When it comes to financial reports, the income statement gets all the attention. It’s like the cool kid in high school. The balance sheet is rarely given much attention. It’s like that kid sitting all alone at lunch. The thing is the balance sheet holds the key to your financial success. Three financial mistakes that I see all the time involve the balance sheet. The errors are easy to spot and easy to fix, if you know where to look. The danger is that if these errors go unnoticed for too long, they become big, expensive financial surprises.
No one likes surprises in the financial statements. In this post, I’ll break down the three common financial statement mistakes. I’ll show you how to find them and how to fix them. You don’t need to be a rocket scientist. You just need a little direction to find the landmines.
- Income statement overload
- Balance sheet basics: No. 1 give it some love
- Common mistakes and how to avoid them
Income statement overload
The income statement is the rock star of the financial statements. Everyone loves to look at top line sales and sales growth. We love to see the bottom of the income statement – how did we do? What did the profit look like this month? There’s nothing wrong with this approach, so long as you remember that the income statement only tells you part of the financial story of your brewery. The income statement reports on the here and now. It is the “what have you done for me lately” of the financial statements.
Balance sheet basics: No. 1 give it some love
The balance sheet reports on assets, liabilities and equity. Assets are things you own (like brewery equipment). Liabilities are things that you owe (like loans), and equity is the difference between the two. If assets are more than liabilities you have equity or a positive net worth. The equity line item is the sum total of all the profit (or loss) of your brewery since the beginning of your business. This one number tells a lot about the financial health of your brewery.
Three common balance sheet mistakes + how to avoid them
- Pre-paid expenses are payments for things you’ll get in the future. Pre-paid hop contracts are a good example. You pay now and expect to receive the hops later. Often, the payment is made and “pre-paid” is recorded, but never removed from the balance sheet. When the problem is discovered, it usually means a big hit to income statement expense.
- Inventory is well understood as your raw materials, work-in-process (beer in process), and finished goods. However, pallets and kegs are part of inventory, too. These often-forgotten assets go missing, and eventually lead to a big write off. The write off is recorded as an expense, and another hit to the bottom line.
- Accounts receivable (A/R) is uncollected cash from your accounts. When you make a sale, but haven’t yet collected the cash, a receivable gets recorded. Sometimes the customer never pays. These receivables accumulate and become bad debts. When bad debts are discovered and written off, they become another hit to the income statement in the form of bad debt expense.
How to avoid these three mistakes: Reconcile the accounts
A monthly balance sheet reconciliation sounds like a complicated process, but it’s not. You simply need to look at the details that make up each account and determine if they make sense. For example:[…]
Click here to view original web page at www.craftbrewingbusiness.com