By: Ruth King
An estimated 75% of all small business financial statements have errors. As you know, good financial statements are critical for spotting and resolving impending issues such as a cash flow crunch. Over the next few months I’ll write about the 12 most common financial statement errors. Last month I covered the first four common mistakes. This month I’ll cover the next four common mistakes.
Mistake #5: Negative Cash Value on Your Balance Sheet
It is impossible to have negative cash in the bank. You would be bouncing checks, paying a lot of bank fees, and the banker would close your account.
Most of the time when this happens the bookkeeper printed out all of the invoices that had to be paid that month and there was not enough money in the bank to pay all of the bills so the checks are still sitting on her desk.
Mistake #6: Negative Accounts Receivable Value on Your Balance sheet
If your accounts receivable balance is negative, then your company owes your customer base refunds. Yes, one or two of your customers may have overpaid by a dollar or two. Your entire customer base didn’t overpay their bills.
This normally happens when you get a deposit for future work. The software sees money without an invoice and assumes the negative accounts receivable balance. To correct this, put a general ledger account called Customer Deposits in the current liabilities section of your balance sheet.
When your company gets a deposit for future work, the payment should go into customer deposits – you have a liability because you’ve received money for work that hasn’t been done.
This will eliminate negative accounts receivable.
Mistake #7: Negative Inventory Value on Your Balance Sheet
You can have no inventory on your balance sheet. You cannot have negative inventory. That is phantom inventory.
This generally happens when a bookkeeper takes materials out of inventory and doesn’t replenish inventory.
If your company has inventory it should be accurate with additions to and subtractions from inventory.
Mistake #8: Negative Accounts Payable Value on Your Balance Sheet
Generally I see this at the end of fiscal years when companies prepay their invoices. If this is the case, then you know it is a real prepayment.
If it is happening during your fiscal year, then your entire accounts payable balance has been prepaid. Probably not.
Find out who has been overpaid and why.
We’re happy to give you a free review, i.e. financial check up, of your 2023 year end P&L and Balance sheet. Click here for more info.
Note: If the link doesn’t work: https://keap.page/rk139/ffb-upload.html
Check out Part 1 of this Series Here
Check out Part 3 of this Series Here
For more great business content see here.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
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