6 Ways to avoid black holes in your Balance Sheet!
Posted On February 15, 2020
I have recently been reminded of a role I had where my predecessor was asked to leave for allowing a financial black hole to develop in the Balance Sheet. Indeed, the reason for a failure at Patisserie Valerie was a focus on the Income Statement which allowed a black hole to develop on the Balance Sheet.
When the primary focus of management is the Income Statement, it is often the case that reconciling the Balance Sheet accounts becomes secondary. My argument is that you cannot rely on accuracy of the Income Statement if you haven’t reconciled the Balance Sheet accounts first.
An example of this is where goods are booked into stock, but what happens if the invoice has not been received at the period end? The key to this is providing an accrual for the amount (“Goods Received Not Invoiced” or “GRNI”). But the only way you can do this is with good systems and knowledge within the accounts team of how it works. This latter point is often where the problem lies, and was the reason my predecessor (who was a qualified accountant!) was asked to leave.
Here is my list of the 6 ways to avoid creating a black hole: 1. Reconcile your bank balances to statements, every period end. 2. Ensure that stock is valued at the lower of cost or net realisable value. In other words, it should be valued at cost unless you expect to receive less for it, then value it lower. 3. Provide for any expense that you have incurred but not charged the period. EG GRNI, fixed asset impairment, obsolete stock, bad debts, sales commissions/bonuses to name a few. 4. Seek third party verification to balance sheet accounts where possible. EG PAYE due to HMRC records, Inter-company balances to the other company, Trade debtors to post-dated remittances/customer verification, accruals to documentation etc 5. Ensure that only true fixed asset costs are capitalised. If costs are later found to be capitalised in error, they will then have to be charged to the income statement. 6. Look for “dangling debits” in the Balance Sheet. These are amounts just lingering on the Balance Sheet in the hope that they won’t be charged to the Income Statement! I have seen many examples over the years, EG Costs incurred that you hope will be covered by suppliers/refunded by customers, cost incurred that you don’t know where they should go in the income statement, suspense accounts, negative balances in trade creditors etc
In summary, the key is ensuring the debits on the Balance Sheet (assets) are legitimate and not overstated and that credits (liabilities) are not understated. Sounds easy! But as systems get more complex and reporting deadlines become tighter, the risk of creating a black hole is increasing.
But help is at hand! If you do not have the right level or number of staff in role, suspect a problem in your accounts or just want a check before audit or due diligence then why not get in touch? We can carry out a SWOT review of your accounts function and establish any areas of concern, or indeed opportunities to improve the service you get from your finance team.