Virtual CFO | How Business Owners Can Use Balance Sheets
For all business owners to understand how to read their balancing says virtual CFO. As Albert Einstein once said, if you canít explain simply, you donít understand it. Business owners need to make financial decisions throughout the year in their business, but they are only using the income statement in order to base their decisions on, they end up making financial decisions that the best for them. Reason for that is because they are only looking at part of the information, and since 29% of all failed businesses say that the reason the business was because they ran out of money, business owners should be mindful every time they make a business decision, on how it impacts their business so they can avoid running into cash flow problems.
Business owners should understand why you should not be looking at their income statement says virtual CFO. Income statement is only going to so business owner how theyíre month did. If business owners had one good, bad month, isnít enough information for business owner to determine their entire businesses financial state. The Balance sheet will speak to the entire financial reserves of the business, what payables are coming in, but payments are going out. Business owners are going to be able to figure out how much money coming into the business, how much liquidity exists in the business
Business owners are reviewing their penalties, they should look at their six month comparative balance sheet in order to help them understand that balance sheet. The reason for this says virtuals CFO, is because are going to be able to draw attention any variances that donít make sense over time. The business owner looks at one month at a time, they may miss some extreme client or extremely periods that could be caused by errors. If they look at six months at a time, they will be able to see if thereís totals that donít end up making sense. It will also allow them to see if there are any trends, which can continue to help them make business decisions. If they are trending up they should be certain that the business is growing, they can make decisions that will help with that. If there turning down, they may need to cut expenses in certain places in order to be proactive.
Business owners should also understand that when they are reviewing their balance sheet, that the cash is going to look very differently on the balance sheet and is in their bank account. Virtual CFO says that the reason why amounts on the balance sheets are different than on bank statements is because of uncleared items. If a business owner writes a check, they will take note of the check on the policy, but it may not appear in their bank statement until the check actually clears. If a business owners making financial decisions based only on their bank statement, they wonít end up over spending money because they think they have more money in their account than they do. If they write a check, and then look at their bank balance and think they have additional money, they may end up spending more money than they should, and that would cause it to bounce.
Business owners often need to make critical financial decisions in their business throughout the year in their business says virtual CFO, and they canít wait until their corporate year end financial statements to come back in order to make those business decisions. Can they afford to hire new staff, and the need to lay off staff to save money, or in the position to be able to afford a large asset purchase. All of these decisions often need to be made throughout the year, and canít wait until a business owner itís their financial statements back from their chartered professional accountants. Being able to make financial business decisions responsively in their business is important aspect of being able to remain financially solvent. If business owners donít make decisions early, then they may not avoid cash flow problems in their business. 50% of all businesses close their business within five years, and 29% of those failed businesses say that the reason why they failed because they ran out of money. Helping business owners make better business decisions can help them avoid running out of money.
Many business owners believe that they can look their income statement in order to these decisions. Virtuals CFO says of the reasons why business owners why itís important not to look at the income statement, is because the income statement of the most important information on it. That only says how well the business has been doing one month to the next, and not the business as a whole. Business owners often use the income statement primarily because itís the financial statement they can understand. Itís important for entrepreneurs to learn how to read the balance sheet, because the balance sheet is where the most important information is.
Not only is the most important information on the balance sheet, but business owners will be able to find errors that may exist on those balance sheets if they know how to read them says virtual CFO. When business owners get their year end financial statements from their accountant, those have been verified to be arithmetically correct, therefore they are less likely to have errors on them then these interim statements. Because business owners are prepared their own interim statements, there may be errors that they need to catch. Being able to view their balance sheet and pitcher errors is an important part of using the balance sheet to make financial decisions.
Business owners are able to catch errors on their balance sheets, they can fix the errors, and then use that information to help them make financial decisions in their business. Virtual CFO says this will be able to save them in keeping their accounting records very clean throughout the year, and also help them avoid cash flow problems that cause so many businesses to be forced to close their doors.