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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 To Properly Review Balance Sheets

Reviewing balance sheets as an extremely important skill that business owners need to develop says virtual CFO. The reason for this, is because being able to understand their balance sheets is going to give business owners a good understanding of the financial health of their business. Since many entrepreneurs are going to need to make important business decisions based on the financial health of their business, itís important that they understand how to review their balance sheets in order to help them do that. Since 29% of all failed businesses say the reason their business failed was because they ran out of cash, understanding financial statements can go a long way to helping business owners avoiding this business pitfall.

Business owners need to understand what generally happens if there Accounts Receivable is over or under stated. Virtual CFO says that if a business owner has overstated there Accounts Receivable, that ends up looking like they have more money coming to them than they actually do. This is generally due to a duplicate invoice, or an entry mistake somewhere. If an entrepreneur has understated there Accounts Receivable, a business owner thinks that they have less revenue than they thought. You this often shows up as a missing invoice, or the wrong amount was entered into the computer. Business owners should verify all of the invoices that are entered are accurate.

Business owners also need to understand what happens when their accounts payable is under or overstated. Understated accounts payable means that a business owner has not entered all of their invoices incorrectly. They think they owe less money than they actually do and it ends up the profit looking better in their business than it actually is says virtual CFO. Overstated accounts payable, means that a business owners income statement shows that they are making less money than they actually are. Itís extremely important that business owners have the proper amount entered into their accounts payable as well as Accounts Receivable in order to ensure that their balance sheets are accurate.

Business owners should understand what is typically going on on their balance statement if their credit card balance remains unchanged from one month to the next or shows as a negative number. Typically the reason this would show up on six month comparative balance sheet, is if the credit card charges have not been added to the balance sheet. While itís possible that the credit card charges from one month to the next with the exactly the same, itís much more probable that something has not been added incorrectly. If a business owner sees that the credit card balance is unchanged from one month to the next, they should not only review the entries to be sure if that has been entered correctly, that should trigger them to review everything else to ensure that has been entered correctly as well. This is one of the most important reasons why business owners should not make financial decisions based on income statements. Because this error would not show up on the income statement.

Entrepreneurs usually have to make financial decisions in their business throughout the year, and not just and their financial year end says virtual CFO. In order to make the best financial decision that they can, they should be sent on itís happening financially in their business. If they donít, business owners put their business at risk of running into cash flow problems. Since 29% of all failed entrepreneurs say that the reason why their business failed was because they ran out of money, business owners should be very mindful of not making financial decisions without documentation.

Itís extremely important that business owners should look at the transactions in their shareholder loan at least once a month. Virtuals CFO says that this is extremely important, because any errors in their shareholder loan account will end up with a business owner paying personal taxes on corporate expenses. Business owners should go through their shareholder loan account, and verify that everything that has been attributed to that account is actually a personal expense. The reason why itís important to do this every month, instead of just that year end says virtual CFO, is because business owners will have a better memory of what happened in their business one month at a time, rather than at the end of the year.

Business owners also may be stunned when they are reviewing their balance sheets and see that there corporate tax payable account is negative. However, this is okay says virtuals CFO. The reason is because corporate taxes end up looking different on interim financial statements than a year end statement. When business owners take tax payments in instalments, itís not represented on the balance sheet. any tenant business owners prepaying the liability it ends up looking like a negative number that grows larger every single month. Business owners should understand, though that when the tax bill is actually applied in the 12th month, actually goes towards that amount into zeros it out. Business owners may review their corporate tax amount and see that they are negative and look for errors because of this, which is a good habit to get into, but if they understand that outlooks, they can be assured that it is not an error.

Something else that business owners should be mindful for when they are reviewing their balance sheet, is that there loan balance should decrease every single month says virtual CFO. If a business owner notices that there is a period of time where their balance does not change, it could mean one of two things, the amount was entered in incorrectly, and thatís causing on their errors throughout the balance sheet, or that the business owner did not make that loan payment. Regardless of the reason, business owners should cash that mistake and fix it either to avoid defaulting on their loan, or to catch words causing errors throughout the rest of the balance sheet.