Updated: Jun 3
Balance sheet boils down to what you own and what you owe. This is crucial as the surety wants to know if you have the resources to satisfy your obligations so they won't have to if something goes wrong. So let's start deconstructing the major balances on the everyday balance sheet.
Cash: This should be a gimme. Reconcile your cash on a regular basis. Depending on how many transactions you have, that might mean daily or weekly. This is huge, it's one area that CPAs really hate to see any differences! There's a lot that can go wrong when your cash doesn't reconcile! Transfers between cash accounts recorded as revenue (yikes), because cash wasn't reconciled. Also, pay attention to older deposits and checks that haven't cleared the bank. You may have sent a replacement check to vendor and never cleared the first one off the books. Now you've understated your cash and your bottom line. Remember you're going for your best look so tidy up.
Accounts Receivable (AR): Who owes you and how much do they owe? These are questions you should be able to answer quickly with a couple of clicks. Remember to run all of your billings through the AR sub-ledger, AKA the detail listing the customers and how much they owe you. Scan the detail for anything that's "aged" significantly, like greater than 90 days. Are you likely to collect this money? If not, write it off!
Retainage, retainage, retainage! Keep track of retainage in your accounting system if you're not already! Billed to date should include the retainage amount, if any. If you're using Quickbooks you may not be doing so already! I've seen this left out on numerous occasions.
Other and Related Party Accounts Receivable: You'll want to make sure that money owed to you by someone else other than a project owner or general contractor for something other than the services you've provided is recorded to another accounts receivable account. It's money that's still owed to your company, it just may have different payment terms. Similarly, if another company you manage owes the company in question, you'll want to isolate that out as well. The key here is that everyone wants to know "IS THIS GOING TO BE COLLECTED? IF SO, WHEN?!"
Underbillings: Check out Parts 1 through 4 of the WIP series in previous posts!
Fixed Assets: My favorite! Just kidding. Where to begin?
- Fixed Asset Listing: Do you really have all of the equipment, vehicles, furniture, etc. on the list? It's likely you got rid of something but never took it off the list. Don't worry, it's probably fully depreciated by now so removing it won't have an effect on your bottom line or income statement.
- Fixed Asset Additions & Disposals: If you don't keep track of your fixed assets yourself, organize the information for your CPA! Check out the following link for some pointers! https://www.thewipreport.com/post/fixed-assets-boooooooring-sort-of. This will save a lot of time!
- Accumulated Depreciation: Have you been recording your depreciation on the tax-basis, or accelerated method? This would result in a lower net fixed asset balance, which could significantly impact your bonding capacity. In that case you'll want to consider using the straight-line method.
Accounts Payable and Retainage Payable: This is a great one! In the CPA world, completeness is key. Just because you recorded a liability doesn't mean you deserve a cookie...yet! Is that all you should've recorded?! It's likely the answer to that question is no. Don't worry, materiality plays a big role here, AKA the the dollar amount of what you excluded. If it's not a significant amount (significance depends on your overall financial position), you shouldn't lose sleep. Come up with a good cut-off date for your payables. Just because you received an invoice in February for services provided in the previous year doesn't mean you don't have to record it (unless you're on the cash basis). So keep in mind the invoices you haven't received yet. Reach out to your subs, and don't forget to record retainage payable.
Accrued Liabilities: Similar to accounts payable above, completeness could be an issue. Payroll and related liabilities are the usual suspects here. Did you record payroll expense and the related liability for the last period of the fiscal year? This may be OK if the amount isn't significant. You should technically record payroll expense through the last day of your fiscal year even if you don't pay it out until the following year. Also, always check to see if your balances are changing or if have debit balances. Stale balances are a red flag! Something may be broken!
Overbillings: Check out Parts 1 through 4 of the WIP series in previous posts!
Notes Payable: Barn burner! Keep a detailed list or payment schedules for all of your notes! Especially, if you have compiled, reviewed or audited financial statements, you'll want to know the principal balance, interest rate, installment amounts and number of payments. Don't wait until year end to find out how much you owe in total! You can ask your CPAs for assistance on this. Know your obligations. All of this feeds into your cash flow projections! Don't forget to record interest expense either. The installment amount doesn't all go to the principal balance, so make sure you're recording interest expense for every payment.
Common Stock: Who owns the stock and how many shares do they own? Always keep a list of shareholders and the number of shares held by each of them. What's your policy for buying back stock in the case of having multiple shareholders? Additional paid in capital and treasury stock may need to be adjusted if you've bought back and reissued stock.
Retained Earnings: Why won't you roll?! The prior year balance in retained earnings plus your prior year net income should equal the balance in retained earnings for this year (excluding distributions), AKA rolling. If it doesn't, you're not alone! You may have cleared something off of your bank reconciliation or deleted a payable or receivable that threw off your prior period balances! You also may not have recorded all of your CPAs entries. And so the puzzle begins! There are many ways to troubleshoot. Enough to create a separate post but one of the first things you should do when you close out the old year is "roll" retained earnings.