10 Balance Sheet Red-Flags to Look for Every Month

Check these 10 Balance Sheet accounts every month to catch problems early

In this article, we’re going to answer why small business owners should read and review their company Balance Sheet every month.

Let’s divide your balance sheet up into its 3 main sections. Starting with the Assets section, then the Liabilities section, and last the Equity section. I will pinpoint some accounts to review each month, carefully. The end goal is to catch financial problems early…so you can then take corrective action.

But first…

What is the purpose of the Balance Sheet?

To answer this, we must first ask, why is accounting for your business important. And the best way to answer this is it gives you, the owner/manager financial data.

Data is important to have. If you provide services to customers, you must collect information from them. If you are a painting contractor, you have to get the client’s info, the square footage to be painted, and the conditions to determine what level of prep work will be required. And don’t forget…their ability to pay you for your services.

You have to collect data to assemble your bid. We’re going to talk more about this in future articles. **The data from your accounting gives you feedback on your bidding strategy.**

It’s the same for accounting. Data into the system gives us reports to review. Data in and data out. In this case, your business money transactions. Money in and money going out.

This helps you see cash flow problems. It helps you see trends, both good and bad. And this knowledge helps you manage your business.

So in a nutshell, the Balance Sheet shows three main things:

1. What you own and labeled Assets on the Balance Sheet
2. What you owe and labeled Liabilities on the Balance Sheet.
3. What you have invested into, what profit has been retained, and what you taken out of the business and labeled Equity.

Asset Accounts – What the company owns

1. Check these Current Asset accounts regularly:
   1. Your bank accountt balances. Checking these monthly can catch shortfalls early. Or internal…fraud. Or…asking, “where is all of my income going?”
   2. Your Account Receivable (AR) balances. Do you have an AR aging report? This will tell you if you have money owed that’s past due. Past due customers kill your Cash Flow. Slow cash flow can spell disaster.
   3. Inventory account – if you resell materials and buy inventory to stock, make sure it is being debited to the COGS account on your P&L statement when you use it on the job. And credited to the AR account.
2. Fixed Assets – Property Plant & Equipment (PPE)
   1. Capital equipment purchase. Are you including cost recovery in your customer pricing? Calculating the rate to charge is covered here.
   2. Don’t forget equipment maintenance costs…another cost of doing business you should be recovering through pricing.
   3. And the cost of labor or Labor Burden for operating each piece of equipment. You have charge for the operator’s time somehow. Or give it to your customer for free.

Liability Accounts – What the company owes

3. Current Liability Accounts
   1. Using Other People’s Money i.e.: Credit Cards? If you’re carrying a month to month balance it becomes a high-interest rate loan. You may want to create a new strategy to get closer to paying off CC balances every month. And reduce or eliminate your monthly interest rate expense.
   2. Other liabilities…Like Sales Tax liabilities, Insurance payments, Payroll & Payroll Tax liabilities, and other liabilities that are due next month. These will affect your Cash Flow…will you be able to cover them? You should do the math every month.
4. Long-Term Liability Accounts
   1. When to use a long-term loan at a lower interest rate. If your CC use is high and the interest rate expense you’re paying every month is high…it may be time to seek a lower interest rate loan.

Equity Accounts – Owner’s Investments & Withdrawals

5. Equity Accounts
   1. Owner’s Investments & Withdrawals. You should be taking a salary. But it also should be a burden the company can carry. Another area to check and do the math.
   2. Retained Earnings. This is what is carried over from your Profit & Loss Statement. It is what revenue is left after deducting COGS and administrative

FAQs about the Balance Sheet

Balance Sheet Basics

Q: Why is this financial statement called the “Balance Sheet?”

A: Because of the accounting equation; Assets = (Liabilities + Equity). When this equation is true, we say that the books are In-Balance or just Balanced. And if the equation is not equal or false, we say that the books are Out-of-Balance. So, the total of the assets sections must equal the total of the liabilities section plus the owner/shareholder section

Q: Why would the Balance Sheet be Out-of-Balance?

A: Your company accounting follows the standard practice called Double-Entry Bookkeeping. This means that every financial transaction you make during the daily operations affects two or more accounts. Here’s a quick example: You record sales for the day in the amount of $1,254.00. Your bookkeeper will have set up the P&L account called Revenue. This amount will be Credited to this account. And you immediately deposit this amount into your company’s checking account. So, your bookkeeper will enter this amount into the Balance Sheet account called Bank-Checking as a Debit record.

Hint: the Debit record must match the Credit record…to stay In-Balance.

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I can keep talking about accounting for small business owners but I think this is a good place to stop.

In the meantime, if you have any questions about this topic or other accounting topics, we’re here to help. You can give Manny or me a call to schedule a Small Business Accounting Consultation.

We will be happy to describe our services and how we can help you understand the data contained in your financial statements.

Call today and get on our books for an accounting consultation.