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The first thing that entrepreneurs should keep in mind with their loans and leases is they need enough income being made in their business to cover the principal payments. Before an entrepreneur goes to apply for financing, or before they accept financing, they should look at their financial statements in order to ensure they have enough profit. If they are not making lease and loan payments with profits, they will risk having a negative balance in their business. Do this often enough, and an entrepreneur will run out of money. Therefore, before they even accept a lease or loan, entrepreneurs should look at their financial statements to be able to understand if they are going to be able to pay for that.
Once they have determined they have enough money to pay the principal payments, the next thing that an entrepreneur should do is an account for each lease and loan on the balance sheet in separate loan accounts. This is going to help an entrepreneur be able to see all of the different loans and leases they have in their business very easily says Edmonton bookkeeping. When they review their balance sheet on a six-month comparative statement, they should be able to see that all loan accounts have regular decreases the amount outstanding, so that they can verify that they are making payments regularly.
In order to ensure that leases and loans are accounted for properly on the balance sheet, entrepreneurs should understand that whether it is a lease or a loan, changes where it appears on the balance sheet. Because loans are going to end up with an entrepreneur owning an asset, it should be in the asset section of the balance sheet. Leases, on the other hand, do not end up and ownership of an asset, and therefore should be entered into the liability section of the balance sheet.
Not only is it important to ensure that the loans and leases are entered correctly on the balance sheet so that they end up with accurate cash flow, but accurately reporting this can help an entrepreneur get more financing. Banks like to see more loans in a business, because that indicates that an entrepreneur is building equity, and when they are done making the payments, the have additional money that they can spend on other things, as well as and assets. Leases, on the other hand, are simply a liability, and if an entrepreneur ends the term of the lease, it is typically because they have signed a different lease, not because they do not require the asset or the thing that they are leasing anymore.
It is very important that entrepreneurs learn early on in their business how to read their financial statements says Edmonton bookkeeping. One of the worst assumptions that a business owner can make, is if they are good at delivering the product or service that they offer, they will be good at running the business. Running a business is a very different skill set to providing excellent products and services. Therefore, entrepreneurs who understand this, and learn early on in their entrepreneurship will be able to make more informed financial decisions earlier on, that can help them avoid problems and build their business.
One way that an entrepreneur can ensure that they are ending up with accurate financial statements so that they can make informed financial decisions is understanding how to enter into their accounting software their loans and leases. Edmonton bookkeeping says that when entrepreneurs are able to understand this, they will be able to make better decisions in their business. For example, because leases do not end up with an asset being owned at the end of the term, it is actually considered a liability and should be entered into the liability section of the balance sheet. Loans, on the other hand, end up with an entrepreneur owning an asset and should appear on the asset section of the balance sheet. By putting loans and leases in the accurate place on the balance sheet, they will have a more accurate view of the cash flow in their business.
It is also important that entrepreneurs understand that leases and loans get put on the balance sheet because that tells the overall financial position of the business. Many entrepreneurs mistakenly believe that leases and loans should be entered into the income statements, representative of the month that they signed the loan or lease paperwork. However this is not correct says Edmonton bookkeeping because the item that they are leasing or loaning is going to benefit the business as a whole, and for a longer period of time then is represented in the income statement. By understanding that, entrepreneurs can ensure that there entering loans and leases on the correct financial statements, and in the right place as well.
The only other thing that entrepreneurs need to understand, is a capital lease should be considered a loan because the aim of the capital lease is to offer an entrepreneur an opportunity to buy the asset at the end of the lease, which makes it legally more like a loan than a lease.
When entrepreneurs learn early on in their business how to read their financial statements and understand their cash flow, they will be able to make informed business decisions that can help them strategically grow their business, or avoid making financial mistakes. When they understand this, it will increase their ability to become successful as an entrepreneur.
