Welcome to the first edition of Fun With Financials! Managing finances doesn’t have to be overwhelming or boring—we’re here to break it down into simple, actionable steps. This month, we’re diving into squeezing the balance sheet: what that means and how to do it.

The balance sheet report shows what your business owns (assets) vs. what it owes (liabilities).  “Squeezing the balance sheet” (proving or cleaning up the balance sheet) means ensuring that all asset and liability account balances are complete and accurate, which proves that all transactions have been captured, which in turn forces the profit and loss statement to reflect the correct bottom line. 

This process is critical in financial reporting because any missing or incorrect entries in the balance sheet directly impact a company’s financial performance on the profit and loss report.  It’s especially important at the end of your fiscal year to have all of these balances accurate for financial and tax filing purposes.

How to Squeeze the Balance Sheet Effectively:

Bank accounts – Checking, savings, money market, CDs, petty cash, drawer cash – reconcile these accounts – ensure that the balances in your books reconcile with the balances on your bank statements or physical counts of the petty cash bag or cash register drawers.

Accounts receivable – Review the outstanding invoices that you’ve sent to customers and confirm the balances of who owes you money and how much – if someone is not going to pay, write it off – get it off the receivables list before year-end.

Inventory – Do a physical count to confirm what you have, remove obsolete or damaged items, and ensure that the value on your books matches what you actually have in stock.

Prepaid Insurances/Expenses – If you have paid your insurance premiums or any other business expense in advance, an adjustment needs to be made to record the expenses in the proper accounting period to avoid distorting financial results.

Fixed Assets/Depreciation – Review the depreciation schedule from the prior year’s tax return – do you still own those assets? Are they damaged or obsolete? Did you scrap them? Did you trade them in?  Have you purchased a new building, vehicle, or equipment for your business – has the purchase transaction been recorded in your books?  Has depreciation been calculated and adjusted on the assets you own?

Accounts Payable – Review the bills you owe to vendors and suppliers as of year end – many times you’ll receive a bill after year-end that is for a service or material provided in the prior year – it’s a payable when the service or material is received – make sure all outstanding bills are recorded in the proper accounting period.

Gift Cards/Certificates – If your business sells/redeems gift certificates or gift cards, it’s important to tie out the amount on your books to the amount that the gift card company shows as outstanding – many times, gift cards will be sold for zero dollars in your point of sale system, i.e. when a donated gift card is provided to a nonprofit organization – it may be zero dollars on your books, yet it has a balance on the street.

Credit Cards – Confirm that all credit card transactions have been entered and each credit card statement has been reconciled to your books, even if you have not paid the balance due yet – it’s a liability until you pay it, yet it’s an expense when you incur the charge – transaction dates matter.

Long-Term Debt – Did you buy an asset with payment installments over a period of time?  Is the asset reflected in your books at the principal amount with interest recorded separately?

By tightening up these balance sheet areas, your business can ensure that the profit and loss statement accurately reflects net income, leading to better financial decision-making in the future. Would you like a checklist for squeezing the balance sheet for your business? Contact us at info@newbusinessdirections.com!