Virtual CFO | How To Read Balance Sheets
Often, business owners need to be able to make financial decisions in their business prior to receiving their fiscal year end financial statements says virtual CFO. Because of that, business owners need to be able to understand how to read their financial reports such as their balance sheets, income statements and bank statements. By completely understanding these financial documents, business owners will be able to make the best financial decisions that they can in their business. If they are unable to reach their financial documents, when they make financial decisions in their business, it may not be in their best interest. Since 29% of all entrepreneurs who fail say that the reason their business failed was because they ran out of money therefore itís extremely important that business owners do their best understand their finances, to enable them to make the best possible financial decisions.
By asking several questions, business owners can gain a deeper understanding of their financial documents, in order to help them make the best financial decisions. The first question is why should a business owner look at the individual transactions in their shareholder loans? Virtuals CFO says that itís extremely important for entrepreneurs to review those individual transactions because the shareholder loan is one of the most significant accounts business owners going to use for tax purposes. Itís not only the business ownerís income, but income that they are taking out of their company. All the money that is taken out of their shareholder loan, is going to be taxed personal rate, which can be up to 48%. Because of this, itís extremely important that businesses ensure every single charge that is taken of their shareholders loan account is a personal expense and not business expense. Any transaction that should be considered business, should be removed from the account or else the business owner could end up paying personal taxes on business expenses. Itís extremely important that business owners stay on top of this every month, because it may be difficult and time-consuming to try to do this all year end. Business owners may forget what certain charges were for, therefore itís easiest to do this each month.
Business owners also need to understand why there loan balances should be decreasing on their balance sheet every month. Virtual CFO says that the reason for this, is if a business owner notices the balance of their loan is not changing the balance sheet every month, they can only mean one of two things: the business owner did not make a loan payment in a certain month, or that thereís been are made and the loan amount was paid is being documented in a different account which is triggering other errors that appear on the balance sheet. For example, if the loan balance is sitting in a profit and loss account, and start shoeing the business is making less money than they actually did.
Business owners can gain a deeper understanding of their business financial reports says virtuals CFO, they will be able to make their financial decisions in the business that can help them grow their business.
It is extremely important for entrepreneurs to learn how to do says virtual CFO. The reason for that is because when business owners need to make financial decisions in their business, understanding how to read the statements can help them make the best decision possible. The second biggest reason why businesses fail in Canada is because entrepreneurs are running out of money. Making financial decisions without being properly informed can be conjoining factor to businesses running out of money.
The first things that business owners should do is look at their balance sheet for they start looking at their income statement is virtual CFO. The reason why itís important to look at their balance sheet first, is because thereís a big chance that there are mistakes on the income statement. The errors become much more noticeable when the business owner knows how to read the balance sheet, and we discount first. When business owners need to make financial decisions in the business with her hiring new people, laying people off or making large asset purchases, businesses should verify how to read those financial documents before they commit to those decisions.
One of the first things that business owners should understand is what information is on the balance sheet says virtuals CFO. The balance sheet indicates to entrepreneurs what is coming into the business, how much money, payables are coming in and what payments are going out. The balance sheet hopes the business owner to determine the liquidity of the business.
Business owners should understand why the cash is going to look differently on their balance sheet then in their bank statements says virtual CFO. The reason is because they see on the balance sheet is everything that a business owner has indicated is going to happen, while the bank balance is everything that has happened so far. For example, the balance sheet will show that there is money that has been paid towards a bill and and shows as a negative on the balance sheet. However, if that check has not yet been cashed by the person who received it, then the bank balance will show more money in the account then the balance sheet does. A business owner needs to understand the difference between looking at the mall sheet and the bank balance. Whenever possible, virtuals CFO says that business owners need to refer to their balance sheet instead of their bank balance. If business owners making financial decisions by solely looking at their bank balance, a business owner may think that they have more money than they do because checks have not been cashed yet. The risk bouncing checks were not having the money in their account when checked is go to clear.
Business owners also need to understand that something happens when they deposit checks into their own account, we have money coming into their account on debit or credit machines, it doesnít necessarily show up in their bank account for couple of days, but it does immediately show up on their balance sheet says virtual CFO will.