Virtual CFO | How To Catch Errors On Balance Sheets
Itís extremely important for entrepreneurs to be able to read and understand their balance sheets says virtual CFO. The reason for this is because if entrepreneurs need to make financial business decisions, reviewing their balance sheet to understand the state of the finances in their business currently is going to help guide them towards making the best decision they can for their business. By making a financial decision without consulting their finances first, is like a business owner making a decision blindly, but having any understanding how that decision is going to impact their business in the future.
Balance sheets are the documents that business owners are going to be able to determine what is currently in their business, what payables are coming in and what the payments they are making. This is going to be helpful document to help the business owner determine how liquid their business is. An entrepreneur cannot determine how successful their business is going based on having a good or bad month. Business owners should keep in mind that in order to gauge the financial health of the business, you need to review their balance sheet first and then we can move on to their profit and loss statement. Many entrepreneurs believe that they can make financial decisions based on income statements, but itís much harder for them to be able to catch any errors that occur based on their income statement.
Not only is it important for entrepreneurs to be reviewing their balance sheet, but itís important that their balance sheet be a six month comparative statement says virtual CFO. The reason this is important is because itís going to draw business owners attention to any variances that donít make sense from one month to the next. If a business owner see something that looks out of place in one month, they will be able to investigate it and verify if this is accurate, mistakes have been made.
Business owners should also understand when they are learning how to review their balance sheets, that their cash is going to look very different on their balance sheet and it is going to look on their bank statement. The reason for this, is because their bank statement wonít show an uncleared items. Checks that have not been cashed yet for example says virtual CFO. If an entrepreneur is using their bank statement to gauge how much money they have, they may make critical errors in assuming they have more money in their bank account than they do. This is why itís extremely important that business owners get into the habit of reviewing their balance sheet, which is going to show the checks that they have sent out whether theyíve been cashed or not.
By being able to easily review their balance sheets, and cash errors, can help business owners significantly when they are making financial decisions in their business. Entrepreneurs will be able to avoid making decisions that could cause them financial hardship, and by making great financial decisions, they can help their business grow and thrive.
One of the biggest mistakes that business owners can make when they are reading their financial statements is to be reviewing their income statement is a way of making financial decisions is virtual CFO. While it may be very tempting for business owners to look at their income statement is a way of making decisions, itís far more important that business owners learn how to read their balance sheet first. The main reason for that is, interim financial statements often have more mistakes on them and their year-end financials, and because of that, business owners should be mindful of errors when they review their financial information. Errors are going to show up on balance sheets more easily then on income statements.
Itís extremely important that business owners are very careful to enter their accounting receivable information very carefully. If they make any errors, and overstated Accounts Receivable will make it look like they have less revenue in their business. Virtuals CFO says that if a business owner has understated the accounts receivable, then it looks like they are making more money than it shows. Mistakes in Accounts Receivable can simply be an invoice that is been missed, or an entry error.
Entrepreneurs should also understand what happens to their balance sheets when their accounts payable is understated or overstated. Virtual CFO says that if Accounts Payable has been understated, this means that a business owner has not entered all of their invoices in yet. Which looks like they owe far less than a business owner actually does, and that the profit in the business looks better than it actually is. Entrepreneurs should be mindful that theyíre entering all of their invoices on time and correctly. If Accounts Payable is overstated, the income statement will show that a business owner is making less money than they actually are.
When business owners are reviewing their balance sheets, they should ensure that they are looking at their balance sheets six months at a time, in order to help them see any variances that donít seem to make sense. If a business owner is only looking at their balance sheets one month of time, it can be harder for them to see if there have been any unusual occurrences in one specific month or another. It can be extremely valuable for business owners to learn how to read their balance sheets by looking at six months of time, and they will be able to start to understand if their business has seasonal periods, or if their business is starting to become more profitable over time.
Learning how to read and understand their balance sheets, entrepreneurs can catch mistakes, and again a deeper understanding of where their business is financially. This can help them greatly says virtual CFO make important financial decisions whether they are able to purchase important assets, hire new staff, or if they need to pare down their spending.