Virtual CFO | Teaching Business Owners To Read Balance Sheets
If entrepreneurs are not able to properly read and understand their balance sheets and income statements, they will be less able to make great financial decisions in their business says virtual CFO. 50% of all entrepreneurs fail in business within five years, and 29% of those failed entrepreneurs will cite that running out of money was the reason why their business fails. Making poor financial decisions can contribute to that high number of entrepreneurs who are running out of money. If business owners can understand how to read their financial documents, then they will be better armed to make financial decisions throughout the year for their business.
Many entrepreneurs believe that they can look at their income statement in order to make their financial decisions, but that is not where they should start says virtual CFO. They should first look at their balance sheet because they will be able to catch any errors easier on the balance sheet. Since interim financial statements are more likely to have errors than their year end documents, business owners should always be aware that mistakes are possibility. By reviewing their balance sheets first, all of these errors will be found, where they might not even be noticed on an income statement.
Business owners should keep in mind that when theyíre looking at their balance sheet, the mace find that there corporate tax accountant is in the negative. Virtuals CFO says that if they are used to looking at their year end financial statements and see that there corporate taxes are not in the negative, this may catch them off guard. Business owners should understand that corporate taxes are going to look differently on interim financial statements. If business owners are making tax payments each month, itís not going to show up on their balance sheet until month 12. Business owners should understand that if they prepay a liability, it ends up looking like a negative number that grows more negative each month. The tax bill is added to the balance sheet, it goes onto that amount and cause it to zero out.
Something else a business owner should be mindful of when they are looking over their financial documentation, is that they should pay close attention to their shareholder loan transactions says virtual CFO. The reason itís important to this on a regular basis, is because if there are any charges that are coming out of the shareholder loan account, that is business and not personal, this puts the business owner at risk paying personal taxes on that amount. Since the highest personal tax rate in Alberta is 48%, business owners should be very mindful of not paying more taxes than they absolutely need. Reviewing this account on a regular basis will help them avoid paying personal taxes on amounts that they spent corporately.
Helping business owners understand how to read their financial statements can go a long way in allowing them to make great financial decisions in their business that can help them grow their business.
More often than not, entrepreneurs are going to need to make financial decisions on their business throughout the year, says virtual CFO. Itís not always possible for business owners to wait until their fiscal year and statements come back from the accountant, in order to make financial decisions. They may have to make decisions whether to hire new staff, lay people off, or make asset purchases in their business thatís not possible to wait for. Helping business owners understand their business finances and how to read balance sheets can help them make better financial decisions for their business that can help them grow their business instead of running into a cash crunch.
One of the first things that business owners should understand when it comes to looking over their balance sheets is that there balance sheet is going to look very different than their bank account balance. The reason for that is because their balance sheet is going to reflect how much money they have once all their payments clear says virtual CFO. And business owners need to understand that their bank account is going to look at what the state of things are currently. Payments that are coming out of their bank account will necessarily show until checks clear, as well business owner should understand that deposits they enter into their bank or payments made on a debit or interact machine may take a day or two to appear in their bank account. If business owners make financial decisions based on how much money they have in their bank account, they can run into huge financial problems by not having enough money to cover what theyíre paying for.
Itís also incredibly important for business owners to be able to look for errors on their balance sheet whenever possible. Seats are going to be an obvious place for errors to show up, especially if business owners are looking at a six-month comparative statement says virtual CFO. One way that business owners can catch errors, is if there shows as not decreasing from one month to the next. Thereís only two reasons why this might be the case, and the first reason is if the business owner did not make that loan payment. As an extremely important thing for a business owner to catch, and therefore fix. The second reason that a balance sheet make sure that is if the amount that should have been attributed to paying the loan balance down was applied to a different spot on the balance sheet, if this is the case, it can actually end up causing other errors throughout the balance sheet. If business owners notice this, they should go through the balance sheet and verify if any other errors have been made.
I understanding how to read their balance sheet, and how to look for errors business owners can verify the accuracy of these reports, fix them and make great financial decisions for their business based on them.