A financial statement is a reflection of a business, so it should go without saying that the statement needs to be error free. However, a number of businesses have inaccurate statements. Inaccurate statements don't just offer a false account of an organization; they can also produce a number of costly consequences when it comes to valuation, profit margins, and tax liability.
If the error with your financial statement is an inaccurate account of your sales, this can have a negative effect on the valuation of your business. Whether it's a lender looking to approve you for a loan or another organization investigating your business as part of contract negotiations, valuation offers a reliable indication about an organization's financial standing.
Consequently, you want your information to be accurate. If the statement's valuation is lower than the accurate figure, this could cause you to be denied a loan. If it is higher, another business may enter into a contract with you on the false premise that you have access to more capital than you actually do, and that may lead to issues later.
It doesn't matter the industry: all businesses succeed when they make more money than they spend. In order to determine just how much is necessary to reach this level of success, an organization needs to have an accurate account of their profit margin.
An error on your financial statement can lead to an inaccurate profit-margin calculation. If the error causes you to calculate a lower-than-necessary number, you could be aiming for a sales goal that is actually too low to meet your basic operating costs, leaving you in the red. It's imperative that your profit-margin calculation be accurate to ensure your business has the capital it needs to sustain itself.
Financial statements can also help a business determine its tax liability. Many businesses review these statements to get a general idea of how much they earned and to calculate any exemptions they are entitled to. Based on this data, a tax-liability figure is determined. If the statement is inaccurate, the liability calculation may also be inaccurate.
Even if the error isn't immediately recognized by the revenue department, once you submit your supporting documentation, errors are generally highlighted. When a tax-liability calculation is too low, this often results in past-due interest payments and other financial penalties, such as a derogatory mark on your business's credit report.
A financial-statement consulting service can help you avoid these error pitfalls and keep your business's financial information more accurate.