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

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Outsourced CFO | The Differences Between Assets And Expenses

It is extremely important for entrepreneurs to understand the difference between assets and expenses as it relates to their interim financial statements according to outsourced CFO. The reason is because how these things are classified can greatly impact their income statements. When entrepreneurs are making financial decisions in their business, having the most accurate and up-to-date interim financial statements possible can ensure that there making the best decision for their business.

In order for entrepreneurs to be able to correctly classify expenses and assets, they should understand what a definition of an asset is to their business. It is something which has a useful economic benefit of over one year and costs over a thousand dollars. Great examples of assets are vehicles, leaseholder improvements and real estate. Outsourced CFO says there is a very good reason why entrepreneurs should not worry about assets that are less than a thousand dollars. It takes a certain amount of time to entering all of the assets into the financial statements, and then every single year an entrepreneur needs to depreciate those assets. This can add up to a lot of time it takes to manage assets. The more assets that are counted that are under a thousand dollars mean that an entrepreneur spending a significant amount of time managing these, well not affecting their bottom line very much. In order to ensure that that an entrepreneur is spending time on what can truly impact their business, they should discount any assets under a thousand dollars and count them as expenses.

When entrepreneurs purchase assets in their business, they will notice that those expenses do not to show up on their income statements at least initially. They will notice that the purchases will go directly onto their balance sheet and then show up on their income statement at the end of the year as the asset depreciates. This ends up satisfying the revenue and expense matching principle. Outsourced CFO says that this principle is that the expenses need to match the income that they generate. When an asset purchase goes directly onto the balance sheet and then shows up in the income statement later it completes this match.

When entrepreneurs are looking at their interim financial statements, outsourced CFO says that they should notice if they see small changes in the asset account that is under thousand dollars. If they see this, it is usually because an expense was mistakenly classified as an assets. Since all assets should counted that are over a thousand dollars if the change in an asset account is under that, an entrepreneur should fix the mistake. It could be as simple as someone who purchased an office printer for under thousand dollars claiming it as an asset. It might make sense to put it there, but business owners should know that it is best to clean it as an expense.

By keeping their assets versus expenses their interim financial statements are Very accurate so that business owners can use that information in their business to make financial decisions. The importance of the accuracy of these financial statements is huge, that is why business owners should be very careful how to book assets in their business.

Outsourced CFO | The Differences Between Assets And Expenses

Understanding the difference between assets and expenses especially as they relate to the interim financial statements can help entrepreneurs keep accurate financial statements so says outsourced CFO. That means, when entrepreneurs use those interim financial statements in order to make decisions in their business about finances, the have the best possible tools available. However, if entrepreneurs are not booking asset purchases correctly, or are mixing up assets with expenses, they may render their interim financial statements useless. If they use those statements to make financial decisions it increases their chances of making poor financial decisions in their business that could negatively impact their business.

When entrepreneurs are purchasing assets, they should proactively set up subaccounts in their financial statements for those fixed assets. This is going to help entrepreneurs stay organized in case they ever decide to sell those assets later on, or if they sell their business. Outsourced CFO says this is extremely beneficial to the types of businesses that purchase a lot of fixed assets in their business. A great example of that is a construction company that has a lot of vehicles that they use to haul equipment around the job site. Not only do they purchase a lot of vehicles, but as soon as those vehicles start needing more maintenance, they will also sell them just as quickly. Having subaccounts set up for all of these assets can help entrepreneurs stay organized so that they have the most information on those assets when they are going to be resold.

Business owners should understand that when they go to sell those assets, they should know the difference between book value and market value. When an entrepreneur depreciates the value of that asset in their financial statements once a year, they are going to end up with the book value of their assets. It is the cost of that asset less the amount that it is depreciated. They financial statements are going to show book value because it is the simplest way to calculate the value of an asset. However, outsourced CFO says that entrepreneurs will be selling that asset at market value. Market value is the amount of money that can reasonably be expected for that assets. Sometimes the book value can be a predictor of fair market value but not always. Businesses should be prepared to not get a book value for their asset.

By ensuring they keep their assets and expenses organized and calculated properly, business owners can end up with an extremely accurate interim financial statement that they can use to make decisions in their business with. Ensuring the accuracy of this information is paramount so that entrepreneurs can make the most informed decisions possible in their business.