How A Well-Maintained Balance Sheet Can Help You Decide
This can be a hectic time for you as you work to close the books on the previous year while strategically plan for the year ahead. For me, this is the time of year I find myself fielding questions from clients who want to know if buying equipment will help them keep their taxes down. If you have a well-maintained balance sheet, it’ll be easier to determine whether or not this could be a good move for you.
To determine whether purchasing equipment would be beneficial to your business from a tax perspective, I have to know what your profit looks like. And while it may be easy to pull out your profit and loss statement to find the answer, I would encourage you to take a look at your balance sheet as well.
Inaccurate numbers on your balance sheet typically result in misleading numbers on your profit & loss statement so it’s important to keep your balance sheet accounts up-to-date. Your balance sheet can paint a detailed picture of your business and is a great tool that can help you make sound financial decisions for your business.
Before making any decisions that could impact your business’s financial stability, make sure these six items on your balance sheet are accurate.
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Cash Reconciliation
Check to make sure that all cash has been reconciled and make special note of checks that have remained uncashed for an extended period of time.
Verify that all checks – incoming and outgoing – have been recorded, and their statuses have been tracked.
Collectability Of Accounts Receivable
Does your business currently have any bad debts? If so, have you taken the necessary actions to determine whether the account in question is uncollectable?
Once an account is uncollectable, take the steps needed to prove that determination was made and receive the benefit from it.
Inventory
The end of the year is an ideal time to take a physical inventory.
An inaccurate inventory can greatly impact your profit – not to mention your ability to properly manage your resources.
Read Also: Better Inventory Management Solutions Do Exist
New/Disposed Fix Assets
Be sure to add all new assets (equipment, fixtures, etc.) to the correct accounts. Don’t let them become buried in your purchases.
If you are planning to sell your company in the next five to 10 years, it’s extremely important to keep an accurate record of your assets because they can help determine your asking/selling price.
Liabilities
Keep a current record of all your liabilities and update it regularly to maintain accuracy.
Make sure all debts are tracked and recorded.
Owner Draws/Distributions
Check to make sure that your owner withdrawal/distribution account is accurate. If there are any expenses you expected to see but didn’t, investigate and find out why.
If after year-end you happen to find personal expenses that were incorrectly classified as business expenses, fixing this increases your profit as well as your taxes.
Your balance sheet paints a picture of the financial strength of your business. If you have to borrow money to purchase equipment, this may impact how a bank or other third parties view your business in the future. Take into consideration the importance of maintaining a healthy balance sheet when making big purchase decisions.
By Todd Mizer, CPA (retired)