Know your Numbers – #2 Reconcile, Reconcile and Reconcile!
Do you reconcile your balance sheet on a monthly basis? And if not, why not?! The balance sheet is the ultimate checking tool to ensure your profit or loss made in that period is correct. If you have a fully reconciled balance sheet, then your Profit and Loss account will be correct, it is as simple as that.
Reconciling a balance sheet covers all areas of the financial side of your business, from unpaid purchase invoices to who owes you money, and gives you a complete overview of the current financial position of your business. Sadly I believe this valuable part of financial reporting is often forgotten about. Key areas to review are;
Stock and Work in Progress
Counting stock or valuing work in progress can be a lengthy and time-consuming task, but without it, your profit and loss figures can be seriously misleading. It’s important to ensure you are matching purchases and expenditure with the sales incurred during the period. This will then help correctly calculate your gross profit margin on the sales you make, otherwise you’ll find this fluctuating month by month, which doesn’t make analysing your businesses performance easy.
This one is very self-explanatory, if you don’t include all your payments and receipts, how will you ever know who you owe and who owes you?!
I’m sure you receive monthly statements from your suppliers, probably not all, but most. Instead of putting these to one side, use them and ensure the balance on the statement agrees back to your accounting system. Knowing you have accounted for all purchase invoices during the month will ensure you’re not showing an over inflated profit figure.
Accruals / Prepayments and Deferred / Accrued Income
I’m sure you have heard of these terms before, and more than likely at year end when discussing your figures with your accountant. Accruals / prepayments are used to bring forward or defer costs that relate to the period in question, that have either been invoiced after the period or in advanced. Ensuring you recognise your costs in the correct period will give you a more accurate profit figure. Deferred and Accrued income works in the same way, but for income, instead of expenditure. For example. If you invoice your customer annually in advance for a service you provide, 1/12th of this should be released to the Profit and Loss account each month and not all in one go during the month the invoice is raised.
All the above will help your profit and loss account reporting and ensure the numbers you are reviewing are correct and not misleading. So, get reconciling and start ensuring the information you’re looking at is correct!
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