Virtual CFO | Should Businesses Review Their Income Statement

Business owners are making critical financial decisions in their business, they should not base those decisions on their income statement says virtual CFO. The reason is because the most important financial info is actually on the balance sheet. If business owners donít understand how to read their balance sheet, they may end up making financial decisions that are not in their business is best interest. Since 50% of all businesses close their doors within five years, and 29% of those failed businesses say that the reason is because they ran out of money.

Business owners need to understand why they need to look at their balance sheet first. One of the biggest reasons is a high likelihood that there are errors on the statement is, that they will be able to see. By looking at the balance sheet first, virtuals CFO says that business owners can find mistakes and fix them a lot easier. There is more financial information on the balance sheet. Where the income statement is going to be able to the business owner how the business did in the last month, the balance sheet speaks to the higher overall financial health of the business. It will talk about how much cash the business owner has overall in the business, and is a much better document for business owners to make long-term financial decisions on. Simply because an income statement show that there was a good month, doesnít mean information for business owner to make a significant financial decision on.

Virtual CFO says that not only should business owners be looking at their balance sheet, they should be looking at a six month comparative statement. This is going to allow business owners to review six months of the balance sheet at a time, which is going to be a great tool they can use in order to compare months to see trends or if they have been unusual deviances and one month over another. This can be a reason for business owners to look at that month, and see if there have been any errors on the balance sheet in that month, he attributes to the unusual reading.

Business owners should also understand that their cash is going to look different on their balance sheet than it does in their bank says virtual CFO. The reason is because the amounts on the balance sheets of taking into consideration the payments that business owners have already made, but may not have cleared of the bank. If business owners are making financial decisions based on what it currently in their bank account, but the into consideration any significant payments that are going to clear, business owners can cause amounts to bounce, as checks that were not taken into consideration clear, leaving a deficit in the bank account.

Business owners need to understand that while financial statements is a good way to base financial decisions, they canít base your decision on the statement alone. The balance sheet is going to be the business ownerís best check to ensure that business owners make the best financial decision possible.

Itís extremely important for entrepreneurs to understand their balance sheet says virtual CFO, especially when they are making important financial decisions in their business. Since 50% of all entrepreneurs end up failing business before their fifth year, and 29% of those businesses say that the reason why their business failed was because they ran out of money, business owners who are making financial decisions without consulting their balance sheet, running the risk of making decisions that can cause them to run out of money.

Business owners should understand that income statement is going to show an overarching picture of what the business looks like, and itís going to be difficult if not impossible for business owners to find errors by looking at the income statement alone. However, looking at the balance sheet can be a great tool business owners use in order to catch these errors says virtuals CFO.

An example of this is when a business owner is looking at the credit card balances in a six month comparative balance sheet statement. Virtual CFO says that if business owners notice that the credit card balance is unchanged from one month to the other month, this is usually because charges have not been added to the balance sheet. Business owners can check for that steak, because they should understand that itís less likely that credit card balance will be identical to consecutive months.

Another example of this is in the business owner reviews their balance sheet and sees that there loan balance does not decrease from one month to another business owners should be paying off the loan balance every single month, the reason why itís decrease is most likely because there was an air entering the loan amount in one month on the balance sheet. Were that amount was entered in incorrectly. Either way, not only will it show up here here, but it can also increase errors in other areas of the balance sheet it was entered in incorrectly. These are examples of mistakes that are possible to find while looking at the balance sheet, that are just not going to show up the same way on their income statement.

Business owners should be aware of this, and also how their corporate tax accountant is going to look their interim financial statements. Virtual CFO says that business owners may use to look with their tax accountant looks like year-end financial statement, and that is not how itís going to look on these interim statements. If business owners are making tax payments in instalments, they make see that there is a negative amount of the balance sheet. This is a business owner is not going to be getting the tax bill until the 12th of their fiscal year, but a business owner repays liability, ends up looking like a negative number on the balance sheet. If business owners understand that, they can realize that itís not here, and with their tax bill is applied to it it will zero negative amount.