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E-Myth – “Why most small businesses don’t work & what to do about it”

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Virtual CFO | Reviewing Balance Sheets To Make Financial Decisions

Business owners who are consulting their interim financial statements in order to make important financial decisions in their business should understand that it is difficult for them to make those decisions based on income statements says virtual CFO. The main reason why many entrepreneurs use their income statements in order to make financial decisions, is because they donít understand how to read their balance sheets. This can be difficult for business owners, because if theyíre not using the proper documents to make their financial decisions, there is a high chance that business owners could make financial decisions that are not beneficial to their business. By learning how to read balance sheets, can help business owners significantly any time they need to make a financial decision in their business.

Many business owners may wonder why the balance sheet is more important than the income statement. And the biggest reason for this is because there may be errors on interim financial statements, simply because they are not being prepared by chartered professional accountants says virtual CFO. Because of that, business owners need to look at the financial statement that is most likely able to help business owners figure out where those errors are. Since balance sheets are going to have more information on them, this is owners will be able to learn how to review them in order to locate any errors that exist and fix them.

An example of an error that shows up on the balance sheet instead of an income statement is if a business owner sees that a credit card balance is unchanged from one month to the next. Virtual CFO says that while itís possible for credit card charges to the identical from one month to the next, the chance of that happening are extremely low, and it should because the business owner to want to investigate why itís the exact same. The most obvious reason for this is there is because the credit card charges have not been entered properly on the balance sheet. If a business owner is only looking on the income statement, theyíre not going to notice this mistake. By adding the proper credit card charges, will restore the balance to the balance sheet, and a business owner can ensure that no additional errors have been made.

Another example of help business owners can catch errors by using the balance sheet, is when business owners are looking at their loan balances on the balance sheet says virtuals CFO. Business owners should be verifying their loan balances are decreasing every single month. If thereís ever a time that a business owner notices that the balance of the loans are not changing, it generally only means one of two things, the business owner did not make that loan payment or the loan payment was entered incorrectly into the balance sheet. By knowing what to look for, business owners can easily locate and fix errors in their balance sheets, much more easily than they could if they were looking at their income statement.

Many business owners wait until they get there fiscal year end created in order to make extremely large financial decisions in their business says virtual CFO. This can be a good strategy, because business owners will be able to make great decisions based on all of the financial information that their accountant prepares for them, but often business owners arenít able to wait to get their year end financials complete in order to make some important financial decisions. If this is owners need to hire more people, or lay people off, these are often decisions that need to be made in the moment. For times like these, business owners should consult their interim financial statements in order to make that decision, to avoid making a financial decision that would negatively impact their business. However, many business owners donít understand how to review their balance sheet, so they make their decision based on income statements, which ends up backfiring.

Business owners often wonder why they cannot use their income statement in order to make financial decisions. Virtuals CFO says that the reason for this is because the most important financial information of business is included on the balance sheets, and itís a lot easier for business owners to detect errors by utilizing the information on their balance sheet first. Not only is it important for business owners to look at balance sheets, but that itís actually most important for business owners to look at their six-month comparative balance sheet instead of looking at their balance sheets from month-to-month. This is going to help them catch any errors by watching months over six-month period for any variances that donít seem to make sense.

Other things that business owners need to be mindful of when theyíre looking at their balance sheets, in order to catch errors, is overstated or understated Accounts Receivable. If a business owner has overstated their Accounts Receivable on their balance sheet, that shows that they are owed more money and is actually coming in. Virtual CFO says that this is often created by excellent duplicating an invoice or entering it twice. If the business owner has understated their Accounts Receivable, itís shows that a business is making much less money than they actually are says virtuals CFO. Itís extremely important that business owners catch these errors and check them.

Business owners should also be very mindful of what happens to their balance sheet when their accounts payable is overstated or understated says virtuals CFO. If a business owner has understated their accounts payable, this is usually due to not entering all of their invoices in. And business owners end up thinking they owe less money than they actually do owe. This makes the profit look better than it actually is. If the business owner has overstated their accounts payable, balance sheet is going to show that they are less money than they actually are.

By being very mindful of their accounts payable and Accounts Receivable says virtual CFO, business owners can mitigate errors simply by reviewing their balance sheets on a regular basis.