How to Tell If Your Financial Statements are Wrong – In less than 2 minutes
2 September 2015

How to Tell If Your Financial Statements are Wrong – In less than 2 minutes

Ruth King
Contributing Writer
Profitability Revolution Paradigm

Grab your latest financial statement and look:

1. Are you on an accrual basis?

This means you see accounts receivable, accounts payable, and inventory on your balance sheet. If you don’t see these figures,  your financial statements are not accurate – from an operations basis (they may be from a tax basis – but the IRS doesn’t run your business on a day to day basis). Accrual accounting is critical for good financial analysis and spotting minor issues before they become major crises.

2. Do you have negative cash on your balance sheet?

You can’t have negative cash in your checking account – the bank would charge you large fees and close your account.  More than likely you have a lazy bookkeeper who prints out all the checks at once and sends them out when there is money to pay the bills.  Don’t print checks unless you have money in the bank to cover them.

3. Do you have negative payroll taxes on your balance sheet?

The IRS more than likely doesn’t owe you money.  Your state revenue department more than likely doesn’t owe you money.  This is a bookkeeping error. Get the accounting for your payroll expenses correct.  It affects your entire financial statement.

4. Do you have negative loan balances on your balance sheet?

The bank doesn’t owe you money for your loan payments.  Again, a bookkeeping error. This usually happens when the entire loan payment is deducted from the loan balance.  Part of the payment is principal and part is interest expense.  Make sure the interest expense shows up on your P&L and the principle reduction is shown on your balance sheet.

5. Do you have a negative gross profit on your Profit and Loss statement?

Unless you are crazy, you don’t purchase a part for $10 and sell it for $8. The only time this might happen, and it is rare, is when all you do in a month is warranty.  Then you have almost no revenue and large costs for providing the warranty.

6. Do you have no rent expense (or utility expense or any expenses that you know you pay every month)?

Make sure these bills are recorded each month.  You have to pay your rent every month or your landlord will kick you out of your office.

In two minutes you can find the answers to these questions.  Start here.  Then continue with the rest of the financial analysis which should take you less than 30 minutes a month. (My book, The Courage to be Profitable, www.thecouragetobeprofitable.com)  explains the rest.

You’ll make better business decisions and spot minor problems before they become major crises.

Ruth King is CEO of HVACChannel.tv and a nationally recognized HVAC expert. You can reach her at ruthking@hvacchannel.tv or review her manuals at www.hvacoperationsmanual.com.