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

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Outsourced CFO | understanding assets versus expenses

An extremely important practice that entrepreneurs should get into regularly, says outsourced CFO is reviewing their interim financial statements before making any financial decisions in their business. There it is running payroll, disbursing payments or purchasing assets for their business, entrepreneurs should be reviewing those financial statements in order to understand if they have the money in order to do that in their business. If those interim financial statements are not accurate, it may lead an entrepreneur to make the wrong decision about what to do in their business, and could end up negatively impacting their finances, or even causing them to run out of money. Since 29% of all failed entrepreneurs say that running out of money was the reason their business failed, this is a significant problem that entrepreneurs should be proactive to avoid.

In order to ensure their interim financial statements are accurate, entrepreneurs should learn how to enter in expenses and assets into their balance sheets and income statements correctly. Outsourced CFO says by understanding the difference between an asset and an expense can help entrepreneurs do this. An asset is anything that an entrepreneur purchase that has a useful benefit to the business that is over one year. Vehicle is a great example of an asset. After the entrepreneur makes that purchase, they are going to be able to use that vehicle for several years. And expense on the other hand has no useful benefit past its initial purchase or use. Office supplies are great example of an expense. It is important to purchase, but once an entrepreneur has made that purchased and use those supplies it has no additional benefits.

Entrepreneurs should understand that assets need to be put into the asset account on their balance sheet, while expenses need to go onto the income statement. Entrepreneurs should understand that assets should not appear on the income statements, or at least not right away. Outsourced CFO says the reason that assets should not appear on the income statement right away, is because since they provide a lasting benefit to the business, they should not negatively impact the profit and finances of the month that it was purchased in. Therefore entrepreneur should be very clear that it needs to go onto the balance sheet first, come out of cash, and it will show up on the income statement at the end of the year. Each year, when an entrepreneur and their accountant calculates the depreciated value of all of the assets, it will be entered into the income statement then. Entrepreneurs can review their income statement at the end of the year to verify that all new assets that were purchased are now accounted for.

By understanding the difference between assets and expenses, and how they should appear on their income statements and balance sheets, can help entrepreneurs end up with to make financial decisions in their business with. By doing this, entrepreneurs can be confident that they have the best information possible in order to make informed financial decisions.

Outsourced CFO | understanding assets versus expenses

Entrepreneurs need to use interim financial statements of their business to gain insight to their business finances in order to make financial decisions says outsourced CFO. However, if there asset or expenses concerning major equipment, vehicles and real estate are not booked correctly, they end up with income statements that are unusable in their business. This will cause entrepreneurs to potentially make poor financial decisions in their business that can negatively impact their company.

One of the first things that an entrepreneur can keep in mind when they are entering in the assets to their balance sheets, is that they should be accounting for assets under thousand dollars. Outsourced CFO says technically assets can be counted if they are under thousand dollars, but when business owners use this threshold, they are ensuring they are making the best use of their time. Not only can it be very time-consuming to enter in many small assets, but entrepreneurs also need to keep in mind that they have to depreciate assets every year. This might not be the most efficient use of an entrepreneurís time, even if a large number of small assets need to be entered. Instead of spending this time entering assets and depreciating them, entrepreneurs should be putting that time into their business to grow it and increase sales.

One of the biggest benefits that entrepreneurs can have to doing it this way, is that it also makes it extremely easy to spot mistakes. Outsourced CFO says that if an entrepreneur sees a small change in the asset account on the balance sheet, they can immediately see that it is a mistake. By moving that into the expense account where it belongs, entrepreneurs can help ensure the accuracy of their interim financial statements easily.

Something else that entrepreneurs should keep in mind when they are setting up their asset accounts, is in order to stay organized and keep the maximum amount of information on those assets as possible, entrepreneurs should be setting up subaccounts in their asset account. The reason why this is important, is if an entrepreneur ever wishes to sell those assets later on, having more information on those assets can be extremely beneficial. Vehicles are one example of assets that are most likely able to be resold for high-value. Computers on the other hand typically are not resold because by the time an entrepreneur no longer finds them useful, they are obsolete. This is a good practice to get into when the business is being sold. An entrepreneur can help increase the selling price of their business if they have an extremely good record of all of the assets that they have purchased in their business.

By keeping good records, by understanding where expenses and assets should be accounted for in their financial statements, and how to do that accurately and in an organized fashion, can help entrepreneurs end up with great records, and accurate interim financial statements. This can benefit the business as well as the entrepreneur.