Whether you keep your books on a cash or accrual basis, don’t forget to pay attention to your balance sheet. While your income statement (or Profit & Loss or P&L) tells you how your business is performing, failure to look at your balance sheet at the same time can either inadvertently hide activity that belongs in your income statement and/or be a a good source of information.
In terms of inadvertently hiding information, sometimes the people keying information into your general ledger or accounting system aren’t quite sure what something is or where it should be coded. While it is important that they get answer to that question, the person that has the answer, often you, isn’t immediately available and so the item gets coded to a temporary account possibly a balance sheet account. When that happens and you only look at your income statement, you’re missing the impact–whether good or bad–of the item that was put into a balance sheet account. Looking at changes to the balance sheet as compared to the prior month and asking questions about those changes will help prevent this problem.
Even if that doesn’t happen, you should be looking at a comparative sheet each time you look at your income statement. While looking at your bank account online or in a check register will tell you the balance, a comparative balance sheet will show you whether your cash balance is growing or shrinking and by how much. The same goes for accounts receivable, and if it’s growing significantly, you want to make sure it’s in proportion to growing revenue and not to customers paying you later and later. Looking at your balance sheet can also uncover accounting activities being ignored such as failing to file and remit sales & use tax payments as required. You would see this if your Sales Tax Payable account kept growing out of proportion to your revenue.
For our typical clients, a review of a comparative balance sheet only takes a few minutes each month and can alert you to things that need to be addressed now before they take up hours or days of your time.