The other day I had a concerned phone call from a friend about the financials of her business. “Something isn’t right, but I just don’t know what”, she said. After a brief silence I responded. “Have you checked your balance sheet?” From that point, a little can of worms opened.
Whether you’re a savvy small business owner or a seasoned corporate executive it’s easy to get into the trap of reviewing the profit and loss statement (P&L) and cash flows with regular intensity without giving the balance sheet much of a look-in. I get it. Reviewing the P&L and cash flows makes you feel like you’re kicking goals. It can immediately validate that you’re making gains, can keep your job, re-invest profits, or get that bonus. But here are just a few reasons why you should spare more thought for what’s lurking on your balance sheet with a greater sense of urgency.
1. How hard is your investment working for you.
To get good insights that provide the fuel you need for making good finance decisions you need to make comparisons. One of the key comparisons to draw is how hard your investment in working capital and long term assets are working for you. Do you have lazy assets? Inefficient assets? Is the return from them below your forecast, below industry benchmarks, below other business units in your organisation that you are competing for investment funds from?
2. Impairment of assets
Many assets will devalue over time. Accounting practices such as depreciation help to ensure assets are recorded at an appropriate value on the balance sheet, and the P&L expense reflects the use of the asset. Depending on your reporting requirements you may also need to undertake an annual review for asset impairment to ascertain whether your asset values have fallen further. And if they have, an impairment expense will hit your P&L. Corporates take note, ASIC recently released guidance indicating this area to be of particular interest to them for 20 June 2015 year ends.
3. Presentation of liabilities
The ability of an organisation to repay loans is an important consideration when reviewing financial performance. So the correct disclosure of loans and other payables as current (due within 12 months from balance date) or non-current (due 12 months after balance date) is vital to someone relying on the accuracy of your financial statements. When you’ve had a loan for many years it’s easy for the maturity date to sneak up on you without changing the classification to current. You only need to take a look at the Centro case to realise such a mistake can cause significant grief.
4. Accounting errors
They happen. Sometimes a transaction intended for the profit & loss statement ends up on the balance sheet. And the balance can build up over time if left unchecked. In the small business arena bookkeepers and accountants unfamiliar with the business can ‘park’ transactions on the balance sheet when they are unsure what to do with them. In large corporates, a process (say in an operational area) might change, become complicated, and somehow ‘differences’ start accumulating in a ‘bucket’ account on the balance sheet. These accumulated errors might not get much attention when surrounded by some large balances on the balance sheet, but when it comes time to fix them more often than not it becomes a huge surprise when viewed in a P&L context.
So isn’t it the finance team’s job to get the numbers right? Yes, it is. But if it’s your business, your profit, or your bonus at stake, and you don’t want surprises at the eleventh hour then it doesn’t hurt to review your balance sheet more regularly and ask the question… “what’s this”?