Should I care if my Balance Sheet is wrong?
We’ve noticed that some small businesses focus on their Profit & Loss (or Income Statement) and ignore the Balance Sheet in their Quickbooks account. Many people don’t really understand what the Balance Sheet is for anyway, so why worry about it if it’s wrong?
What is the Balance Sheet?
The Balance Sheet is a financial report which gives a snapshot of the health of your business at a specific point in time. It’s made up of three things:
- what assets you own and are owed
- what money you owe other people
- shareholder’s equity (the portion of assets (or debts) that the owners own/owe)
- You can run a Balance Sheet for any date (e.g. today, or the end of last accounting year), and it will show you how you were performing on that date.
Why does it matter?
It matters a lot! Do you want to know how your business is performing? Do you have investors or potential investors? Then you will need an accurate Balance Sheet. The Balance Sheet shows a real overview of the business and it’s overall health, not just how it performed within a certain period.
Another reason the balance sheet matters is because it helps explain where your cash is going. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management. The balance sheet is an integral part of cash management.
For instance, If you took profits from the company and used it to buy assets or pay off liabilities, cash was removed from the company, but it won’t be reflected on your Profit & Loss. Or, if you used the profits to fund personal expenses or distributions, you may be paying out more cash to your owners than the company can actually afford. So, despite having a profitable business, you’re actually setting yourself up for failure due to negative cash flow.
“Sometimes people start businesses with a dream of making money but don’t have the skill or interest to manage cash flow, taxes, expenses, and other financial issues. Poor accounting practice puts a business on a path straight to failure.” – 6 Reasons Your Small Business Will Fail (And How to Avoid Them) by: Mike Kamo
If your balance sheet is off, it can be very difficult and time consuming for non-accountants to investigate and fix those errors. That’s why we offer Quickbooks Clean Up Packages so that you can get make sure all of your reports are accurate. We can also help businesses with monthly accounting and bookkeeping services that include analysis of their financial statements to break down what the numbers actually mean and what actions they can take to improve their financial health.