One of the most common frustrations that dealer/operators are confronted with is that bomb shell that the controller or the business managers drops without notice asking for money. I mean not just 10 or 20 thousand dollars but more like half a million at a time. They expect you to write a check on the spot and to them, since you are the owner you should have that kind of money on demand at your disposal. Whether you do or not that is grocery store management.

The other operational deficiency often experienced is not being well informed about certain assets and liabilities that reside on your balance sheet which might be distorting the reality and hardly ever looked at. Particularly if you are an absentee owner or a multiple store owner with general managers at the helm; or even just working with a controller who has been with you for a long time and has earned your confidence, you need to have intimate knowledge of every line on your balance sheet.  All the data that ends up on your profit or loss statement in essence flow from your balance sheet. In accrual base accounting what you record as profit is only real to the extend that there is not smoke screens or clutter on your balance sheet.

Intimate knowledge of your balance sheet accounts will save you from surprises such as:

  • Unexpected cash shortages
  • Distorted or inflated profit figures
  • Potential theft
  • Intentional or unintentional concealing of certain expenses
  • Distorted inventory values
  • Uncollected or overdue receivables
  • Warranty fraud
  • Over drafted accrual accounts
  • Working capital deficiencies due to misclassified assets and or liabilities
  • Excessive charge backs
  • Inflated parts inventory

The Balance sheet page of your statement does not repeat itself every month. Unlike the rest of the pages you do not have a month and a year to date figure to be able to determine if your month for a particular line item is out of norm compared to the YTD averages. Unless you have a photographic memory of all balance sheet line items you will not notice the changes from one month to another. The only solution to track the variations is building what we call a “Balance Sheet Trend Report” which is basically side by side display of your balance sheet accounts for a running 12 months and perhaps the annual average column for the last two years.

The next thing would be to absolutely learn what makes up the detail of all of the balance sheet accounts and understanding what the running averages are for each of them. Then your life is a bit easier since you will be able to ask questions to your business office once these numbers have changed significantly compared to averages. This would be the first step to understand what caused the change in a particular account and address it accordingly before it’s too late.

Of course, this within itself may not be enough to disclose inconspicuous changes that may have taken place either intentionally to hide something or innocently recording things into wrong accounts. For example, if a pack accrual account resides with other accrued liabilities, it would be difficult to see when pack account is over drafted if other parts of this account keeps reflecting the account balance at its consistent level. In other words, the overdraft would lower the balance while other newly recorded accruals might bring it back up since one is a credit the other is a debit entry.

Conversely if your business office records a bad receivable account on the liability side as a credit this would also lower your liability balance, but you won’t know why and or notice it. So, what is really the solution if trend report alone is not enough to monitor your assets and liabilities. You must have an outside and independent accounting firm to perform routine and periodic audits and only report to you. When selecting auditors, you must also make sure that they have no evident relationship with your controller or the general manager. In fact, if that status changes you should hire new auditors every other year. This will not only clean all your schedules but also will identify all the clutter and write off in your books thereby correcting the distorted profit or loss numbers and clean up your company’s net worth. Now you would be looking at a set of numbers on your balance sheet that reflect reality and can be used as a benchmark going forward.

In our line of work, we intimately work with our clients to do Trend Analysis reviews at least twice a year and also review their independent audit results. At a time like this when the buy/sell market of dealerships is very active, cluttered balance sheets may cause a deal fall apart during the due diligence process. Please feel free to contact me if I can be of help.

See you next month. Best…