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Mar. 9, 2009: How to chart a true course to a solid economic future

The newly elected Barak Obama was being interviewed by Time magazine last December as its person of the year. He was talking about what had to be fixed in order for us as a nation to regain solid financial and economic footing. After first referring to public trust, Obama made a comment about the necessity of having balance sheets that could be relied on.
It really struck me that Obama would refer to such an arcane accounting concept as “balance sheets.” I was first surprised that he was conversant with the concept, but even more surprised that he would mention it in this interview setting. Who, besides accountants, cares about balance sheets and would bring it up during a personal interview? Not one in a thousand people would understand the import of this comment, but he was dead on.
And suddenly here it was again. It was President Obama’s first news conference just days ago, and the meeting was dominated by the economy. Amidst all the talk about what we need to do, there it was: “…and balance sheets must really mean what they say…” I would expect to hear such a comment from a Mitt Romney, or a Ben Bernanke. But to hear it from a newly elected — nonaccountant — president, I was amazed.
Because, all accountants know that no matter what the P&L may say, no matter what you say you have done in sales, in margin or in the expense section, if it doesn’t show up on the balance sheet, it didn’t really happen. Use whatever word you want: true, reconciled, confirmed, whatever — if the balance sheet is right, everything else is right. And, if the balance sheet is wrong, everything is wrong. This is a basic truth about accounting, and here’s why: The Profit and Loss statement records actions. You can’t hold a sale in your hand. It is the process of inventory going out and money coming in. Expenses? You can’t put an expense in a bag. Employees show up, and we give them money. The gas we put in the truck is burned up. The windows that were dirty are now clean. Action in, money out. All intangible.
But the balance sheet has things that you can touch. You can see them. You can hold them. And most important of all, you can count them. You say you have $100,000 in contracts in transit? Show me. If I can find only $80,000, I go with the $80,000. You say your payables are at $800,000? If I find $900,000, we go with the $900,000.
By the time we go through every account on your balance sheet, count stuff and reconcile it to the real world, we have the truth about your business position. That is what our new president was referring to. He got it. Without balance sheets that are based in fact, we are fooling ourselves. As a nation, we must demand accurate balance sheets, at every level, if we are to chart a true course to a solid economic future.
This includes you. You have seen, time and time again, numbers that you know are not right on your balance sheet. You question them, and the bookkeeper says that she or he will have to “adjust” it. Next month it is the same, just some other account. And finally, after months, even years of this, you give up, give in and look only at the bottom line. If that, even. Too many mistakes over too many years in too many areas. There seems to be no way out. So you live with it.
But there is a way. No, nobody has time enough to go back and redo End of Days, or research journal entries from months ago. But you can count parts, check VINs, review AR and total AP. This is relatively short work compared to reviewing all the checks you cut last year looking for errors. The accounting term is “reconcile the balance sheet.” Any CPA office will know exactly what you mean if you ask for that.
So as a nation we are recognizing that we must expect — no demand — better accounting. It is critical to our very economic survival. Looking back, we can see the beginnings of our problems in the collapse of the big six accounting firms — when Enron and others were able to fool the auditors with bogus assets and mythical subsidiaries. That first step on this slippery slope has led from bogus assets, to toxic ones, from mythical subsidiaries, to ponzied hedge funds and from bungled oversight, to bundled mortgages of little or no worth.
Don’t let this happen to you.
Focus on your balance sheet. Make someone prove every number, every month. Don’t let one funny number go unchecked. Our industry is not known for having expensive, high-octane accounting people running our financials, so you have to step up and set the expectation. Do it, and get accustomed to the peace of mind that comes with knowing the truth of things. Good or bad, establish it. Then, and only then, can you chart a course through rough waters to both survival, and success.

Hal Ethington has been associated with the powersports industry for more than 30 years. Ethington is a senior analyst at ADP Lightspeed. He can be reached at Hal_ethington@adp.com.

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