Whether you are planning to sell your business to family, employees, or outsiders, you must show a potential buyer clean, accurate financial statements. 

There are 12 common financial statement mistakes that you must avoid. I’ve written about operating your business on a cash basis rather than an accrual basis, a profit and loss statement date that doesn’t match the balance sheet date, a balance sheet that doesn’t balance, a negative gross profit, and negative cash. This month, I’ll write about the final two current asset mistakes.

Remember, to present your company well, you must have clean financial statements showing that your company is growing in profitability.

Mistake #6:  Negative Accounts Receivable

It is unlikely that you have negative accounts receivable on your balance sheet.  

Negative accounts receivable means that many customers have overpaid, and you owe them a refund.

You might have a few customers who have overpaid by a few cents or a few dollars. It is very unlikely that your entire customer base has overpaid their bills.

How do you get negative accounts receivable on your balance sheet?

Generally this happens when you do not have customer deposits set up in the current liabilities section of your chart of accounts.

Your salesperson makes a sale and gets a deposit for the work to be done. You enter the deposit into your software. It is programmed to look for an invoice for this job. When it doesn’t see one, it is programmed to record the deposit as a negative accounts receivable – your company got money for work you haven’t done.

You must map out the program   differently. With the customer deposits current liability account, the software is programmed to record that money received as a deposit against future work – a current liability rather than an inaccurate accounts receivable balance. 

Then, when your company does the work and creates the invoice, the customer receives an invoice showing the deposit and the remaining amount due. 

Every week, when your bookkeeper produces your weekly cash flow report, she should print out an accounts receivable aging report. Look at this report. Make sure there are no large negative balances. If there are, then your accounts receivable is inaccurate.  

You need an accurate report of the monies owed to your company. A negative accounts receivable value prevents you from knowing the total amount of money you can expect. Without knowing your true accounts receivable, it is impossible to accurately plan cash flow and know the true financial health of your company.

Mistake #7: Negative Inventory, No Inventory, or Inventory is the Same Value Each Month

If you have a negative inventory balance, this means that you have phantom inventory! It is impossible.

Generally, this happens when your bookkeeper doesn’t enter materials that were bought for inventory. Then, the decrease in inventory is taken as the materials/equipment are used for jobs. Soon, you have negative inventory.

It is important to identify materials bought for future use (i.e., inventory) and materials bought directly for use on a job (i.e.,) cost of goods sold material expense. Those materials bought for inventory are accounted for as the cost of goods sold when they are used on a job.  

Our industry has inventory. If you don’t have inventory on your balance sheet, or it is the same number all the time, a potential buyer knows that your company does not have accurate financial statements. 

You might ask, why do I need inventory on my balance sheet? If you don’t have inventory on your balance sheet or the same inventory value each month, then your profits are lower based on the value of your inventory. You don’t know if you have accurate pricing or gross margins. And you definitely don’t have an accurate bottom line.

Even more important, if you plan to sell your business and inventory is not on your balance sheet, your purchasers won’t tell you your profits are lower than they should be.

If you have $100,000 in inventory, you’ll receive $400,000 to $600,000 less for your business than you should receive. If you have $200,000 in inventory, then you’ll receive $800,000 to $1.2 million less than you should receive.

Is receiving a million dollars less than you should receive worth NOT putting inventory on your balance sheet?  

Accounting for inventory is easy after establishing a process.  However,  if it has never been there, putting inventory on your balance sheet is a discussion you should have with your CPA because of the tax implications. Remember that profits in previous years have been lower than they actually were, and this has affected your income tax reports.  

Ruth King has more than 25 years of experience in the HVACR industry and has worked with contractors, distributors and manufacturers to help grow their companies and become more profitable. Contact Ruth at ruthking@hvacchannel.tv or at (770) 729-0258.