What story are your financial statements telling you?

There is a reason financial statements are a set. We sometimes think about them as three chapters of a book, a book that every business owner needs to contribute to, study, and use to operate any business. Each report is like a chapter that details important insights about different pieces of a business’ story. Together, they tell the story of the business’ financial health and can even be used to predict its financial future. If one chapter is missing or filled with inaccurate details, you will not get a true, accurate, and complete story.


Chapter 1: The Balance Sheet

The Balance Sheet captures the assets, liabilities, and equity at a point in time. This statement is cumulative and begins on day one of your business.


Each month, you should verify the balance sheet accounts to an outside source document. Some examples of source documents include bank and credit card statements, a credit line, and loan statements. Let’s take a look at a real lesson learned.


A Real Story: A client’s tax accountant was preparing the business’ taxes and discovered that the starting balances from the year before were changed. We were hired to review the discrepancies and clean up the file. Upon our review, we realized the tax files were prepared with bank statements that were not reconciled. There was an account on the balance sheet with a large balance ($50,000) that showed payments received but not deposited to the bank. The business owner had deposited the money and created a deposit in QuickBooks improperly, resulting in a duplication of revenue, which lead to the incorrect reporting of higher income. As a result, the client had to amend the previous year’s tax filing and correct the revenue error again before filing that year’s taxes.


The Result: Fixing this error reduced taxable income by $50,000. In addition to creating accurate books, this customer recouped the money overpaid to the IRS.


Chapter 2: The Profit and Loss Statement

The Profit and Loss Statement captures the Revenue/Sales, Cost of Sales, and Expenses for the current year in various time periods.


A Real Story: A client was showing a large gross profit. While sales figures were in line with the owners’ general sense of sales volume, there were very few expenses showing in Cost of Sales. Upon our review of the balance sheet, we discovered a large balance in inventory that captured the purchases of goods (to be sold) but no corresponding entries decreasing the inventory for the subsequent sale of those goods. We corrected the problem, showing the changes by each month, and developed a monthly process for the owners to follow that accurately maintained the data going forward.


The Result: We advised the business owner to begin recording the cost of sales by month. By doing this and by tracking the cost of sales as a percentage of sales meant they and their team could analyze purchasing data over time and make more profitable business decisions.


Chapter 3: The Statement of Cash Flow

The Statement of Cash Flow identifies how a business generates and uses cash. This statement has three categories: Operations, Investing, and Financing.


Up-to-date, carefully maintained accounting records and books let you build a much more robust data analysis that you can use for managing and growing a business.


A Real Story: A project for a customer involved converting a file to QuickBooks Online, cleaning up the books, and reviewing reporting results. When reviewing the file, we discovered an opportunity to improve cashflow significantly by improving both the invoicing process and the payment collection process.

  • For invoicing, we helped the business owner fully understand the billing contracts. Originally, the client invoiced customers every three months. Based on our findings and advice, the owner decided to notify customers that, starting the new year, they would begin receiving billing monthly. Next, we helped set up recurring invoices that were to be sent on the first day of every month.
  • Our client also found the payments very tedious to manage. To solve this problem, we added a merchant services account to the QuickBooks file, which allowed invoices to be sent directly to the customers, giving them the option to pay electronically, either by ACH or credit card. In addition, the owner now had the ability to get permission to charge the customers automatically for recurring contract charges.


The Result: This process created a significant increase in cashflow, a solid process for reviewing outstanding accounts, and decreased administration time.


We hope this overview reminds you how treating your financial statements as a set is critically important to understanding the entire story of your business. Remember, putting your financial information to work can result in more successful outcomes for your business.


We are here to help.

Recent Posts

Leave a Comment

Contact Us

Send us an email and we'll get back to you, asap.

Not readable? Change text. captcha txt

Start typing and press Enter to search