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E-Myth – “Why most small businesses don’t work & what to do about it”

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Cfo Services | The Importance Of Profit And Loss Statements

Running the business has significant challenges associated with it says CFO services. If business owners are not comfortable reviewing their financial information, they may be making decisions based on incomplete or incorrect information. Doing so, results in business owners making decisions that may negatively impact their business. As Warren Buffett said, “accounting is the language of business”. To help business owners understand accounting, and their finances in business, can help them immensely in running a profitable organization.

Almost all business owners will have loans from time to time, CFO services says that it’s important for entrepreneurs to know how those loans are going to appear on their income and profit and loss statements. Many business owners don’t know this, but the principal portion of the loan will not appear on their income statement, however the interest will appear on their profit and loss statement. It’s important to know that, especially when business owners are making payments based on what’s included in their income statement, they need to include the payment for any loans that they have. The principle of their loan will appear on their balance sheets and as they pay their loan off, that amount will be reduced over time.

It’s also important to know that asset purchases should not appear on their profit and loss statement as well. CFO services say that the reason it doesn’t appear on their profit and loss statement, is because while the business owner receives it in one month, it actually will advertise in the business over the next several years, or the useful life of that equipment. If it appears only profit and loss statement, it will end up making the one month it was purchased look like it took a massive negative hit, even though that might not be accurate to how the month looked in all other ways. Business owners should be very aware that asset purchases will not appear this way.

Many entrepreneurs count their salary that they take out of their business as an expense of doing business, but CFO services says that this is not the case. It is important for a business owner to separate their salary from all other expenses. The reason for this is because an entrepreneur should not be utilizing their salary as a way of figuring out how successful the business is. The salary should be kept separate from other business expenses and away from the activity of that business.

When reviewing their statements, business owners should also get into the habit of looking at their comparative monthly income statements at six months at a time. The reason it’s important to look at them six months at a time, is because if an entrepreneur is looking at each month separately it may be very hard to see errors, or any anomalies that may have happened in a single month and did no other month. By looking at six months of time, business owners can get a reasonable idea of how profitable the business is where they will get the same information simply looking at one month of time.

Out of all the decisions a business owner is faced with in their business says CFO services, how to reduce their expenses and stay profitable is some of the most important decisions. What can help a business owner make the best business decisions, is learning how to read their income statements. Whether they don’t know how to read, or don’t know how to tell if they are correct, by learning how to look at their finances in business, business owners can learn how to help the business become profitable not only by reducing costs and minimizing expenses, but by being able to make larger financial decisions without having to wait for the financial year end of their business to be returned to them. This kind of proactive work on the finances, can help business owners stay profitable and avoid cash crunch issues.

It’s very important that a business owner gets very comfortable with looking at their income statement is CFO services. However, there may be errors of the income statement especially if it’s an interim statement, because interest statements are not as strict be checked for errors as they are at year-end. A business owner should be able to look at their balance first in order to understand what that looks like, before moving onto their income statement.

In order to accurately be able to review their income statement, business owners should keep in mind that it’s most powerful in its simplest form. CFO services say that many entrepreneurs try to create so many subcategories, because they think the more information they give their income statement the better it will be, but this is actually counterproductive. If business owners are able to minimize the subcategories they have, the income statement can be a powerful single page that is easy to read, and therefore easy for business owners to make business decisions from.

It’s also important how the income statement is organized says CFO services. The best practices is for a business owner to organize their income statement numerically descending in order. Although many business owners are tempted to have their income statement be organized alphabetically, it’s far more impactful for it to be organized with the most expensive items being at the top of the list, and the least expensive at the bottom. The reason why this is a good idea is because if the business owner would like to know how to minimize their expenses very quickly, all they need to do is look at what’s at the top half of that list, and spend their time in minimizing those expenses. Expenses that appear at the bottom are often very negligible, therefore much more difficult to make a significant impact on the bottom line by changing those. Entrepreneurs should also understand that if there is a negative number of this income statement, it most likely indicates an error. Usually it’s a misclassification, they can be easily fixed.