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

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Outsourced CFO | Expenses Versus Assets

When entrepreneurs are ensuring the financial information included in their interim financial statements, they should also work hard to ensure that their purchases are also classified correctly. If transactions concerning major purchases like equipment, vehicles, leaseholder improvements or real estate are booked incorrectly, that can mean that the income statements that the end up with are unusable.

Entrepreneurs should understand the difference between an expense and an asset. An asset is a purchase that has a useful economic life over one year. An expense on the other hand is a purchase that has no ongoing benefit past the point of purchase. An example of an asset versus expense is a vehicle versus advertising. The vehicle is going to continue giving value to an entrepreneur four years after the initial purchase. However the advertising is going to be beneficial but once it is done it is not going to continue giving value to the entrepreneur for years.

Outsourced CFO says that entrepreneurs should recognize the various types of fixed assets that can be counted in the interim financial statements. Vehicles, real estate, computers are all examples of fixed assets. Something that entrepreneurs may not realize are considered assets are leaseholder improvements. The reason for this, is because an entrepreneur is going to be able to continue to benefit from that improvement for many years. If then entrepreneur has replaced the plumbing in their office building, put on a new roof or put up new insulation, they are going to be able to operate out of that building for years to come, meaning that all of those leaseholder improvements will continue to benefit the entrepreneur for years.

When calculating assets, entrepreneurs should use the general rule that anything less than thousand dollars is not worth the entrepreneurís time to include on the income statement. The reason is because the number of assets that an entrepreneur might have under thousand dollars be extremely significant. Also, it is going to take time on behalf of the entrepreneur and their accountant to calculate the depreciating value of those assets. Rather than spending a significant amount of time trying to calculate the depreciation of several small assets, an entrepreneurís time is better spent in achieving the strategic priorities of their corporation, and can avoid putting any assets on their income statement less than a thousand dollars.

Outsourced CFO says that when entrepreneurs are being very careful to ensure that their accounting assets and expenses properly, they can end up with extremely accurate interim financial statements. However, entrepreneurs should always be aware of errors, and if they end up seeing a small change in their asset account, it is usually a mistake. Entrepreneurs should understand that the mistake is usually accidentally claiming an expense as an asset. Since all assets in this account should be over a thousand dollars, entries less than that are usually because an expense was entered into that account. An example of this would be if an employee buys a printer for four hundred dollars and books it as an asset instead of an expense. Good thing is it is easy to catch, and easy to fix.

Outsourced CFO | Expenses Versus Assets

Helping entrepreneurs ensure that the accuracy of their interim financial statements is of utmost importance to outsourced CFO. The reason for this is because half of all Canadian entrepreneurs fail in the first five years of owning their business, and out of those failed entrepreneurs, 29% said the reason why their business failed was because they ran out of money. Having accurate interim financial statements can significantly help an entrepreneur avoid the same fate. However, if entrepreneurs are booking asset purchases and expenses incorrectly, they could end up with unusable income statements.

In order to avoid this, outsourced CFO says that business owners should be very aware of how expenses show up on their income statements. Many entrepreneurs believe that assets should show up immediately on their items statements. However, the reason why this is not the case is because when entrepreneurs make the asset purchase, it should not negatively impact that months finances. So to get around that, the asset will bypass the income statement completely at first and go directly onto the balance sheet of the business. Where it will show up on the income statement, is after it depreciates at the first fiscal year end. It will continue showing its depreciation there at each year end until it no longer has a useful life and it drops off the assets of the business.

In order to help stay organized with all of the asset purchases that they have, especially if it is the type of business that makes a lot of asset purchases, outsourced CFO says entrepreneurs should set up subaccounts for all of their fixed assets. This is most beneficial if those assets are most likely to be resold later and for a significant amount of money. For example, trucks in a contractors business are going to be sold as soon as their maintenance starts costing the business, but they still will probably be able to get several thousand dollars for those trucks. Keeping accurate subaccounts can help an entrepreneur have the most accurate financial information for reselling them at a later date, or help an entrepreneur have a complete list of all assets in their business should they sell their business.

Entrepreneurs should understand that how these depreciating assets will show up on their financial statements is called the book value. Calculating it is the simplest way of calculating the depreciating value of the asset says outsourced CFO. There is a certain percentage that each of the assets will appreciate, and what is left is the book value. It is the cost of the asset minus the amount it is depreciated since it was initially purchased. On the other hand, a market value of an asset is wanton entrepreneur can expect to get from selling it. Something that entrepreneurs should keep in mind is that the book value and market value may be different. Sometimes it can be a good indication of what people are willing to pay but not always. Entrepreneurs should be prepared for getting a smaller amount than the book value for their assets.