In these tough times it’s only natural to focus attention on the bottom line. Few organizations have the financial depth to sustain repeated losses. For publicly-held corporations, quarterly performance is routinely summarized as “X” straight quarters of losses as reported in the nightly news.While this “thumbnail” of performance is not without its uses, ask any good banker or CPA what concerns them more and you’ll find that it’s the balance sheet. Why? Overstated assets and under-reported liabilities mean that any cushion that’s reported in retained earnings is overblown and unreliable. Once an organization is forced to restate its balance sheet, key measures of financial health, such as current ratios and debt-to-equity ratios, can suddenly nosedive. Both credibility and credit-worthiness plummet—not situations that your lender or outside accountant will treat lightly.
Your financial team should be reviewing your assets and liabilities on a regular basis. Ideally, expect them to reconcile major balance sheet accounts monthly or quarterly. Key questions include:
- Do all bank and investment accounts agree to statements from their respective financial institutions, after allowing for outstanding transactions?
- Have inventories been recently verified by physical counts? Does their costs reflect the lower of cost or market value?
- Are fixed assets still on the books that were actually retired in some prior period? Are you capitalizing acquisitions for small equipment that should be expensed instead?
- Are “soft” assets, such as prepaid insurance premiums, still on the balance sheet that should have been amortized or written off?
- Have accounts payable to trade vendors and others been accurately reported?
- Does the company owe vested compensation, such vacation pay, sick pay, vacation or commissions to its employees?
- Have tax liabilities been reported for sales taxes, franchise taxes and income taxes?
- Have prepaid revenues been claimed as current income that should instead be classified as liabilities to be amortized?
- Is your company committed to paying on-going lease obligations that create a significant claim on cash?
- Are your loan and mortgages booked properly?
The above list, while not comprehensive, should give you a starting point for reviewing your balance sheet. While your bookkeeper may not be attuned to these issues, your controller and your tax preparer should. Be sure you have ethical and competent professionals to keep your balance sheet reliable throughout the year.
