If you’re a small business owner, you want an accurate balance sheet for your small business. You really do.
An accurate balance sheet delivers several valuable benefits.
Accurate Balance Sheet Benefit #1: Obtaining a Loan
If your business needs or wants a loan in the future, the bank is likely going to want copies of full financial statements for your business. This includes both your income statement and your balance sheet.
That means if you don’t have an accurate balance sheet to provide your loan officer, it can upend your whole loan application.
Just so you know? Loan officers don’t always catch wacky-looking errors on balance sheets, but the underwriter certainly will.
What’s more, you’ll almost certainly be considered responsible for giving the bank accurate information for the sake of approving the loan.
And this awkward reality: Your accountant likely isn’t going to have time to help you quickly fix errors in your balance sheet if you ask for this help when you’re already midway through the loan application.
Accurate Balance Sheet Benefit #2: Protecting Yourself in a Legal Dispute
If you’re a small business owner and you find yourself in a legal dispute, such as a divorce, the court is often going to expect a balance sheet for your small business as part of the process of figuring out your net worth.
Balance sheet errors that overstate or understate your equity in the business are both really undesirable in this scenario, each for their own (hopefully obvious) reasons.
Accurate Balance Sheet Benefit #3: Selling the Business
Someday you might want to cash out by selling your small business.
If you do, any sensible buyer is going to want an accurate statement that explains to them what assets they’ll be buying, and possibly what liabilities they’ll be assuming.
You balance sheet provides this information in a commonly-understood, well-designed format.
Accurate Balance Sheet Benefit #4: Tracking Partner Capital Accounts
An awkward comment: Partner capital accounts are one of those things that’s tempting to ignore in the books as years go by, since it’s one of the more complicated aspects of partnership general accounting.
Furthermore, most years most people seem to not really care what their partnership K-1 Box L says.
This tends to change, however, at key milestone events in a partnership.
For example, when a real estate investment partnership sells a property and calculates liquidating distributions, partners will care—a lot—about partner capital accounts.
Unless the partnership has been using a dead-simple allocation formula, in our experience, often there’s at least one partner who ends up unpleasantly surprised to find out how much less cash they’re getting out of the deal than they thought.
One way to prepare to deal with this issue? An accurate balance sheet that keeps partners informed of who really is entitled to what—including correct liquidating distributions.
Accurate Balance Sheet Benefit #5: Finding Hidden Errors on the Income Statement
A final benefit of a good, accurate, up-to-date balance sheet: Sometimes visible errors on the balance sheet are how you can find errors in your income statement that aren’t obvious on their own.
For example, weird A/R balances sometimes result from errors that also cause sales revenue to be misstated. And erroneous payroll liability balances sometimes result from errors that also cause payroll expense to be misstated.
Finding errors on your income statement not only helps you run your business better by providing you with high-quality information about how much money your business makes; it also helps keep you out of trouble with the IRS.