We work all year, run our companies, sell our products, pay our employees, deposits are made and expenses paid. If all is going right, it is like a well oiled machine and with efficient monitoring of the most important KPI’s, you can ensure that your business is headed in the right direction.

Then comes the end of the year, when a glance at the financial statements is not enough. Deep financial analysis and account reconciliation is required to ensure that you not only have a good grasp of the year that just passed, but also are able to map where you want your business to go in the year ahead.

Comb through your Balance Sheet with a magnifying glass

Many times during the year when you are analyzing your business your attention is focused on the Profit and Loss or Income Statement. What did you sell, what are your corresponding expenses, and what is the net bottom line? However, the end of the year is your opportunity to look at your Balance Sheet and really see what your business is worth.

Look at the detail of each Balance Sheet account, one by one. You should be able to identify every transaction that makes up the balance of any given account. Are those transactions legitimate? Are all of the Accounts Receivable invoices really being expected for payment, or is there a balance that needs to be written off? Is there an active collection effort in place for those invoices? Leaving open A/R invoices on balances that are not truly collectible overstates your income, which may lead to an overstated profit and additional tax expense.

Our customers most valuable asset is usually their inventory. This is a Balance Sheet account that should be monitored on a constant basis, but at a minimum needs a good cleaning and reconciliation at year end. Compare the inventory reports you usually look at to the inventory accounts on the Balance Sheet. Do they balance? Are there differences? If you are not sure of how to compare these reports, call your dealer management system or accounting software vendor to help you. There could be balancing errors that are producing incorrect financial statements.

The same is true of your Liability Accounts. Review each transaction that makes up the balance of your Accounts Payable, and Short and Long Term Liability accounts for accuracy. Has interest been booked? Have payments been incorrectly classified to expense accounts instead of the liability accounts? This common bookkeeping mistake overstates your expenses, showing less profit than actual.

Don’t just leave this to the Accountant

Many business owners “leave this stuff to the Accounting Office”. On a regular month to month basis, with the proper safety controls in place, this tactic may be fine. If your accounting staff does a good job of bookkeeping and your financial statements are timely and accurate for the most part, then that’s great!

However, at the end of the year in order to make sound financial decisions about your business you should know more. You need to plan your inventory levels to prepare for the buying season, and digging into the details of your Balance Sheet will help you do this. You need to plan your cash for the slow season, and analyzing the details of your Balance Sheet will help you do this. You need to compute your equity levels for borrowing requirements, and having a reconciled and detailed Balance Sheet is necessary for this.

Don’t be afraid to ask questions about things you don’t understand. Invite your CPA or trusted financial advisor to go through this exercise with you. They will likely point things out you don’t know to look for, or they may be able to shed light on acceptable levels of outstanding invoices on the Balance Sheet. Exuma offers this type of service by our Professional Services team to help dealers, marinas and boat yards stay on top of important indicators and flags.

You will learn something new

There are valuable lessons to be uncovered from really digging into your year-end Financial Statements. You will quickly learn which people owe you money. I have seen owners learn only at the end of the year that a manufacturer hasn’t paid any warranty receivables all year long, and currently owes them tens of thousands of dollars. Isn’t that information you would like to know before placing your next inventory order with that manufacturer?

As they say, “Hindsight is 20/20”. Looking back on the year through your financial statements, calculate how much of your business is done in each month. Since most of you run seasonally affected businesses, it is important for you to know if you do 15% of your business in the month of June. Computing this on a yearly basis, will help you plan for the year ahead in terms of staffing, inventory and customer transaction levels.

This level of analysis of your business can be time consuming and tedious, but is rarely a waste of time. While you have competent, capable employees that help you keep track of your business finances, it is important for you to get your hands dirty in the details of how your business has performed, and where you plan for it to go moving forward. Often times when a business owner does this level of analysis they are shocked at what they have found parked on their Balance Sheets. This has led them to require this type of analysis on a more frequent basis than only at the end of year. We explain how to do this on a Daily/Weekly/Monthly/Yearly basis at our Online Learning Summit Class, please check it out if you are interested.

Do you go through this process at the end of each year? What have you learned? Leave your comments here: