Why The Balance Sheet Is Important To The Business OwnerBy Mark Johnson Originally published Aug. 7, 2010
The balance sheet is an often overlooked and misunderstood financial statement. It’s not very sexy and it’s often considered less important because the income statement shows profit and loss — which is where the action is in the financial statement world. Still, the balance sheet is extremely important and needs to receive the proper attention.
Here are some important Focus Areas I point out to my client when we review the balance sheet each month. The nine Focus Areas are:
Does the balance make sense and have we reconciled these accounts to the most recent bank statements? Are the timing differences recent and explainable or are they old and unidentified? Do we remit stale checks to the state in accordance with escheat laws?
Accounts Receivable –
Do we have an aging report that lists each open invoice and the days unpaid by customer? Is there a consistent and effective process to ensure the older receivables are followed-up and collected? Do we write of uncollected receivables after six months? Have we identified and reserved the customers that might not pay us?
Do we know that the quantity on hand is properly stated based on physical count or inspection? Have we determined that the costs assigned to each inventory item are reasonable and consistent with the current costs and that the inventory items are valued at or below current market values? Have we identified and reserved for inventory that is obsolete or damaged?
Other Current Assets –
This is usually pre-paid assets such as pre-paid insurance or deposits held for some short period of time (less than a year). Are the balances amortized to their current value?
Fixed Assets –
Do we have all our manufacturing equipment, trucks and office equipment identified and recorded on each asset at cost? Are we properly depreciating this equipment?
Accounts Payable –
Do we have an aging report that lists each open vendor and the days unpaid? Have we scheduled payments for the next two weeks against the oldest payables based upon estimated incoming cash?
Notes payable –
Are all of the notes payable to the bank or other creditors recorded on the financial statements? And, do the balances shown reflect the current principle due on the debt?
Credit cards payable –
Do we have all credit cards listed with the balances owed stated properly?
Common Stock –
Have we recorded the original stock capitalization correctly and adjusted for capital infusions and withdrawals?
As you can see, there is a great amount to look at and discuss during each monthly review of the balance sheet. Consult your financial expert should you have unanswered questions based on this analysis.