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

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Virtual CFO | Business Owners Need To Understand Balance Sheets

Balance sheets are an extremely useful tool for business owners to utilize in order to make important financial decisions in their business says virtual CFO. Many entrepreneurs believe that they can review their income statement in order to make financial decisions, but the most crucial information about business finances is on the balance sheet, so business owners should learn not only how to read them, but fix the errors so that they can keep current accounting records, and make great financial decisions for their business. With half of all entrepreneurs feeling in business within five years, and 29% of those entrepreneurs saying that running out of money was the reason their business failed, and business owners can utilize balance sheets to make great financial decisions, they can increase their odds that this will be less likely to happen to them.

When business owners are reviewing their balance sheets, needs to be looking for overstated or understated accounts receivable information. Virtual CFO says that this is extremely important, because over or understated Accounts Receivable information can significantly impact how the finances look in business. If a business owner has overstated Accounts Receivable in their accounting, this usually is a duplicate invoice error that ends up making the business look like more money is coming into it when thatís not the case. If thereís understated Accounts Receivable, the business is actually making more money than it shows. This is usually due to a missing invoice. Business owners should be very aware of how entering Accounts Receivable information can drastically impact the balance sheet.

Business owners should also be aware of what their balance sheet looks like if there accounts payable is overstated or understated as well says virtuals CFO. If they have an understated accounts payable, that makes the business look like there is less money that they owe and they do. This is usually due to the invoices being entered wrong, or a business owner having one invoice missed. In overstated accounts payable and showing up on the amount statement as a business making less money than they actually are. Usually due to additional invoices being entered.

When business owners are adding long-term assets to their balance sheet, virtual CFO says that they should be added to property, plant and equipment section. Since have a greater value of $1000 should be included, as long as they have a useful life longer than one year. This can help them keep an accurate record of all of the assets in their business, they can help their balance sheet remain current.

By being very mindful of how their balance sheet looks from month-to-month, and moving them regularly in order to catch errors as well as in order to make financial decisions in their business, business owners can avoid making poor financial decisions in their business, and help their business remain financially viable and growing. This is extremely important and all business owners should learn how to do this.

Many entrepreneurs believe that they can make financial decisions in their business by looking at their income statement says virtual CFO. While it is extremely important for business owners to review their financial statements prior to making business decisions, best practices is for business owners to learn how to read their balance sheet. The most important financial information is actually contained in the balance sheet, as well itís easier to catch errors on balance sheets and income statements. When business owners are making financial decisions in their business, ensuring that their accounting information has fewer errors is an important part.

Not only should business owners be reviewing their balance sheet, but they should be looking at their balance sheet on a six month comparative statement. Virtual CFO says that this is going to enable a business owner to look at six months at a time, that will allow them to see if the business is trending upwards, downwards, or if there are any anomalies in one month that donít appear and others. If business owners see something strange peak in one month and not another, business owners should investigate as to why. This may be because they have an accounting error somewhere on their bills sheet, or it could simply be something happened in their business and that month. Being able to definitively find out why is incredibly important.

Another way that business owners should be able to read their balance sheet in order to catch errors, is by checking their credit card balance from month-to-month. If there credit card charges havenít changed for one month or more, this may mean that credit card charges have not been added to the balance sheet, or have been added incorrectly says virtual CFO. Business owners can then catch the mistake, and fix it is and look for the other entry errors that may have occurred. Business owners can do the same thing when looking at their loan balances. These balances should decrease each month as the business owner pays off their loan. If theyíve noticed that the loan balance doesnít change from one month to the next, it could either mean the business owner did not make the loan payment in that month, which needs to get fixed. Or it could mean that the loan amount was entered incorrectly which is triggering errors throughout the balance sheet. Finding this error in fixing, business owners can affect great change throughout the entire balance sheet.

Business owners should also be reviewing their shareholder loan account every month. The reason for this is because they need to ensure that every amounts that has come out is for personal reasons and not for business. If business owners have business charges coming out of their shareholder loan account, you will end up paying personal tax on something that is actually a business expense. Since the personal tax rate in Alberta tops out at 40%, business owners need to be very mindful not to pay personal taxes on corporate expenses.