Analyzing Your Financial Reports: Part 3 – Cleaning Up Your Liabilities
As mentioned in a previous blog post, your balance sheet is an important financial statement that offers clues as to what’s going on in your business. It’s important to have accurate balances so you have a clear picture of where you stand.
Begin by running a balance sheet dated the end of the month. It’s more informative if you run it on an accrual basis rather than a cash basis. The balance sheet has three sections: Assets, Liabilities & Equity. Before you can accurately analyze your balance sheet, it’s important to make sure the values are valid.
This blog post will focus on looking at your Liabilities. Knowing what you really owe is important – and can be a real reality check to see if you need to make any changes in your business.
Liabilities (obligations of the company)
Accounts Payable (A/P, what you owe vendors)
Credit Cards Payable
Payroll Liabilities (payroll taxes not sent yet, child support withholdings not remitted)
Sales or other Taxes Owed
Line of Credit Balance
Other Loans Payable
Look at all of these balances. Are they correct? How do you know? If any of these balances are negative – that’s a sign that something was accounted for incorrectly (or that you overpaid!).
Analyzing Your Liabilities
Your accounting software should have an accounts payable report you can run that will list all the vendors and invoices you owe. Make sure you use the same date as your balance sheet, and look at the items on the list. Do they all belong there? Does the total on this report tie to the balance sheet? If not, there are accounting issues to be fixed.
Most software will let you reconcile your credit cards, lines of credit, and loans just like a bank reconciliation. Get your statements and do that for each account. Look at what is still not cleared – these are the items that you need to investigate and likely adjust.
If there are loans to employees or owners, are the balances accurate? If not, an adjustment is needed.
Are your taxes payable correct? An easy way to tell is to look at the next tax payment you make. Did it match what was on the balance sheet for the month before as being payable? If not, it needs further investigation.
If you report your taxes on an accrual basis, you may have accrued expenses or unearned revenue. If so, make sure the balances in these accounts reflect what you actually owe or have not yet earned.
Some long-term leases must be recorded on the financial statements. If you fall into this category, check with your tax accountant to find out if it needs to be recorded.
Finding errors that you don’t know how to fix or don’t understand? Schedule a time to chat with us! We want to help you get your financials in order so you can know where you stand and can move forward successfully.