Have you ever thought, I know we made more money than our
statement shows, or I know we don’t owe that much in taxes; we never
have any money! These moments of confusion are usually the result of either
an assumption that your data is accurate, or a misunderstanding of how
financial statements work.
Where did all the cash go?
You can always find the answer in your balance
sheet. One of the first red flags that something is amiss is when your balance
sheet tells a different story than your income statement. The key to unraveling
the mystery is understanding the balance sheet, which shows your financial data
at a fixed point in time. There are three pillars of a balance sheet.
- Assets: WHAT YOU OWN – Cash, receivables, equipment,
supplies, inventory, land, etc.
- Liabilities: WHAT YOU OWE –
Accounts payable, accrued expenses, bank debt, credit, etc.
- Equity: NET VALUE – Assets minus Liabilities
A business owner’s primary goal is to increase profit month over month. So, when a CEO reviews a balance sheet, their eyes typically skim right to net value. A mistake on the balance sheet will never be in your favor. If the value is inflated, demise awaits. If the value is deflated, you miss opportunities. Novice bookkeepers tend to make the mistake of confusing assets and expenses. The ripple effect is showing less expense and more profit and failing to price future jobs with the true associated costs. Ensuring the right people with the correct understanding control your books is the first step to avoiding errors. Outsourcing accounting services is a great way to make sure the job is done right the first time.
Another tip is to approach your assets, liabilities,
and equity in the same the way you look at your income statements. Keep a
historical record or your balance sheet and compare the data month over month.
A snapshot view is great for a quick assessment, but if you want to avoid
discrepancies, you need to look at the whole story.
Understanding your financial statements
When a CEO lacks the financial knowledge to catch nuances in their statements, they are unable to take corrective action to change the results. Once you understand the language of your financial statements, you can interpret what they mean to your organization’s financial health. For example, knowing what you sell beyond the widget is a critical step to calculating your true assets. Likewise, a mature business owner knows that most likely reason for a discrepancy between a healthy P&L statement and a low cash account is lagging receivables. The numbers on the page are clues. When you learn to read the clues with the big picture in mind, you are better positioned to make sound business decisions. Failing to understand variances, overreacting to numbers on a page, and not catching insufficient and inaccurate data are clear indications that you are a good candidate for external help.
Financial statements can be misleading. As a business owner, noticing when something is amiss is a key element to managing your organization and driving growth. Do not let misleading financial information or a misunderstanding of financial statements be the downfall of your company. Ensure that you and your managers have the right financial management skills. We can assist you in developing accounting practices that will help make your company more profitable. Call us to learn more about our outsourced accounting services.