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If you take the time to get your balance sheet in order, the rest of your financial statements will be no problem at all. Tangled balance sheets lead to messy income and cash flow statements, which in turn lead to additional complications. If you simply address this one particular kind of financial statement, you will be on the road to better decision making and more precise financial forecasts.
Perhaps the most vital function of a CFO is to assist the CEO in making wise, strategically-sound business decisions. In order for such decisions to be made, it is critical to have timely, precise, and relevant financial data close at hand. When the financials are in disarray, it becomes difficult, maybe even impossible, for the leadership team to guide the business in an intelligent manner. Aside from issues with controls and process, there are numerous financial concerns that can be alleviated simply by getting a clean balance sheet.
Balance Sheet Fundamentals
Balance sheets cover a company’s assets, its liabilities, as well as its equity at a particular snapshot in time. Over a month, a balance sheet will change as each transaction is conducted. When these changes are especially sizable, they can help executives become aware of issues with the receivables turnover rate, the cash conversion cycle, and even cash flow warning signs. When used together with cash flow and income statements, CEOS are better able to assess the overall health and vitality of the enterprise. When balance sheets are incomplete or inaccurate, the cash flow and income statements will be as well, and the decisions that stem from them will often be faulty.
Timely Transaction Recording
Erroneously recording a transaction during the wrong time period can undermine the validity of cash flow forecasting and make balance sheet reconciliation difficult indeed. Always make certain that payables are accounted for in the correct time. Verify the prior month’s balance sheet to check for changes. If changes have been made since the books were officially closed, make sure to adjust things accordingly and get transactions into the right time period.
Balancing Is Critical
This may seem obvious, but you need to make sure that your balance sheet actually balances. If assets are not equal to the liabilities plus the equity, something is off and needs to be rectified. No less than every month prior to closing the books, do a double-check of the accounts to ensure accuracy. If you spot an incorrect balance, it is necessary to review all of the entries for the account to discover what went wrong and make necessary changes. Some of the most frequently-seen errors include putting entries into the wrong account, improperly classifying something as a credit or a debit, and creating duplicate entries.
Capitalizing On Balanced Financials
After you have made all of the necessary adjustments, you will want to take a closer look at all of the other financials. This is because the balance sheet informs the rest of the documents, and you will need to update these as well to reflect the other changes already made. Critically, make required changes to cash flow and income statements. When the balance sheet is right, these documents should be too, and if things look off, perhaps a professional should be sought to provide some insight.
CEOs need accurate financial statements to make smart, strategic decisions moving forward. If you believe your financials have gone off the rails, take a close look at your balance sheet. By addressing issues with this one document, you will be that much closer to getting everything else on the right track.
