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

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Virtual CFO | Helping Business Owners Utilize Their Balance Sheets

Important financial decisions often need to be made intermittently throughout the business fiscal year says virtual CFO. Helping business owners understand how to read their financial statements and balance sheets in order to make the best financial decision they can, can go a long way in helping business owners with their cash flow, and avoid running out of money in their business. Half of all businesses fail within five years, and 2010% of those businesses say that the reason why their business failed was because they ran out of money. Many business owners were unable to avoid making financial decisions in their business, many entrepreneurs can increase their chances of business success in learning how to do so for themselves.

Often, entrepreneurs believe that they can make critical business decisions based solely on their income statement, but the income statement doesnít give a business owner a broad enough view of their entire business. If business owners can understand how to read balance sheet, that can go along with being helping them make better financial decisions. More information is contained on their balance sheet, and by learning how to read them properly, business owners can spot obvious errors that would be less obvious on the income statement. Since interim statements are more likely to have errors on them says Virtuals CFO, this is something that business owners should be very mindful to guard against.

One question that many business owners who learning to pay their balance sheets have is why is it okay for their corporate tax accountant to be negative. Virtual CFO says that it is because corporate taxes tend to work differently on interim statements than they do on the year end financial statements prepared by chartered professional accountants. The reason for this is because when the business owners making tax payments and instalments, it will show up as a tax expense until the 12th month says virtuals CFO business owners should understand that if they are prepaying a liability, but it looks like on the balance sheet is a negative number that gets larger every single month. When they finally do get their tax bill and if itís applied to the balance sheet, it zeros out that negative number restoring the balance back to zero.

Itís also extremely important for business owners to be reviewing their shareholder loan account on a monthly basis says virtual CFO. This is because business owners need to be mindful that everything that comes out of their shareholder loan must be solely for personal use. If business expenses are coming out of the shareholder loan account, business owners will end up paying personal tax on those business expenses. Since the personal tax in Alberta tops out at 48%, if business owners want to avoid paying high taxes, then they should avoid having corporate expenses come out of their shareholder loan. Itís important to review this every single month, because of the business owners are trying to do this at their fiscal year end, they may not remember every single charge, and it may take a significant amount of time.

When business owners make financial decisions without checking the financial state of their business, they are taking a great chance that they may be making poor financial decisions says virtual CFO. Any time a business owner needs to make any financial decisions in their business, they should be consulting to ensure that the decision that they are making is the best one for their business. Whether a business owner has to by an accident, hire new staff, or have to lay stuff off these are all examples of financial decisions that business owners need to consult their balance sheet in order to make in order to avoid running out of money in their business.

When business owners are adding long-term assets to the penalties, they should be adding them to the property, plant and equipment section. Virtual CFO recommends that business owners only and assets to the balance sheet that are of greater value than thousand dollars, and even if they have assets they consider significant that are lower in value, they should avoid including those on the balance sheet. Virtuals CFO says that business owners also need to be aware that the only way they would at those long-term assets is if they have a useful life longer than one year.

Business owners should also understand why their cash might look differently in their balance sheet and on their bank statement is virtuals CFO. Amounts on the balance sheet have already been balanced based on all of the money that is scheduled to come out of the account as well as scheduled to be entered. For example, checks that have been written but not cashed will appear on the belt statement, and not on the bank statement. Business owners should also understand that the same thing happens with deposits they make in a bank machine, or for using debit or credit machines, it may take a day or two to show up on their bank account, but as long as their balance sheet is current, it will show up immediately there. If business owners are making in their business based on the money that is in their bank account, they could run into cash flow problems very quickly. Business owners should resist the urge, and always make financial decisions based on the amount of money that exists on their balance sheet.

When business owners are reviewing their balance sheets, itís extremely that they also look at their belts statements six months at a time. Virtual CFO says that this is going to go business owners to see more clearly if there are any variances or anomalies from month-to-month. If they do see something that looks out of place from one month to another, they should review to see if there has been an error thatís made.