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If business owners are not able to understand their business finances, and the important financial decisions they make end up being uninformed, and very often result in that business decisions says CFO services . Since 50% of all businesses are out of business within five years, and 29% of those failed businesses say that the reason why they failed was because they ran out of cash understanding business finances can help business owners make better financial decisions, and therefore increase their business significantly and in positive ways.
This can be fairly simple for businesses, but it takes discipline says CFO services. The first thing that they should do, is understand what expenses are going to appear on their income statement. The first thing that business owners need to understand, is that their own salary will not appear on their business expenses. The reason for this, is because business owners should not use their own salary as a way of determining how successful their business is. Plus, the salary that they take is actually corporate tax strategy for their personal life, and should factor in to a business decision. Ultimately, the business owner can have two reports that can help them, what the business did before the owner took salary, and what the business did after the owner took salary.
Business owners should also understand that asset purchases do not belong profit and loss statement says CFO services. The reason for that is because if the assets appear on the profit and loss statement, that would give the month that was purchased and huge negative hit which impacts the profit and loss statement. Since the month that the asset was purchased in, might not necessarily have been a bad month. Since the vehicle will be used in the business over the next several years, whatever the useful life of the equipment is, it should be impacted on the income statement that way rather than one massive hit at the beginning.
Another thing for business owners to understand when there reviewing their financial statements, the principal portion of the loan is not going to appear on the income statement, however the interest will appear on the profit and loss statement. CFO services says that business owners need to understand that even though the principal does not appear on the income statement, is still will need to pay that every single month. However the principal loan will actually appear on the balance sheet and it will be reduced every month that the business owner pays off more of that loan.
When reviewing all of their financial statements, business owners should keep in mind that a good rule of thumb is to look six months at a time their income statements. This way, business owners can see how their business is trending, and if it’s going up, down or if there are mistakes. CFO services says that it will be very easy and very clear to see, especially the more often a business owner gets into the habit of reviewing their financial statements.
One of the most important is employees that entrepreneurs can impact their business says CFO services, is by simply learning how to read their financial statements. Business owners who make important decisions based on profit and loss statements that are incorrect, or on a statements that they don’t completely understand, tend to make poor decisions that can end up impacting their business very negatively. To avoid making negative business decision, business owners can very simply learn how to read their financial statements properly in order to positively impact their business.
The first thing that business owners should understand is understanding income statements. It’s extremely important that the business owner has the income statement categorized and organized in a very specific way says CFO services. The first thing is, that the income statement should be numerically dissenting order. The reason for this, is that there organize this way, it’s very easy to see what is providing the biggest financial impact on the business because it appears at the top, what is providing the least financial impact on the business because it’s going to appear at the bottom. If business owners want to reduce costs in their business, looking at the very top of their income statement is a good place to start. This way the statement becomes an extremely easy to read tool.
Another thing that makes the income statement is very easy to read tool says CFO services, is that it is easy to read. Many business owners have a hard time resisting try to put lots of information into the income statement, by creating many subcategories. Unfortunately, this is counterproductive because the more subcategories there are on the list, the harder it is to read, and less useful it is. Reviewing statement is most powerful when all of the information is on one page.
When business owners are looking at their income statement, a very simple way that they can look for errors, is by looking for any numbers that are negative in the report. CFO services says that if there is a negative number on income statement, 90% of the time it is a misclassification, so business owners can use that as a way to figure out if their report has errors on it.
When they look at their income statement, they should understand direct cost versus general expenses. Direct cost are the costs that a business owner will incur simply by doing the work of their business. CFO services says that this includes labour and supplies. The general expenses on the other hand is the expenses that are going to exist in the business whether they are invoicing the jobs or not. Examples of those are rented, administrative staff as well as office supplies.
CFO says that by understanding their profit and loss statements, business owners can significantly help their business by being able to understand financially their business.
