A balance sheet is often referred to as a snapshot of the health of a company. Assets, liabilities, and ownership equity are all shown here. The purpose of the balance sheet is to give users an idea of the company’s financial position along with displaying what the company owns and owes. A simple way to look at the balance sheet is that assets equal liabilities plus owner’s equity.
Many small businesses turn to small business bookkeeping services to ensure that their Balance Sheet and other financial statements are up-to-date and correct. Having an accurate Balance Sheet can help small business owners make better business decisions. Here are some red flags in your balance sheet that your business may be experiencing issues:
1. Low current ratio
On a balance sheet, assets that can be used as cash within a year are reported as “current assets,” while liabilities to be paid within a year are reported separately as “current liabilities.” Together, these two metrics make it easy for investors to assess a company’s near-term liquidity.
The current ratio is the ratio of current assets to current liabilities, found by simply dividing the former by the latter. A ratio of one or higher indicates that the company probably won’t need to sell more shares or take on more debt to pay its upcoming bills.
2. Gross Margins
Gross margin measures the profit a company makes on a product considering only production costs. A 25% margin means that the company made 25 cents for every dollar of sales before deducting the other costs. Gross margins tell you a lot about a company’s position in its market. Rising margins say a firm’s competitive position is improving and vice-versa. You’ll need a calculator, but gross margin is simply gross profit divided by sales.
3. Loans in and out of the business from shareholders
Using a company as a personal bank gives the impression of a lack of professional discipline. To this point, a business entity is created to protect you, the business owner. When personal loans are floating through the entity, an attorney could make the case that this “veil of protection” is non-existent.
4. Fixed assets
Make sure that you or your CPA is properly recording fixed assets (computers, vehicles, office furniture, etc.). What you purchased these items for, as well as any accumulated depreciation, should be easy to find. We have seen cases where accumulated depreciation is higher than the actual cost of the asset. This just shows that you are not paying attention to one of the most important snapshots of your company’s health.
5. Negative net tangible assets
Net tangible asset is Equity less Goodwill. Goodwill is the amount that a company pays to acquire another company in excess of the tangible assets the acquired company holds i.e. net worth less book value. It is “intangible” and cannot be sold and has to be made up for by running the acquired company successfully. Negative net tangible assets could indicate failed mergers that are taking the company down.
6. Dormant accounts
We also see a lot of balance sheets that have dormant accounts. If you have items that appear here, and have not changed for three years, it will surely raise questions.
7. Abnormal deferrals on the balance sheet
Watch for entries in the assets section titled “Prepaid Assets” or “Deferred Assets.” It could be an accounting irregularity, a fraudulent maneuver, or simply a special circumstance — push hard to find satisfactory answers.
8. Writing off assets over a longer period
For example, net earnings can be manipulated higher by writing off an asset over 10 years instead of the more appropriate five years.
9. Negative retained earnings
Retained earnings is a way to measure the cumulative net income of a company. Negative retained earnings may indicate that the company has been accumulating losses over the few years.
The Bottom Line
Balance Sheet analysis is the foundation for understanding any company. The composition of assets and liabilities play an important role in deciphering the quality of business its strengths and weaknesses. You should be able to tell your company’s “story” off of the balance sheet. It’s not that time consuming if you devote some time every month to ensure your Balance sheet is up to date and correct. Small business bookkeeping services can ensure that your financial statements are in tip-top shape to ensure better decision making.
Limitless Investment and Capital’s Small Business Bookkeeping Services in Denver
Our accredited accountants (CPA, CGA) will produce all financial statements (balance sheet, income statement, cash-flow statement…) according to the highest standards of quality for both profit and non-profit oriented businesses. You’ll have all your financial documentation (balance sheet, cash flow report, etc.) prepared accurately and on time.
We can perform the following small business bookkeeping services in Denver on an ongoing basis based on your business’s needs:
- Account keeping (monthly / quarterly / annual)
- Setting up an accounting system for new businesses
- End of the year preparations, along with monthly and quarterly reports
- Thorough review and analysis of the bookkeeping process
- Adjusting and closing all entries
- Financial statement analysis and projections
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