How to Review Financial Statements Like A Finance Know-it-All (even if you’re a Finance Not-at-All)

We see a lot of ugly financial statements.  Not ugly in the sense that the business is performing poorly (well, we see some of those too!) but ugly in the sense that they contain glaring bookkeeping errors.  We suspect there are several reasons for this. One is the proliferation of software that makes “doing the books yourself” attainable for almost anyone with basic computer skills. Answer a few interactive questions, choose from the drop down list of industry choices and you're off and running with your very own income statement.  Press a few more buttons, and voila, instant balance sheet.

The other reason is that many business owners only consult accounting professionals at year-end to figure out how to reduce taxes.  While we're usually all for saving money (and paying no more taxes than absolutely necessary), this approach can cost dearly in the long run.  First of all, if you're waiting until year-end to do tax planning, you might be waiting too long to take proactive steps.  In addition, bookkeeping mistakes can lead you to make costly, irreversible business decisions based on bad information.

And finally, most business owners, if they're not doing the bookkeeping themselves, are most likely in the difficult position of having to hire, train, and then manage a person in a position about which they themselves might have little or no knowledge. Not an ideal situation.  Then, periodically, you get to review the output of this person, again not really knowing what you should be looking for (or at).

Here, is a brief primer for the “financial not-at-all” business owner on how to review statements to help determine if they are, at the very least, an accurate reflection on what's happening in your business:

Balance Sheet

Are there any unusual balances, such as:

• Negative amounts (only accumulated depreciation & amortization should be negative)
  
   
• Negative cash – should be in the form of a note payable (or bank overdraft) on the liabilities side
  
   
• Inventory – amount should vary from month-to-month according to actual inventory levels (if inventory is off, then your cost of goods, net profit and retained earning amounts will be off as well.)
  
   
• Accounts receivable – should have a balance (assuming you sell on account)
  
   
• Accounts payable – should have a positive balance (unless in the unlikely event that you've paid off every one of your suppliers by month end)
  
   

Income Statement

• Sales and cost of goods sold detailed for each category
  
   
• Sales should be greater than cost of goods sold for each category
  
   
• Cost of goods should vary every month to reflect actual expense, not estimate
  
   
• Estimated depreciation should be entered monthly, and then reconciled to actual amount at end of year
  
   

Overall Look

• Income Statement expenses should be grouped by expense category, for example: sales & advertising expenses, employee expenses, general and administrative, and not just listed by alphabetical order.
  
   
• Add a column that shows expenses as a percentage of sales, along with year-to-date and year-to-date from prior year so you can see trends and determine real changes in your expenses, not just changes due to sales increases or decreases.
  
   

And finally:

Be curious, don't be afraid to ask questions, and if it doesn't seem right to you, get to the bottom of it! If you (or whoever you use to do your books) can't produce both an accurate profit and loss and a balance sheet on a monthly basis, think about outsourcing or upgrading your bookkeeping services. And if your accounting professional isn't available for large portions of the year due to tax work or isn't capable of providing this type of advice, find one who is. We promise they're out there.

© Business Resource Services, Inc. Reprinted with permission.