Why Ignoring Your Balance Sheet Could Cost You Thousands: Susan’s Mistake

Most business owners wouldn’t knowingly hand over an extra $50,000 a year to the IRS. But that’s exactly what Susan, a SAAS business owner, did, without even realizing it.

It all started when Susan noticed an unusual $350,000 balance in her QuickBooks register. She knew her bank account only had about $20,000 in it. After reaching out to an accountant, she uncovered a major issue: duplicate revenue entries. Her bank account was feeding transactions into QuickBooks, and so was her sales system, but they weren’t syncing properly. Every sale was counted twice, inflating both her bank balance and reported income.

The Overlooked Power of the Balance Sheet

Most entrepreneurs focus on the Profit & Loss statement, thinking it’s the best snapshot of business health. But the balance sheet is just as critical. It confirms whether the P&L can be trusted. Your balance sheet represents your business’s assets, liabilities, and equity as of a specific date. Reviewing your balance sheet can help you identify issues like incorrect balances, duplicate entries, or outdated accounts.

In Susan’s case, if she had been reviewing her balance sheet regularly, she would have seen her cash balance get out of whack. Her balance sheet could have alerted her to the error before she paid $150,000 extra to the IRS.

How to Review Your Balance Sheet to Identify Issues Early

Here are three simple steps to use your balance sheet effectively:

1. Verify All Accounts: Ensure every listed account is legitimate and current. If something looks off, like an old loan for a sold asset, look into it. You should know what every account is on your balance sheet and why it’s there.
2. Check for Reasonable Balances: When reviewing your balance sheet, make sure the balances are reasonable. If a bank account shows way more (or less) than you expect, investigate. If you show a significant balance in your accounts receivable, but you know your customers don’t owe you that much, you need to review further.
3. Watch for Negative Balances: Negative numbers in accounts like loans or bank balances often signal mis-recorded transactions or possibly duplicate entries. Negative balances need to be investigated

A Costly Lesson

Susan eventually corrected the mistake, but not before spending $20,000 on accounting help and amending three years of tax returns. Worse, the cash flow hit nearly sank her business, forcing her to sell property to stay afloat.

The takeaway? Don’t skip your monthly balance sheet review. A quick check could save you from massive headaches and financial losses.