The following is an article “Getting Your Balance Sheets To Balance” by Marc Primo.
As every accountant knows, getting a balance sheet to actually balance is a lot easier said than done. Even though you think you have perfected a foolproof template, oftentimes the root cause of discrepancies in your final cash balance is not your balance sheet but the cash flow statement.
To ensure you arrive at the correct ending balance, the following are practical tips that focus on your cashflow statement which ultimately determines whether or not you are on the right track to perfecting your financial balancing act. As with anything that involves numbers, all it takes is one erroneous entry to throw everything into disarray, which can be very frustrating, not to mention incredibly cumbersome.
Historical data — Since your previous months’ numbers are all part and parcel of your ending balance every month, it is therefore crucial that all historical cash flow statements have the right formulas in place to ensure the continuity and accuracy of money going in and out of the business. These should typically include cash flow from operations, net income directly from the income statement, and depreciation backed out of the cash flow.
Assets & Liabilities — In order to determine your asset line, simply subtract the current period from the previous period in the cash flow statement. As a rule of thumb, an asset’s increase on a balance sheet from the previous year indicates that it was a use of cash. On the other hand, an asset’s decrease would indicate that it was a source of cash. If there is an increase in overall receivables, this would indicate a failure to collect thus would classified as a use of cash, while a timely collection that effectively lowers the overall payables would be a source of cash. Liabilities, on the other hand, are the polar opposite of assets, wherein it becomes a source of cash when it increases and a use fo cash when it decreases.
The final balancing act — The best gauge of knowing that you are on the right track is to check if your beginning cash plus the change in cash equals your ending cash balance. Cross check this with your historical, where the ending cash balance from the cash flow statement must be equal to the cash on your balance sheet. If they match, then congratulations, you are on the way to becoming a master of one of the most important financial statements when running a business. If there are still discrepancies, sometimes backtracking step by step will help you pinpoint the error quicker than starting all over from scratch.