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Itís vitally important that business owners understand how to read their balance sheet, because there is often going to be times that business owners are going to need to make financial decisions in their business says virtual CFO. While many entrepreneurs believe that they can use income statements in order to make these decisions, the most vital financial information is actually included on the balance sheet, and in order for business owners to make the best financial decisions they can of their business, they should not only understand how to read their balance sheet, but how to find errors on those balance sheets as well.
Virtual CFO says that itís extremely important that business owners look at their balance sheet first before any other financial statements because there is a fairly good possibility that there are mistakes on these interim financial statements. Since chartered professional accountants create year-end financial statements, those financial statements are less likely to have errors on them. Because of this, business owners need to be able to review their balance sheets and identify what could potentially be errors on those statements in order to fix those errors, and be able to get the best information out of them.
Entrepreneurs should understand all the information that exists on the balance sheets, and then it is a way for business owners to be able to see how the business is doing financially. The balance sheet will be able to show the business owner their financial reserves, itís coming into the business and how much cash a business owner has within the business as well. Virtual CFO says it will also show them what payments are coming in as well as going out. Even if the business owner has had an extremely good month or extremely bad month, doesnít mean that they will be able to have a good gauge of the financial state that there businesses and without looking at the balance sheet.
Itís not not only important for entrepreneurs to review the balance sheet first, but itís in order to look for errors, business owners are going to be best served by looking at their financial statements in the six month comparative statement. The reason why this is so important as virtuals CFO, is because itís going to allow the business owner to see very easily if there are any variances in any month. Variances might be because of things that happened in the business, but variances can also be caused by errors. Anytime business owner sees some extremely higher extremely low. In their six month comparative statement, that should cause them to investigate for errors.
When reviewing their balance sheet, business owners may discover that the cash looks like on their balance sheet is extremely different than what the cash looks like on their bank statement or in their bank balance. Virtual CFO says that the reason why this looks different is because the amounts that are in a business ownerís bank balance subject to uncleared items. For example, the bank balance may show $10,000 in it, but a business owner has written $2000 check that is not yet cashed. If a business owner is looking at their bank balance only, they may believe they have $2000 more than they actually do. By looking at their balance sheet, the $2000 check that they wrote to would be indicated on the balance sheet and will get a better representation of the funds that they have available, not the amount of money that is currently in their bank account.
Business owners are making financial decisions in their business, whether itís hiring staff, paying staff off, or even purchasing assets they should be consulting their financial statements says virtuals CFO. If they are not consulting their financial statements, the chances are very good that business owners end up making financial decisions that are not in their businesses best interest. Since half of all entrepreneurs that open businesses end up closing them within five years, and 29% of them say that the reason why their business failed was because they ran out of money businesses should be very wary of making financial decisions that could end up causing them financial hardship.
Business owners often make their financial decisions based on the income statements in their business, but this is not a great decision for many reasons says virtual CFO. The most important financial information is actually on the businesses balance sheet. Many entrepreneurs donít understand how to read their balance sheets, so the use income statements instead. Business owners also may be unaware that itís much easier for them to catch mistakes or errors that exist on balance sheets, when itís almost impossible to catch those errors on income statements. By learning how to read their balance sheets, business owners cannot only catch mistakes on those financial statements, but they can also improve the quality of their financial decisions.
When business owners are learning how to review with their balance sheets, they may wonder why their corporate tax accountant shows up as negative on those balance sheets says virtuals CFO. The reason they show up as a negative balance is because corporate taxes end up looking differently on interim financial statements than they do on year-end financial statements. Business owners who are making tax payments in instalments, end up looking like their pre-paying tax on their balance sheet, which ends up looking like a negative number that grows each month when a business owner is prepaying a liability. This may cause a business owner to be concerned, however the tax bill is applied in the 12th month of their fiscal year, it goes towards that negative amount and ends up causing it to drop back down to zero.
Business owners should also understand that when it comes to their property, plant and equipment section on their balance sheet, that what should be added into their is there long-term assets says virtual CFO. These long-term assets need to have a value greater than $1000, and have a useful life thatís longer than one year. While itís true that other assets may qualify that are lower in value than $1000, business owners should resist putting them into this account. This section should be reserved for significant assets only.
By understand how to read balance sheets, business owners can catch errors, and make better financial decisions for their business says virtuals CFO. This is a lot much better plan than business owners trying to make critical financial decisions based on their interim income statements.
