“I spend more time looking at balance sheets than I do income statements. Wall Street really doesn’t pay much attention to balance sheets, but I like to look at the balance sheets over an eight- or 10-year period before I even look at the income account because there are certain things that are harder to hide or play games with on the balance sheet than with the income statement.”
Here’s a pretty typical business situation: you’re getting ready to start a new customer project and they send you a $5,000 upfront for the job.
Where does this belong in your financial statements:
Book the $5k as sales/revenue
Customer deposit as an asset on the balance sheet
Customer deposit as a liability on the balance sheet
Cash in the bank
Technically, it’s both cash in the bank and a deposit liability (money that doesn’t belong to you yet; in the case where the customer cancels and asks for their deposit back).
Fair enough, that was a bit of trickery, but I want to reinforce this concept that business activity shows up in more than one place on the financials.
If the income statement is the star of the show, and the cash flow statement is the least looked at, that leaves the balance sheet as perhaps the most abused/neglected of the three statements.
It takes extra work, care, and attention to maintain a clean and accurate balance sheet, and for some of us that might not feel worth it.
Let me show you why it is…
