Creating Timely, Accurate Financial Statements
The Giersch Group views financial statements as foundational for properly operating a business. A company’s financial statements need to be timely as well as accurate. This resource discusses the process used to create timely and accurate financial statements.
Role of the Process
Financial statements come from a data collection and input process. The process needs to gather all of the information for the revenue and expenses of the period, such as the month. For example, all revenue generated in the month should be in the financial statement. All expenses incurred in the month should be in the financial statements. At this point, the reader may be thinking this is the accrual method of financial reporting, which would be correct. For more information on the accrual method, click here to read more on Cash vs. Accrual Accounting.
Mechanically, the company will establish a reporting flow that will allow for the bookkeeping process to have the revenue and expense information automatically or with little additional effort. For example, invoices would be done through QuickBooks creating revenue and accounts receivable. Payments of invoices would be recorded through QuickBooks showing the payment of accounts receivable and deposits of cash.
Expenses can be a bit more challenging because bills received for the month are often after month end. This is where the rule of practicality applies.
Accuracy of financial statements needs to be balanced against practicality both as to time and as to information. As will be seen below, time means a cut-off date and orderly processing so that the financial information can be used to better manage the enterprise. While it is nice to have every item tied down, time generally does not allow for this. Further tying things down costs effort, and generally expense management does not allow for this. Instead, a reasonableness approach needs to be taken; the key being that all relevant information is systematically captured during the year. Month-to-month variations may be tolerated, so long as any particular month’s results are not so misstated as to be unusable for management guidance.
Timely Financial Statements
To be timely, financial statements must be produced close enough to the related time period to give input into management in time to make changes. For example, monthly financial statements that are produced several months after the month in question make it difficult to adjust operations. Therefore, monthly financial statements should be produced by mid-month of the following month.
For management purposes, timely also means having financial statements around the same time in a month, so that the financial statements form part of the management process. When financial statements vary widely in their production, the management usage becomes difficult.
Accurate Financial Statements
Making financial statements accurate involves two components. The first component is that all information that should be in the financials is in the financials. This is the process requirement noted above. A good process means that the user can rely on the financials to have all of the essential information.
Some key checks for accuracy are:
- The use of double entry accounting. In short this means QuickBooks. All entries in QuickBooks require that entries record both sides of a transaction, keeping the financial statements complete.
- The information is traceable to a reliable source. Generally revenue is traceable to the invoicing process and expenses traced to the check book.
- The final and key check is that the balance sheet cash can be tied to the bank statement. It is the bank statement that represents an independent data point for being sure that the financials tie to reality. With these checks, management can use the financial statements as reasonable representation of the business activity.
The second aspect to accuracy is the coding of the data entered. Unfortunately management can never be fully comfortable that the data entered has been categorized properly. Therefore, management must always give financials a review to see if anything stands out as inappropriate. We need to remember that inappropriate could be either a coding error or an activity concern. Both should be corrected.
Where coding is systematically done poorly, then management should make some adjustment in the coding process. It may be that the entry individual is not adequately trained or the items confusing.
The process must continuously be worked to minimize coding errors. The goal is to have financial statements that are timely and accurate so that management can rely on them for making decisions on the operations of the company.
Action Items
- Review current process of creating financial statements.
- Adjust current process if necessary.
Articles for Further Reading
- This article provides a comprehensive outline to understanding financial statements, illustrating the importance to the success of a small business. www.sba.gove/content/financial-statements
- “Beginners Guide to Financial Statements.” This article walks through the basics of financial statements and ratios. Unlike many sites, this article includes a good overview of the Cash Flow Statement. http://www.sec.gov/investor/pubs/begfinstmtguide.htm
- Mulit-millionaire Norm Brodsky provides the 10 top lessons he learned over his 30 years in business, including important lessons on understanding financial statements and liquidity. http://www.inc.com/magazine/20081001/street-smarts-secrets-of-a-110-million-man.html
