It always amazes me to see just how little business owners care about reviewing their assets and liabilities’ accounts (also known as balance sheet accounts) monthly. There is such a focus on the Income statement that the balance sheet is neglected. Yet, an incorrect balance sheet could mean an incorrect income statement result.
Monthly balance sheet account reconciliations preparation and review is a key internal control. The forward-thinking business owners understand the need to prepare and review monthly balance sheet reconciliations because they understand the value associated with doing this. These monthly reconciliations are a means of ensuring the correct statement of assets and liabilities at any given time. It highlights incorrect accounting. In most instances where business owners are unaware of this key control, they are able to sustain their business with under skilled and inexperienced staff that are also not aware of the need to do balance sheet recons monthly.
Inevitably when I am doing a finance team transformation project, I also end up doing a cleanup of the balance sheet. Most of the time, skeletons do come out the closet and the business owner is shocked by it.
In this article I share with you a few balance sheet related matters that I have seen as common oversights by business owners that are worth drawing your attention to.
Generally, on a monthly basis, the Income statement together with the debtors age analysis and inventory reports are given to the Chief Executive Officer (CEO) for review. The following are common matters that the CEO is unaware of:
- The debtors age analysis total does not agree to the balance sheet customer control account balance.
- There is ongoing mismatching of receipts against invoices on the debtors age analysis. There is no clarity on which invoices make up the outstanding balance due by the debtor.
- Receipts from clients are allocated against oldest invoices due to the finance team not getting a remittance from the client. There is no clarity on which invoices make up the outstanding balance due by the debtor.
- The foreign currency balance converted to rand is incorrect because the team is not using the foreign currency module of the accounting system correctly.
Inventory reports are reviewed yet the total does not agree to the inventory balance sheet account. Where the difference is material, the more time goes by, the more difficult it is to narrow down why there is such a difference.
- The supplier age analysis is not requested by the CEO for review.
- Loans from 3rd parties are not reconciled to statements from the 3rd parties.
- Creditors recons of balance in the business books per supplier account to balance per the suppliers’ statement is not prepared. This could result in duplicate payments being made in error or suppliers not being paid timeously.
- Where supplier invoices are not received in the month the service/good was received, the finance team neglects to raise an accrual for the cost in the month the service/goods were received. This results in a mismatch of costs to the revenue generated by having the revenue generated in one month and the cost recorded in a later month when the supplier invoice is received. This distorts both the balance sheet and income statement results.
In conclusion, it is important for business owners to know what makes up the assets and liabilities of their business by knowing what is in these accounts on their balance sheet. Be curious about the financial health of the business and not just the profitability. Look at the balance sheet monthly. Question balances. Follow up for answers. Know your numbers on the balance sheet. Understand that one of the value-adds generated by monthly balance sheet reconciliations is that it is an early warning system of incorrect accounting.