QuickBooks makes preparing cash flow statements incredibly easy and lets users automate many tasks. However, mistakes still happen when preparing a cash flow statement with QuickBooks.
If you want to have an accurate and effective cash flow statement, keep reading to learn about the most common mistakes to avoid when preparing a cash flow statement in QuickBooks.
Not Reconciling Bank Accounts
Bank reconciliation is the process of comparing your company’s bank statements with your own financial records. Reconciling bank accounts ensures that:
- Financial records are accurate
- Accounts are free from errors and fraud
- Incoming and outgoing cash flows are properly tracked
Failure to reconcile bank accounts can result in incorrect tax reporting, inaccurate financial records and an inaccurate cash flow statement.
Incorrectly Categorizing Transactions
You might think that because you’re recording all of your transactions and reconciling your bank accounts, you are doing everything correctly. However, it’s also important that you are properly categorizing your transactions.
If you miscategorize your transactions, it may result in inaccurate financial reporting and as a result, misinformed business decisions. One way to maintain an accurate cash flow statement in QuickBooks is by using QuickBooks categories to keep your accounts properly organized.
Overlooking Accrual to Cash Conversion
Whether you’re accounting on an accrual or cash basis can make all the difference for your business. One common mistake in preparing a cash flow statement in QuickBooks is overlooking accrual to cash conversion.
Cash-basis accounting is a simpler accounting method. It records income when payment is received and expenses as they are paid. The benefit of cash-basis accounting is that businesses can see exactly how much cash they have on hand. It’s also more cost-effective and is easier to learn.
Overlooking the option to switch to cash-basis accounting can cause businesses many unnecessary problems.
Ignoring Accounts Payable and Receivable
Accounts payable and accounts receivable have an immediate effect on cash flow statements. Businesses that ignore accounts payable can rack up late payment fees, damage relationships with suppliers and experience cash flow problems.
Ignoring accounts receivable may result in lost revenue, opportunity costs and damaged relationships with customers. When preparing cash flow statements in QuickBooks, it’s essential to take into account all accounts payable and receivable.
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Failing to Update the Cash Flow Statement Regularly
Cash flow statements must be updated regularly if they are to be effective. Failure to do so can result in:
- Inaccurate financial reporting
- Misinformed decision making
- Poor cash flow forecasting
When cash flow statements are updated, a business can better understand its financial standing and adhere to accounting principles. Software like Cash Flow Frog can help companies keep their cash flow statement up to date.
Confusing Cash Flow with Profit
Many business owners make the mistake of equating cash flow with profit, which can lead to misunderstanding a company’s financial position, resulting in poor financial decisions.
Cash flow indicates how much money is coming in and going out of the business, and shows if a business can meet its financial obligations. Profit is defined as the difference between revenue and expenses.
It’s important not to confuse the two, as a positive cash flow does not necessarily mean a business is profitable. Businesses should focus on maintaining a healthy cash flow so that they can support their operations and meet their obligations.
Neglecting to Review and Adjust Projections
A necessary step of cash flow modeling is reviewing projections and making necessary adjustments. Even with high-quality data and data analysis methods, predicting cash flow is not foolproof.
Therefore, it’s important to review cash flow projections, analyze what went wrong and make changes to improve future cash flow projections.
Overlooking the Cash Flow Report Settings
Knowing how to correctly use cash flow report settings in QuickBooks can help you optimize your cash flow statements.
Cash flow report settings allow users to customize their cash flow reports. Users can adjust the cash flow period and customize the report based on specific data. Cash flow report settings make cash flow statements easier and neglecting to learn how to use them can negatively impact your experience with QuickBooks.
In conclusion
There are many things to consider when preparing cash flow statements in QuickBooks, in order to avoid financial penalties and poor business decisions.
It’s important to update cash flow statements regularly and consider accrual to cash conversion. Overall, staying on top of your accounts and properly organizing your data will help you maintain a clear picture of your finances and make well-guided decisions.
Photo by Piotr Cichosz on Unsplash
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