With New Clients, We Start on the Balance Sheet
- Gabriel Velez
- Apr 7
- 3 min read
Your income statement is lying to you.
That might sound dramatic, but it’s true more often than you’d think. When we take on a new client at Tehrani & Velez LLP, we don’t start by looking at their revenue or profit margins. We start with the balance sheet. Why? Because that’s where the truth lives.
I’m Gabe Velez, CPA and Partner at T&V, and I’ve reviewed hundreds of financials. Every time, my first stop is the balance sheet. It tells me everything I need to know about the health of the books and gives me a window into the business’s history, choices, and trajectory.
In this post, I’ll break down four core balance sheet concepts every business owner should know—and the three red flags we look for first.
The Balance Sheet vs. The Income Statement
Unlike the income statement, which reflects performance over time, the balance sheet is a snapshot. It captures your company’s financial position at a specific point—what it owns, what it owes, and what’s left over.
Lenders, investors, and owners all rely on it to assess liquidity, solvency, and risk. But here’s the key: If the balance sheet is off, the books can’t be trusted.
That’s why we always start there.
Balance Sheet Basics: The Accounting Equation
The balance sheet follows a simple equation:
Assets = Liabilities + Equity
Assets are what the business owns—cash, accounts receivable, inventory, property, and even intangible assets like purchased goodwill.
Liabilities are what the business owes—accounts payable, credit cards, loans, and mortgages.
Equity is what’s left for the owners after liabilities are paid. It includes owner contributions, retained earnings, and is reduced by distributions or dividends.
At all times, the balance sheet must stay balanced. Debits must equal credits. If that’s not happening, something is wrong.
The 3 Biggest Red Flags on a Balance Sheet
When we take on a new client, here are the top red flags we watch for:
1. Unnatural Balances
Cash, receivables, and inventory should almost always appear as positive numbers. If they’re negative, something’s likely broken in the data or how it's being entered. While there are some legitimate exceptions (like accumulated depreciation), most accounts should show positive balances.
2. Opening Balance Equity
This is an account QuickBooks and other software often use as a placeholder. It’s essentially a plug figure—used when someone doesn’t know where a beginning balance belongs. If we see this still sitting there after the first year, it tells us the books haven’t been cleaned up or reviewed properly.
3. Bank Reconciliation Issues
Some small differences between your bank statement and your books are normal due to timing. But if there are old checks from last year that still haven’t cleared, it’s a problem. These stale items usually need to be reversed or addressed.
Best Practices for Reviewing Financials
If you’re a business owner, here’s how to review your own financials with more confidence:
Start with the balance sheet. It’s your most reliable tool for checking accuracy.
Verify balances. Cross-check cash, loans, and other key accounts with external statements.
Dig into details. Use amortization schedules, loan docs, and supporting reports to understand the context behind the numbers.
Final Thoughts
If the balance sheet is wrong, the rest of your books are probably wrong too. Don’t skip straight to the P&L—start with the foundation, verify the numbers, and work outward from there.
Need help getting your books cleaned up or reviewed? We’ve got your back.
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