OK, how else was I going to get you to read a blog about Balance Sheets? I had to come up with something, right?
In my career, I have never had a client come to me and say “my balance sheet is trash…can you help me fix it?” But, it’s always the first place I look when I review their accounting data, and 8 times out of 10, it is complete trash.
I get it. You want to see the sexy P&L. Those sultry sales numbers. Those profit metrics. It’s what we are all programmed to want to see. How much did we bring in? How much did we keep? The immediate gratification of the P&L is hard to resist.
The balance sheet is the foundation of your business, however. Think about what the balance sheet is:
- It's everything you own
- It's everything you owe other people
- It reports how much revenue you can expect to to collect soon (accounts receivable)
- It reports how much you can expect to pay out soon (accounts payable)
- It's the remaining equity left in your company if you paid everyone you owed.
Sadly, it’s also where errors in accounting go to slowly decompose and rot. It’s where the bodies are buried. It’s the graveyard. It starts on day one and ends on your final day of business. Things I see all the time:
- Payments posted incorrectly against customer receivables, so your accounts receivable balance is badly out of whack. You aren’t really owed all that money, so you
can’t forecast your cash position.
- You’ve posted incorrect bill payments, so your accounts payable balance isn’t correct, and you can never forecast how much cash is going out the door.
- Your loans aren’t balanced to anything, so you don’t really know how much you owe other people.
- Inventory…forget about it. That number hasn’t been adjusted in years, so you
have no idea how much inventory you have on hand.
- Bank accounts… don’t even get me started. You didn’t know that matching your QBO transactions was different than reconciling the bank account so you have NEVER reconciled your bank account. Isn’t that what old people used to do on the backs of those actual bank statements you used to receive in the mail?
Your balance sheet tells you the health of your business.
And I'll tell you another secret… if the balance sheet isn’t correct, your P&L isn’t correct, either.
See how all this works together? For growing businesses that deal in inventory, issue invoices to customers, and record payables when received from a vendor, the P&L alone won’t give you everything you need to run your business.
I make it my point to correct the balance sheets of all new customers first before we ever get started with regular day-to-day accounting. If I didn’t do that, it would be like building a house on a mud pit and then expecting to correct the problem later. It will all crash down and mean nothing.
So, as you consider the health of your business, always review the balance sheet first. It’s not the sexiest report, but no one drives by a house and comments on the foundation.
I can guarantee you that if the foundation isn’t healthy, no one is buying that house.