If You Can Measure It, You Can Manage It DO YOU KNOW THE FINANCIAL STATE OF YOUR COMPANY? By Michael K. Farmer, CPA, CHBC M ost of the clients who I work with use an electronic bookkeeping system, such as QuickBooks, to keep track of their finances. The majority of those do not do much beyond entering the deposits and checks in the checkbook, while others reconcile the balance. They have created a very powerful database and choose to ignore it when making financial decisions. This would be like working on your car without using any type of diagnostic tool to identify what the real problem is. Being mechanically inept, I would take it to my mechanic, who would scan for diagnostic codes and then compare those codes to his database. Without the correct diagnosis, he could be working on the wrong issue. The same is true with your financial data. If you do not look at correct data to make a decision, you could end up working on the wrong issue. I will discuss some of the reports and tools that you should be looking at or giving to your clients to help them manage their businesses. the first report in a set of financial statements is the balance sheet. the balance sheet reports assets, liabilities, and equity. assets are those things which you own: some examples would be bank accounts, accounts receivable, fixed assets, or notes receivable. all of these items you either have in your possession or you have a right to them. liabilities are those things which you owe to others. they could include accounts payable, payroll taxes payable, or bank loans. finally, equity is the ownership in the company. the basic formula is assets = liabilities + equity, hence the name balance sheet. the balance sheet is a snapshot in time. it will tell you that, as of 12/31/12, these are all of your balances. Balance Sheet 12/31/2012 12/31/2011 Assets cash . . . . . . . . . . . . . . . . . . . . . . . . . 5300. . . . . . . . 4400 accounts receivable . . . . . . . . . . . . 5000 . . . . . . . . 4500 inventory. . . . . . . . . . . . . . . . . . . . . . . 500 . . . . . . . . . 400 current assets . . . . . . . . . . . . . . 10800. . . . . . . . 9300 fixed assets . . . . . . . . . . . . . . . . . . . 5000 . . . . . . . . 4500 accum depreciation . . . . . . . . . . . –1000 . . . . . . . . -500 net Prop, Plant & equip. . . . . . . . 4000 . . . . . . . . 4000 total assets . . . . . . . . . . . . . . 14800. . . . . . . 13300 Liabilities and Equity Payables. . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . 1500 long term debt . . . . . . . . . . . . . . . . 3500 . . . . . . . . 4000 total liabilities . . . . . . . . . . . . . . . 5500 . . . . . . . . 5500 equity begin equity . . . . . . . . . . . . . . . . . 5000 . . . . . . . . 5000 net income/re . . . . . . . . . . . . . . 4300 . . . . . . . . 2800 total equity . . . . . . . . . . . . . . . . 9300 . . . . . . . . 7800 total liabilities and equity . . . . . . 14800. . . . . . . 13300 as a business owner or manager, you should look at the balance sheet to see what your cash balance is, if the payroll liabilities are being paid, and how the balances compare to previous periods to assess which items are increasing or decreasing. another report that comes from the balance sheet accounts is the accounts receivable aging. this report will show the accounts receivable split up into time buckets. for instance, the report could separate the accounts into 0–30 days, 31–60 days, 61–90 days, 91–120 days, or 120+ days old. if there are amounts in the “120+ day” column, it is important to consider what is being done to collect on those. You can also run this report by insurance company to see if you are having problems with one company. 26 hbma billing • november.december.2013
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