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

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Virtual CFO | How Should Businesses Review Their Income Statements

Many entrepreneurs understand the value of reviewing their financial statements any time they make a decision in their business says virtual CFO. However, business owners should understand which financial statements are the most important ones to review. While many business owners like to review their income statements because they are easier to understand, they are do not contain as much financial information as their balance sheet does. By learning how to review the balance sheet their business, business owners can make better financial decisions. Since half of all entrepreneurs close their business within five years, and 29% of those entrepreneurs so that the reason their business failed was because they ran out of money, making better financial businesses solutions can help business owners avoid this common business problem.

Once business owner learns how to review their balance with, they can start to see a mistakes in them. Ritual CFO says that if a businesses credit card balance remains unchanged from one month to the next month, that should indicates to a business owner that there is an error. The error likely is that the credit card charges havenít been added to the balance sheets, or that they have been added to the balance sheet in a different location. If business owner sees that error on their balance sheet, and then looks for if the credit card charges have been entered incorrectly, or havenít been entered at all, they can ensure that helping their balance sheet correct, which can help them if they ever need to use the balance sheet in order to make a decision.

Business owners should also understand what their corporate tax should look like in their interim statements. This is especially important says virtual CFO because how it looks on the interim statements are much different in how they look on their year end financial statements prepared by their accountant. Many entrepreneurs pay their taxes throughout the year in instalments. But since they donít get their tax bill until the end of the year, business owners should understand that if they are prepaying a liability, it ends up looking like a negative number on their balance sheet. This may cause a business owner to panic if they donít already know what they should be looking for. Once the business owner gets the tax bill in their last month of their fiscal year, itís applied to that negative balance, which restores the amount back to zero.

By understanding how different things should look on their balance sheets, and understanding how to catch and fix errors, business owners can learn more about the financial health of their business, and utilize the information to help them make smarter financial decisions in their business. Whether they need to increase their marketing efforts, purchase assets, or bring on or lay off staff, all the decisions can be made easier by utilizing the information in a balance sheet. This way, business owners can make better decisions, and avoid running out of money in their business from a bad decision.

If business owners arenít able to properly understand their balance sheets, chances of them making poor financial choices in their business are much higher says virtual CFO. As Albert Einstein once said, ìif you canít explain it simply, you canít understand it.î By being able to understand their balance sheet, business owners can significantly impact their business more positively and make decisions that can help the business grow.

Many business owners donít understand why looking at the balance sheet is so important, especially when they are used to looking at their income statement. While itís not a bad thing for business owners to look at their income statement, it does not give a business owner a complete picture of the financial health of the business as much as the balance sheet does. In addition to that, virtual CFO says that businesses that look at the balance sheet, can catch mistakes that have been made. These errors are not possible to find on an income statement, meaning that if thatís what a business owner is using to make a financial decision, they may make a poor decision based on incomplete information or mistakes.

When business owners are reviewing their balance sheet, they can gain a lot of the very good information by ensuring that they are looking at six months at a time instead of month-to-month. Virtual CFO says that the reason why this is important, is because when business owners are able to look at several months at a time, variances that happen in one month and not others become very obvious. It can be a trigger for a business owner to investigate why that anomaly has happened, and either fix a mistake, or gain an understanding of what happened in their business.

Itís also very important that when business owners are reviewing their balance sheet, they are also looking at the individual transactions that are occurring in their shareholders loan account. This should be done every month on average, so that business owners can remember more of the charges then if they waited until the end of the year. While itís important for businesses to ensure that absolutely no corporate expenses were placed into the shareholder loan account, is because everything that comes out of this account, a business owner will pay personal taxes on. Virtual CFO says that the personal tax rate in Alberta tops out at 48%, meanwhile the small business tax rate is only 11%. Business owners can save significant amounts of tax if they ensure that no business expenses were put through their shareholder loan account.

By learning what a balance sheet is, and how to read it, business owners can catch mistakes, and gain powerful insights into their business that can help them make business decisions. When business owners are able to make better choices in their business, that helps them not only grow their business, but helps them avoid running into cash flow problems in their business that could potentially cost them their business.