Insights: Article

What’s in Your Balance Sheet?

By Tom Goekeler

November 26, 2018

Many dealers spend most of their time focusing on the profit and loss of their dealership. While that is certainly important, without adding some understanding of what is in the balance sheet, the dealer may not be getting a true picture of their profitability.

We are often asked by dealers to review their financial records in detail to either assist them with a specific issue, give them reassurance that controls are in place and working, or just as a periodic check-up. When we do these operation reviews, we spend most of our time reviewing the dealership balance sheet. Quite simply, this is where the bones are likely buried. The accuracy of your balance sheet is directly connected to the accuracy of your income statement.

Some common examples of balance sheet items that can distort profitability include:

  1. Unreconciled cash accounts
  2. Old and/or uncollectible accounts receivables
  3. Old and/or uncollectible factory receivables
  4. Overstated parts and used car inventories
  5. Improper/incorrect prepaids
  6. Unreconciled factory open accounts

The phrase “water in your balance sheet” refers to overstated assets or understated liabilities and includes these items as well as others. Every dollar of water represents a dollar of overstated income either in the current or previous periods.

Let’s look at an example related to prepaids. Assume you paid your law firm $50,000 in June for some legal work related to an employment law claim. You tell your office manager to charge this amount to prepaids and expense it out over the next six months, so the current month doesn’t look so bad. Are you sure this is happening, though? If it isn’t, your year-end profit will be overstated by $50,000. We see this happen frequently with insurance, advertising and other expenses. In addition, when employees are paid on the net income of the store, you may see some surprising items in prepaids.

When we perform operation reviews for clients, we review journals, schedules and reconciliations to ensure the balances are correct and to identify issues we believe need your attention. Focusing solely on the income statement can be very misleading and give you a false sense of how well your dealership is operating. If you don’t have confidence in your balance sheet, you shouldn’t have confidence in your income statement. An operation review can give you that confidence or help you make the changes necessary to get there. Contact your local Eide Bailly professional or a member of our dealership team today to get started.

Make Your Business Dreams a Reality.
You’ve built a business and made your dream a reality now it’s time to explore how better to organize and/or outsource your accounting function.

Latest Insights

February 12, 2019
Article
Your employees are the people most likely to catch fraud in the workplace. But how can you help them get over their fears of reporting it?
January 29, 2019
Article
Do you own or plan to build or remodel 50,000 or more square feet of real estate? Are you looking for additional tax deductions? If so, you could likely benefit from energy efficiency deductions available under Section 179D. Here are some common…
January 15, 2019
Article
The back and forth on tariffs is wreaking havoc for many businesses. Here’s what you can do to help ease the pain.
January 7, 2019
Article
Start the new year off right by making sure your expense reimbursement policy is compliant with IRS and DOL laws.
January 3, 2019
Tool
The 2018-2019 Pocket Tax Guide provides a quick view of tax updates, current rates and new tax law summaries for business, estate, general and individuals. It has been designed to be compact and folded into a pocket sized pamphlet.
January 3, 2019
Article
As 2019 begins, it’s important to ensure your accounting software reflects new limits, changes to minimums and more. Here are some changes to keep in mind.
Find A Location