easy-accounting-iconThere is Top Line Terry and Bottom Line Larry, but there are other “players” needed to make a business successful.  The income statement is important for monitoring and finding ways to improve, but if your balance sheet is out of whack, your income statement may be unreliable.  The balance sheet shows how much money you have, how much money is owed to you (accounts receivables), how much you have invested in inventory and fixed assets, how much you owe other people (accounts payable and notes payable), and how much equity you have in the company, just to name a few.  In other words, it is a quick view of your business’s financial standing.

Top Line Terry will let you know that you are having a record breaking year for sales, but the balance sheet will tell you how much of those sales you have collected.  If you do not monitor the aging of your accounts receivable and make a push for timely collections, then the sales that were made will not mean a whole lot if they are written off to bad debt.

Bottom Line Larry will let you know how much net income the company has made. Therefore, cash should be increasing significantly.  However, the balance sheet could tell you that cash has not increased.  It might even tell you that cash has decreased.  This could be because debts are being paid down, or that the money is sitting in inventory and not moving.

Balance sheets are critical and keep you informed about the company’s financial health.  For instance, if the ratio of your assets to liabilities is less than 1 to 1, the company is in danger of going bankrupt, and you will have to make some strategic moves to improve its financial health.  You will want to make sure that the data you are using for this calculation is accurate so you know if changes need to be made sooner rather than later.

Banks look at balance sheets to determine if your business qualifies for additional loans or credit.  Balance sheets also help potential investors better understand where their funding will go and what they can expect to receive in the future.

How do you know if your balance sheet is accurate?  A lot of balances can be verified by outside sources, for instance, bank statements, vendor statements, and loan balance statements.  You will need to review you accounts receivable aging report to determine if the balances are collectible.  You will also want to do an inventory count and review your fixed assets for accuracy.  You want to make sure that you can support each balance with a supporting document.