To Find the Holes in your Financial Data – Look at the Balance Sheet
In most businesses the profit and loss account gets all of the attention. But how can you be confident that the numbers in the P&L account are accurate? Could there be an omission or data entry error that you haven’t noticed? Also, the P&L mainly focuses on your revenue and costs – there are important aspects of the financial health of your business that it won’t tell you about.
The balance sheet should be more than a compliance document submitted with your year- end accounts. Producing a fully reconciled balance sheet every month shouldn’t be an onerous task and it’s certainly a worthwhile exercise, as long as it is understood. The process will highlight any data errors and will prevent you reporting or making plans based on an inaccurate P&L.
The balance sheet records your assets and liabilities; amounts owed to you, and amounts you owe to suppliers and creditors. If your balance sheet doesn’t balance, your profit and loss account is also likely to be wrong.
Let’s take a very simple example of how the profit and loss account can be incorrect. Let’s say the amounts owed from your customers (debtors) is showing £110,000. However, the list that you have received from the accounts team shows a breakdown by customer totalling £100,000. The ‘additional’ £10,000 could be an inaccurate accounts entry. It could mean that debtors are overstated by £10,000 and sales and ultimately profit are overstated by £10,000 (I’m ignoring VAT in this example for the sake of simplicity).
To get an accurate balance sheet at the end of every month, each account needs to be understood and reconciled. Within our management account packs, we ensure that this is the case. The balance sheet will also indicate possible issues with payment collection, overstocked inventory, and cash flow risks that the P&L won’t show.
The balance sheet may not be that interesting to most business owners, directors and managers; but you need the reassurance that it is correct. This will ensure that everything has been reconciled and that you can trust the figures in the P&L, which is probably the report you are most interested in.
Our management account packs are configured individually for each business; but in whatever we do, we ensure the balance sheet is always reconciled and the numbers are robust.
Business owners may lack the time to review detailed financials. A few key numbers and key performance indicators are usually enough – but they have to be accurate and validated.
Finally, it’s always reassuring that when you come to refinance or sell your business, a robust monthly history of the financial health of your business is readily available, ready for due diligence.