This is the 6 and last in a series of posts that have the aim of helping you, the business owner, to better understand your Balance Sheet so that you can use it to work for your business.
So far we have looked at all the categories of accounts that make up a Balance Sheet. We have also looked at Control Accounts, those accounts that are “controlled” by, or are the “summary” of, other ledgers. We have also looked at how to do Balance Sheet reconciliations.
Now finally we will look at how the Balance Sheet reconciliations can be used to help your business.
Using Balance Sheet Reconciliations to Better Control Your Business
When Balance Sheet Reconciliations are being completely properly and in a timely manner they can then be used to ensure that you are properly controlling different tasks and payments that form part of your business.
To help you understand what I mean, I will give you two examples of errors I found in a client’s books thanks to doing a couple of Balance Sheet reconciliations:
Balances re Payments to be Paid or Received
In both examples given above the accounts on the Balance Sheet represented payments that were either due to be paid or to be received:
For both of these accounts, if the balance does not equal your next return then you need to use a reconciliation to identify why not. It could simply be that you have not yet received a refund and if that is the case then this should easily be identified. However, it could also flag that mistakes have been made and if that is the case then they need to be found and corrected.
There are other Balance Sheet accounts that also represent payments to be made or received:
Depending on your business you may have other accounts that also fall into this category. The main point here is that if the balance on the account is not as expected then a reconciliation should be able to identify where the errors are.
The most common types of errors that can be identified in this way are:
By identifying these errors you can make the appropriate corrections and hopefully avoid late payment penalties etc.
Balances re Assets
While both Fixed Assets and Stock were identified as Control Accounts in my last post, and both should have registers and/or inventories to back up the reconciliations, these types of accounts can only be fully reconciled when physical inventories are undertaken.
Any business that has a stock inventory valued at $5000 or more should know that the tax office require a physical stocktake to be undertaken at least once per year. However, even if your inventory has a value of less than $5000 it is still worth doing a stocktake on a regular basis.
A physical stocktake requires you to actually identify and count each item of stock that you have checking this back against a list of the stock that you expect to have. By doing this you can identify any stock items that are less (or potentially more) than you expected them to be.
Once errors have been flagged the first thing to check is your paperwork in case any purchases or sales of stock failed to be processed. Any remaining errors will then need to be written off.
Unfortunately of course it is possible that stock is being stolen and a regular physical stocktake should help to identify if this is the case.
My experience in working in larger organisations has taught me that doing a regular inventory of Fixed Assets is also a good idea. The most common problem with Fixed Assets is that old obsolete assets are often disposed of without the Asset Register being updated as appropriate. Adding new assets is never usually a problem but doing the paperwork when disposing of an old asset is so often overlooked. Doing a regular inventory would help to identify this thus enabling you to keep your Asset Register up to date.
Balances re Value of Business
Of course one of the more common uses for Balance Sheet accounts, and the one that most people would be familiar with, is to value a business – to find out what it is worth.
By properly understanding what each of the relevant Balance Sheet accounts represents, be it assets, stock, shares etc. and by ensuring that these accounts have been properly reconciled, you can then gain a good understanding of what a business is worth.
In order for you to be able to trust the relevant accounts the whole of the Balance Sheet needs to be properly reconciled. It is only then that you can check that the figures on the Balance Sheet account look correct and can be verified. By seeing that ALL of the Balance Sheet accounts can be verified you can gain a greater certainty that the relevant accounts are correct.
Since valuing a business is a whole topic in its own right we will only have a brief look at some of the relevant accounts in this post:
In summary, for ongoing businesses, the most useful check that properly reconciled Balance Sheet accounts can provide is that of ensuring errors and/or omissions have not been made re payments, postings etc.
For businesses that are being sold, the Balance Sheet can be used to verify the value of a business (less of course any goodwill value etc. that may have been added).
I hope that this series has given you a good understanding of the Balance Sheet and of how it can be used to ensure that your business is running smoothly.