One of the most important parts of the Treasurer’s Report is the balance sheet.
The Small Business Development Corporation of WA says,”The balance sheet is a statement of what a business owns (assets) and owes (liabilities) at a specific point in time. It lists the assets that the business owns, the liabilities owed by the business, and the value of the owner's equity (or net worth of the business).”
The balance sheet is a statement showing the financial health of the business and is a legal requirement for most organisations.
But how useful is a balance sheet? To most people who read it, all they see is a blur of numbers that mean very little. Indeed, even the full length balance sheet, usually compared to the previous year’s figures, means absolutely nothing to the layman so is there any real point in putting it in?
1. They are costly to prepare.
2. They take up time that the Treasurer could better use.
3. No one reads them anyway.
4. Very few people actually understand what they are reading.
5. The report is probably out of date by the time it is published so it doesn’t accurately reflect the financial position anymore.
6. One tiny mistake in the calculation of assets or liabilities can make the report invalid.
7. If you were debt free on 30th June but took out a huge loan on 1 July the balance sheet becomes irrelevant in your financial planning.
With all those negatives, I ask you for your opinion. Do you think that balance sheets matter?
4 comments:
Without a balance sheet there are no checks & balances. The critical account reconciiations are done in the BS. It may not be so important in terms of communicating to the board/members, however it is important in terms of ensuring the integrity of the P&L.
Balance sheets are important. Here is an example of why: A small grassroots club has found the ever increasing & unbudgeted costs of utilities and insurance has placed a huge burden on the club. To keep the club going, the Treasuerer decided to put the smaller accounts aside to meet the larger costs. Without experience & understanding, the Treasurer used a "cash basis" for all reporting to the club and governing bodies, believing that he only had to declare invoices that he had paid(because that is all he had been shown & all that the club's accounting system required).
The P&L showed a tight but managable state and as such no one was the wiser of the underlying problems developing.
Had the Treasurer been required to use a balance sheet, cash accounting could have still been maintained, but the balance sheet would have highlighted the significant debt owing to trade creditors that was growing rapidly. The problem only became realised by stakeholders when the Treasurer resigned. Whilst much of the problem in this case was due to the level of skill/knowledge of the Treasurer, recording unpaid invoices which are maintained on the balance sheet, would not have been too difficult a task.
Other situations where balance sheets are beneficial is when a business needs to recognise long term leases &/or loans. This allows you to track the amount remaining to be paid.
Also, without a balance sheet, how do you show how much money you have in the bank, how much you own, etc?
Balance Sheets should provide the key ratios that would be of interest to Directors eg quick asset ratio (liquidity) etc, but should be presented in such a way that the ration range is described ie below this ratio is not acceptebale, above this ratio is good, here is our ratio, and here is what it was last year, and here is the reason why it has changed. Hence balance sheets can be actually strategically useful
-Steve Bowman, Conscious-Governance.com
Thanks for your comments. Apologies for the late response, just realised they were here!
Anonymous - How does a balance sheet contribute to the integrity of the P&L?
In a grass roots organisation, if bills are paid on time and the bank reconciliation is presented, what value does a balance sheet add?
Steve - From my company director training I understand the ratios are important for strategic decision, however are the mums and dads in a local small sporting club (for example) going to comprehend the ratios? Would a balance sheet influence their decision making?
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