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

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Outsourced CFO | correctly entering assets on financial statements

The importance of the accuracy of interim financial statements cannot be overstated says outsourced CFO. Entrepreneurs use this information to help make informed financial decisions in their business. If the interim financial statements that they used to make those decisions are inaccurate, they are at risk of making poor financial decisions, and not even know it. One way that entrepreneurs can ensure that they are working have the most accurate interim financial statements as possible, is learning how to book their fixed asset purchases in their business and the difference between assets and expenses and how it that impacts their financial statements.

The first thing that entrepreneur should learn says outsourced CFO is the difference between an asset and an expense. When an entrepreneur makes a purchase, they should be asking if what they are purchasing has a useful economic benefit of over one year. If it is yes, then that is an asset in their business. An example of this, is a doctor who is purchasing an x-ray machine for their business. If the purchase does not have a useful benefit over a year, then it should be considered an expense of the business. A great example of this is radio advertising. It is going to provide a significant value to the business, but once that radio spot is over, it is not going to continue providing useful value to an entrepreneur.

Entrepreneurs should understand what common types of fixed assets are in businesses. Vehicles, especially for businesses that are contractors. Computers, real estate and major equipment and many entrepreneurs are surprised to hear that leaseholder improvements also count as fixed assets. Outsourced CFO says that the reason for this is because their continuing to provide value to the entrepreneur long after the purchase. If they put a new roof on their business, they are going to continue to be sheltered and be able to operate their business with a roof over the head for many years.

A great rule that entrepreneurs can use to help save significant amounts of time when they are figuring out what their fixed assets are in their business, is not to put assets under a thousand dollars in their income statements. The reason for this says outsourced CFO, is because it can take a lot of time to calculate and then to continue to depreciate those assets every year. Business owners often have to make decisions on the best use of their time, and this is one that trying to calculate all of the assets under thousand dollars is not always worth an entrepreneurís time.

By understanding the difference between fixed assets and expenses, entrepreneurs can make great decisions in their business by having the most up-to-date and accurate interim financial statements for their business. If they go to make financial decisions using interim financial statements that are not accurate, it could be unwittingly putting their business at an unnecessary risk. In order to avoid that, entrepreneurs should do it they can to ensure the accuracy of this information.

Outsourced CFO | correctly entering assets on financial statements

Interim financial statements can be an extremely beneficial tool for entrepreneurs to use to make financial decisions in their business says outsourced CFO. However, if entrepreneurs are not appropriately classifying their asset purchases, they can end up having an accurate financial statements and putting their business at risk. Since 50% of entrepreneurs fail in the first five years, and 29% of those entrepreneurs say the reason why their business failed is because they ran out of money, business owners can work to avoid this fate simply by ensuring the accuracy of their interim financial statements.

One way that entrepreneurs can work to ensure the accuracy of their interim financial statements is understanding how they are asset purchases are going to show up on their income statements. Contrary to what a lot of people say says outsourced CFO, the asset purchases should not show up on the businesses income statements. At least, not at the time of purchase. If that was the case, and would significantly impact the finances of the month that that purchase was made. In order to avoid this from happening, the asset purchase should directly bypass the income statement and go directly onto the balance sheet initially. However, as this asset purchase depreciates, it will show up on the income statement for the value that it has depreciated.

Entrepreneurs should understand that the way this is calculated satisfies the accounting principle of matching principles. This means that expenses match the income that they generate. When looking at the income of one time period, it should match the expenses of the same time period. Outsourced CFO says that this is important to note, that entrepreneurs can understand how their interim financial statements can balance.

Entrepreneurs should also understand that when they are making fixed asset purchases in their business, it is considered good practice to help stay organized by setting up subaccounts in their financial statements for these asset purchases. What this will do for a business owner is help keep them organized with all the assets that I have. This is important especially if an entrepreneur is planning on selling those assets once they have reached the end of their useful life. An example of an asset purchase that is most likely to have value after a businesses done with it is a vehicle. And businesses that need a lot of vehicles often try to sell those vehicles or is much as they can to recoup their costs. Outsourced CFO says that computers are not usually resold due to typically becoming obsolete after they are purchased.

By understanding how they are asset purchases are going to look on their income statements, and how to keep them organized so they can sell them later, entrepreneurs can end up with the most accurate interim financial statements possible. This is going to help ensure that they are going to be able to make great financial decisions in their business that are going to benefit their business and not put it at risk.