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

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outsourced CFO | properly entering assets into financial statements

Many entrepreneurs struggle with understanding basic business financial literacy says outsourced CFO. And different, the makers of accounting software into it did a survey of small business owners to test them on their knowledge of business finances. Out of all of the respondents, 82% scored less than 70% on the quiz. Entrepreneurs tend to struggle with understanding their business finances, which ends up them having inaccurate financial statements. Since business owners need to be using those financial statements to make important financial decisions in their business, if they are not correct, they are not going to help entrepreneurs make great financial decisions. In fact, entrepreneurs can end up making poor financial decisions that can impact the business negatively.

Understanding how to calculate their assets and expenses in their balance sheet and income statement can help entrepreneurs end up with interim financial statements that are more accurate. However, entrepreneurs need to understand the difference is between an asset and an expense so that it can be calculated properly. Entrepreneurs should consider an asset as anything that they purchase in their business that is going to have a useful economic life of longer than a year. A vehicle is a great example of an asset, because business owners will be able to use that in their business for several years.

When entrepreneurs are purchasing assets, they should understand that it should not show up on their income statement right away. The reason for this is because since the asset is going to be benefiting the business for longer period of time than an expense, it should not negatively impact the profit of the business in the month that it was purchased. Therefore, it should be put directly onto the balance sheet, and it will show up on the income statement at the end of the year as its depreciating value is calculated. That way, the income statement can show the asset, as it gets used in the business says outsourced CFO.

This ends up ensuring that the revenue and expense matches up as is important in accounting. The matching principle is essentially when the expenses are matched to the income that they generate. An entrepreneur should verify when looking at the income of a certain time period, that should match the expenses of the same time period.

Entrepreneurs should understand their common types of fixed assets so that they know what to look for in their business. Outsourced CFO says the most common asset in businesses are vehicles. Businesses like contractors tend to use a lot of vehicles. Other assets can include computers, real estate and leaseholder improvements. Many entrepreneurs do not know that improving the building that they operate out of is counted as an asset, but since it is going to help them operate out of that building for longer period of time it counts.

By understanding what an asset is, and how it should show up on their income statements and balance sheets, can help entrepreneurs properly account for them, ending up with the most accurate interim financial statements possible

It is very important that entrepreneurs learn how to use their interim financial statements in order to make informed financial decisions in their business says outsourced CFO. However, if entrepreneurs do not know how to ensure those financial statements are as accurate as possible, they end up with financial statements that are unusable, whether they know it or not. If entrepreneurs are making financial decisions based on incorrect financial statements, they put their business at risk. To avoid this risk, entrepreneurs can learn how to play account for expenses in assets in their business to help ensure the accuracy of those interim financial statements in their business.

When entrepreneurs are entering in assets into their income statement and balance sheets, they should ensure that they are putting only significant assets into their asset account. The reason for this is because entrepreneurs may have a significant number of assets under thousand dollars, but the time it would take to enter all of those into their financial statements, and then spend time depreciating them every year ends up taking a significant amount of an entrepreneurís time. Not only do these small assets do not impact entrepreneurs bottom line once they are entered into the balance sheets correctly, but an entrepreneur could be using that time to grow their business and accomplish all of the strategic priorities of their corporation. The goal is not an entrepreneur to be hundred percent accurate on what is considered an asset, but what is most efficient for the business owner and their business.

A benefit to doing it this way however says outsourced CFO is that entrepreneurs can help ensure the accuracy of their interim financial statements by doing this. How they can do that is if they look at their interim financial statements, and see that a small change, smaller than a thousand dollars was entered into the asset account, they will immediately understand that it is a mistake and can remove it. Most likely this mistake was because someone entered in an expense into the wrong account. By moving it back, entrepreneurs can ensure the accuracy of the financial statements this way.

Another way that entrepreneurs can keep great financial records by entering in their assets correctly, is setting up subaccounts for their fixed assets that they have purchased. This helps entrepreneurs stay organized, and have the best and most amount of information on those assets as possible. This is beneficial if an entrepreneur is ever going to sell those assets later, or sell their business. If entrepreneurs have just vehicles for their business, they need to ensure that they are keeping subaccounts says outsourced CFO. The reason for this is because vehicles are one asset that are most likely able to be sold at a later date for significant profit.

They understand how to enter in assets and expenses into their income statements and balance sheets, entrepreneurs can end up with accurate interim financial statements that can help them make informed financial decisions in their business.