, Negotiate, and Eliminate). Set important costs first, negotiate favourable agreements with suppliers, and eliminate unnecessary spending. This approach guarantees calculated cost reduction without sacrificing essential company operations. It can also reduce the chances of fraud.
Review your Financial Statements like P&L, Balance Sheet, and Cash Flow Statement.
Examine the balance sheet, cash flow statement, and profit and loss (P&L) in detail, among other important financial figures. This stage entails confirming that the presented numbers are correct, evaluating the company’s financial situation, and comprehending how these statements interact to provide a clear picture. We recommend reviewing monthly comparisons of each of these statements to provide more useful insights.
Review Your Monthly KPI Dashboards to Analyze the Bigger Picture
Use dashboards with Key Performance Indicators (KPIs) to see the bigger financial picture. Keep an eye on important variables including profitability ratios, liquidity indicators, and sales growth. Analyzing KPIs offers a comprehensive picture of the performance of the business and makes data-driven decision-making easier.
Update Your Cash Flow Budget and Forecasting Reports
Maintaining current forecasting reports and cash flow budgets is essential for successful financial planning. Review and modify these reports often to ensure alignment with long-term business financial goals. By taking this action, prospective problems and opportunities may be managed proactively, promoting overall financial stability.
Transcounts – Your Financial Advisor
Transcounts will be your helpful financial guide when it comes to financial matters. We can help you understand your monthly financial statements and promise to simplify complex finance and accounting concepts so that anyone, regardless of their financial background, can easily understand.
With Transcounts, you not only get clear and concise information but also benefit from the knowledge of professional experts. We are committed to giving you the know-how and tools to make smart decisions and reach your financial goals. We look forward to being your trustworthy accounting partner. Contact Us Now!
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