When considering financial statements, many business owners and managers spend 80% of their time and energy focused on the income statement (or profit and loss statement), and only 20% focusing on the balance sheet. For some business owners, the percentages are closer to 100% and 0%. But this split of time and focus is not the most effective.
The Balance Sheet Reigns
Contrary to popular belief, the balance sheet reigns supreme in the world of financial reports. Why is this?
The balance sheet is a snapshot in time of the assets, liabilities, and equity of a company. Items on the balance sheet can all be verified to external, or at least secondary, source documents. In other words, the balance sheet accounts can all be validated. Doing this “tie out” of the balance sheet ensures that the financial statements are reliable.
Without focusing time and energy on tying out the balance sheet, one cannot have any assurance on the income statement. Yet, a correct tie out of the balance sheet will ensure that the bottom line net income is correct.
Focused Month-End Close
Therefore, the bulk of your company’s month-end close process should be balance sheet focused. Instead of focusing the most resources on the income statement, the majority of time should be spent on tying out the balance sheet. Not only should existing accounts be verified, but a big picture view should be taken to ensure that any and all assets, liabilities, and equity are included and that account balances are reasonable. Only once the balance sheet has been tied out should any focus be placed on the income statement.
What’s your 80/20 split? Are you focusing your attention on the true king of the financial statements (aka the balance sheet)? Let me know if I can help you in tying out the balance sheet and gaining a better understanding of your financials.