“Every cash flow crisis; every fraud; every incorrect profit margin; every surprise loss; every unexpected tax bill was hiding on your Balance Sheet FIRST, well ahead of when you finally found out about it and could react.” – Pam Prior
I’m pretty sure making that truth clear is the only way I’m going to make the words “balance sheet” interesting to an entrepreneur.
At least, so I’ve been told.
The balance sheet is the early warning system and the fortress that protects everything you’ve worked so hard for in your business. Unless that balance sheet is rock solid, anything else you think you know about your business, from profitability, to sales, to what you owe people, to what they owe you – is completely unreliable.
It’s really, truly that simple.
And if I’ve held your attention thus far, don’t tune out, because you as the business owner don’t have to know every single detail of every item on your business balance sheet.
But you do need to have confidence that it is correct.
So, how do you accomplish that without burying yourself in accounting textbooks?
- No matter how long you’ve worked with your bookkeeper or accountant, once every six months, sit down with them for ½ an hour.
- Tell them to bring out a “trailing twelve-month balance sheet” report with them.
- Ask them to explain – in language you understand – what each account represents. Here are the questions to ask for each one:
- What is it there for?
- Do I own or owe the amount there?
- Why isn’t it on the Profit and Loss Statement?
- Where did you get the amount that shows there?
- Why does it change (or stay the same) every month?
- How long will it stay there?
- Where is the proof that is the right amount?
- Ask them questions until you absolutely understand it; and I mean understand it the way you think and the way you process information.
- Don’t accept answers that don’t make sense, or language that’s intended to make you feel stupid if you don’t “get it”, because that’s complete bullshit.
- You’re not an accountant – if you were, you wouldn’t need to hire this one. You didn’t go to school for or take a certification for bookkeeping or accounting.
- There is no “stupid” for you when it comes to this stuff.
- If you don’t completely understand what is on that Balance Sheet after this ½ hour, so clearly that you could explain it back to someone your way – fire that bookkeeper or accountant. Yes, seriously.
- Hire a new one that understands that the most important part of their job is your financial security and the ability to rely on every number you see on your financial reports.
Now, the most important accounts on the Balance Sheet are your cash and credit card accounts.
They should tie – without exception – to the penny – to exactly what the banks say you have in your checking and savings accounts, and to what you owe on your credit cards at the end of each month.
I can tell you that every fraud issue I’ve helped an entrepreneur sort out, or every cash flow crisis that someone has come to me to help navigate, has started on the Balance Sheet.
Prevent this from happening like so:
- During another review (preferably randomly scheduled) have that bookkeeper or accountant show you the monthly reconciliations for those cash and credit card accounts.
- If they say they haven’t done them lately, or every month, or if they say they can’t provide them, or you wouldn’t understand them… run. Run as far and as fast as you can – and change your banking password.
- No matter what the reasons are for you getting your regular financial reports later and later each month; those bank and credit card accounts should be reconciled by the 2nd workday after the end of each month.
- This is a line in the sand. Missing these or having them done late is a nonstarter. Period!
So, yes, it’s the job of the bookkeeper to keep good books. But it’s your job to secure your borders. These two ½ hour meetings every six months or so will keep everyone on their toes and give you the certainty that everything else you rely on from that bookkeeper/accountant is trustworthy.
The very worst that can happen if your Balance Sheet is tied down is that you may have something categorized on your Profit and Loss Statement as Travel instead of as Meals.
You will know that your Net Profit is correct. You will know that your cash flow reports are correct. You will know that your financial reports represent what the bank account says really happened in your business.
Just an easy categorization fix and you’ll be level again.
Stay tuned for Part II of this blog later this week, and we’ll dive into what you can do more specifically to really step up your financial control game as a business owner.