Startups often have unpredictable income and need to keep an eye on their finances to avoid losing money.
By maintaining accurate financial statements, founders can track essential details like the movement of cash, the cost of sales, and the overall financial performance of their company.
Discover how to read financial statements, why they’re so important, and what you can do to improve the accuracy of your bookkeeping.
What Are Financial Statements?
A financial statement is a document that gives a complete summary of an organization’s financial situation. It should include key details like your current cash flow, expenses, revenue, and liabilities.
Financial statements should also give an accurate overview of the following:
- Current assets
- Long-term assets, including equipment, land, or physical structures
- Intangible assets, such as trademarks, brand recognition, or even legal arrangements with other businesses.
Importance Of Accurate Financial Statements
Maintaining accurate business financial statements is crucial for any startup to succeed.
By regularly monitoring and updating your business financials, you can ensure legal compliance, transparency, and effective future planning.
Here are the main reasons why accurate financial record keeping is vital.
Make Strategic Business Decisions
Having detailed financial documents makes it easier for business leaders to make informed decisions about the direction of your company.
For example, if your financial statements indicate rising costs and declining revenue, you may have to reduce expenses in order to restore balance.
Similarly, if profits are rapidly growing while overhead costs remain the same, it could be a sign that it's time to invest in new assets or hire more employees.
Enhance Operation Management
Having reliable financial statements can make your operation management team more precise and effective.
Thanks to accurate financial statements' insights, operation management can identify opportunities to enhance profit margins, reduce expenses, and boost overall productivity.
In addition, reliable financial statements help your operation management department in making even more accurate financial projections for the months and years ahead.
Create Transparency With Investors
Maintaining financial reporting also builds trust with stakeholders who have an interest in your company. Investors look specifically at your revenue, profitability, debt level, and cash flow.
By consistently providing different types of financial statements to investors, your startup demonstrates that it is built on a solid foundation and effectively manages its resources.
Given time, this transparency can attract additional investment capital to your business, which can help shore up your company's balance sheets.
Stay Tax Complaint
If there are mistakes in your taxable income or deductible expenses, the IRS may audit you and impose fines or penalties.
Keeping accurate financial records helps your startup follow all tax rules from the state, federal, and local levels.
By maintaining accurate financial statements throughout the year, you can avoid tax problems that could harm your operations or damage your startup's reputation.
Achieving Accuracy In Financial Statements: Best Practices
At first, maintaining accurate financial statements may seem challenging, but with a little knowledge, it becomes much easier.
By following a few basic principles of financial recordkeeping, you can avoid most inaccuracies in your monthly statements and annual financial reports.
Here are some essential tips for creating more accurate financial statements.
Maintain Detailed And Organized Records
Accurate financial statements depend on solid data, such as invoices, receipts, and itemized records of all transactions and assets.
Your financial records should include monthly cash flow statements, which show your income sources and business expenses.
Another key financial statement is your startup’s income statement which calculates the net revenue after accounting for all expenses.
Reconcile Bank And Credit Card Statements Regularly
Take the time and allocate resources to make sure you accurately record all bank or credit card charges using invoices or receipts.
This will ensure you have enough cash to cover upcoming monthly expenses and help identify any discrepancies that can affect the accuracy of your tax reporting and annual balance sheet.
For optimal results, it's recommended to reconcile bank and credit card statements on a monthly basis.
Implement Proper Internal Controls
It is a good idea to establish procedures in your business to quickly catch and fix accounting errors.
By implementing internal controls like regular inventory audits or comparing invoices with your income statement, you can enhance the accuracy of your financial records.
Some common approaches to internal accounting controls include limiting access to company funds and using a double-entry accounting system to reduce human errors.
Automate Your Data
By utilizing automation tools, you can complete various accounting duties in a much shorter period of time.
For example, you can set up a balance sheet template that automatically calculates the values of various line items based on the data you enter.
Today's most sophisticated accounting automation software can generate accurate financial reports with minimal oversight or human intervention, saving your company considerable time, money, and labor.
Perform Regular Financial Reviews And Audits
Regularly auditing your company's finances is a great way to confirm the accuracy of your data.
Certified Public Accountants (CPAs) can review your records and create audited financial statements, which are often requested by lenders and investors.
Hiring a CPA to create an audited financial statement every year will help ensure that your startup doesn't miss any accounting details that could lead to balance sheet discrepancies in the future.
The Future Of Financial Reporting For Startups
Financial reporting helps startups prevent expensive budget mistakes and ensures smooth operations.
By keeping accurate records of all transactions, startups can find ways to cut costs, enhance efficiency, and maximize profits.
In the future, advancements in technology, such as AI and machine learning, will make financial reporting easier for businesses, automating many bookkeeping tasks with minimal oversight.