Virtual CFO | How To Review Balance Sheets
There are several reasons why business owners should understand how to review balance sheets says virtual CFO. The reason is because this is how business owners are going to be making financial decisions during the year in their business, and they should be ensuring that they are making the best decision that they possibly can. By learning how to review their own balance sheets, can help business owners make the most informed financial decisions that they can, which can help the business thrive and grow. Since 50% of all entrepreneurs closer business within five years, and 29% those entrepreneurs say that the reason why their business failed was because they ran out of money, helping business owners be financially literate in their business can go a long way to ensuring all businesses become successful avoid running out of money.
The first question that business owners need to ask themselves is why should they look at their balance sheet first? Virtual CFO says that thereís a high chance that there are errors on the income statement of the business. If the business owner reviews the balance sheet first, they will be able to see errors very easily on the balance sheet that they wouldnít be able to see otherwise. Errors such as if their credit card balance is unchanged from month to month, or if there loan balance does not decrease each month. These are extremely obvious errors that a business owner can see and then look for more errors, or correct ensure that is errors have been fixed. If the business owner is looking at their income statement first, they are less likely to see these mistakes.
The second question business owners should ask themselves is how does looking at a six month comparative balance sheet help them? Virtuals CFO says that looking at six months at a time is going to help them see trends and variances. If there are buyers or low lows so any one month, itís much more obvious to look at six months at a time. Business owners can look to see if thatís an error, or if there is another reason for those highest and lose. Some business owners will be able to say that month was extremely high for one reason, or it was the month after their busy period, maybe those highs and lows happened due to an error, and looking at a six month mouse sheet will allow them to see that much easier.
The third question that business owners should ask to help them understand how to understand balance sheets, is why cash is different on their balance sheet and on their bank statement? Virtual CFO says amounts on the balance sheet is what a business owner has done in their business. This would include uncleared items. For example if the business owner rate to $2000 check today, that amount shows is cleared on their balance sheet, but it shows us uncleared in their bank account.
Understanding how to read their financial reports is extremely important to business owners says virtual CFO. Business owners tend to make important and critical financial decisions based on these financial reports, but if they lack an understanding of how to read them, they may be making financial decisions that are not in their best interest. Since 29% of all entrepreneurs who failed in business say that the reason their business failed was because they ran out of money, so helping business owners understand how to read their balance sheets can go a long way to helping them succeed in business.
One question that business owners should understand in order to help them meet their financial statements is what generally happens if the business is Accounts Receivable is over or understated? Virtuals CFO says if a business owner has overstated their Accounts Receivable, that means a business is showing that they are owed more than they do. This is generally due to a difficult invoice being entered or typo. Virtual CFO says that if a business owner has understood their Accounts Receivable, that means that a business is making hormone shows on the books. This is usually due to a missing invoice or an error in entering the amount. Business owners should understand that their Accounts Receivable should not be over or understated.
Business owners should also understand what it looks like if there accounts payable is over or understated? Virtuals CFO says that if accounts payable is understated, that means business owner has not entered all of their invoices, or have entered them incorrectly. This ends up making the business owner think they owe less than they actually do. And that the prophet looks better than it actually is. If a businesses accounts payable is overstated, that means that the income statement shows that a business owner is making less money than they actually are.
Another question is why is it okay for entrepreneurs corporate tax accounts to show negative balance? Virtual CFO says that corporate taxes work differently in interim financial statements. Itís not worth ensuring that there is a tax provision monthly. A business owner can do it, but itís costly and time intensive. However, if the business owner wants to make tax instalment payments, itís not going to show up as a tax expense until the last month of the fiscal year. Since it doesnít show up on the balance sheet until month 12, but a business owner is making payments, it will look like the business owner is prepaying the tax. If a business owner is prepaying liability, it ends up looking like a negative number on the income statement that grows every single month. However, when the tax bill is then compliant in the 12th month, it goes to that amount and brings that negative amount back to zero.
By understanding balance sheets and income statements, business owners can ensure that there staying on top of mistakes and errors, so that they can make financial decisions throughout their business here, and the making the best decision that they can, they avoid making big errors that can negatively affect the cash flow in their business.