Many small business owners use an accountant or bookkeeping team for their entire financial management. While this is reasonable and often necessary, it’s still important to deeply understand your financial information for your small business growth. To start, you should know if your small business financial statements are accurate or not. Use these key questions to guide you to determine if they are:
1. Are all the accounts there?
You can’t have an accurate profit and loss (P&L) statement without having an accurate balance sheet. Many small business owners present a P&L statement they believe to be valid, but after seeing the balance sheet, it shows incorrect or missing information. These two statements are seamlessly linked – if your balance sheet is inaccurate, so is your P&L statement.
You can start by reading your balance sheet to see if all your business accounts are listed there, and if they have an accurate balance. If one of your business checking, savings, or credit card accounts isn’t listed on your balance sheet, all of its transactions (revenue, expenses, and other costs) aren’t in your books or your P&L statement. As a result, your profitability is incorrect.
2. Are there too many accounts?
Check if there are accounts in your balance sheet that shouldn’t be there. This is the most common issue small business owners have. This often happens when closed banks or credit accounts still show a balance because transactions that should have brought them to zero were never recorded.
Missing transactions can mean that your P&L statement is incorrect. For instance, another account is also listed with an incorrect balance, or the information in your tax returns from previous years is inaccurate. Here’s an example to explain:
- Your business lists a savings account with a $7,000 balance on its balance sheet. However, that account was actually closed back in 2022, and it’s still showing up on your financials. As it turns out, your business spent $7,000 on rent that year before closing out the savings account, but that transaction was not entered into the books.
- This means that $7,000 is missing from the 2022 financials, and the reported profitability was $7,000 too high for that year. This affects the business’s financials for years to come, as even today’s balance sheet includes these figures.
Your revenue or expenses could also be miscategorized when the books were recorded as assets or debts. If this is the case, the revenue and expenses are missing transactions, and the profitability is wrong. Here’s a simple example:
- $10,000 deposited from a business loan was miscategorized as sales. This is a liability and shouldn’t be listed on the P&L statement. As a result, the business shows $10,000 too much in revenue on your P&L statement, $10,000 too much in profitability, and your balance sheet incorrectly demonstrates $10,000 less debt than you actually have.
3. Does your POS report match your revenue?
After the balance sheet check, the next level of inspection should be to see if your point of sale (POS) reports match your financial statements. This is more important than ever because major POS businesses now report your sales (through Form 1099-K) directly to states and the national government. Reporting financials that don’t match those POS reports could trigger a sales tax or income tax investigation, and you may be overstating or understating your revenue.
Seeing if the total sales in POS systems and your financial statements match is straightforward – you just need to understand whether fees, tips, and taxes are being deducted from what’s recorded in your books.
- Fees:These are credit card processing and other fees the POS platform charges for its service. Before removing fees, you’ll need to ensure that the total sales are listed as your revenue and that those fees are listed as an expense on the P&L for the same period.
- Tips:Tips your business collects are not revenue, so your financial statements shouldn’t include tips in the total revenue.
- Taxes:Your sales taxes can be included or excluded from your revenue, so it’s important that you stay consistent. If you have sales taxes in your revenue on your financials, make sure to do that every year, and record the payments made to the tax department in your expenses. If you don’t, never put them in your financials, and don’t record the payment made to the tax department as an expense.
4. Does your payroll report match your payroll expense?
Similar to your sales, it’s important to closely match your payroll expenses to the reports from your payroll business, especially Form W-3, which is issued at the end of the year. The most common issue is businesses treating employee taxes as business taxes.
For example, if your employee’s salary is $1,000, and you give them a paycheck for $700 and then pay $300 of their taxes to the government, your financials should show $1,000 as the cost of wages, not $700, and their taxes shouldn’t be listed as your tax expense. This can cause your small business financial statements to demonstrate lower wage expenses and higher tax expenses.
Why do you need the right support?
These problems can go unnoticed for years if you have a CPA who simply files returns based on the reports you give them. A good CPA challenges the information you provide with questions to get a better understanding and helps you notice errors in your books sooner rather than later.
Pursuit is here to help
Pursuit offers financing and resources to ensure all business owners have a path to success. We’ve helped thousands of small business owners get the funding to launch, grow, and thrive.
We offer a range of financing options for small businesses in New York, New Jersey, Connecticut, Pennsylvania, Illinois, Nevada, and Washington. We help you get the financing you need, including more than 15 loans and a line of credit, and we offer insightful resources, and business advisory services for small business owners.
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