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

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Virtual CFO | Utilizing Balance Sheets In Business

Itís crucially important that a business owner needs to make a financial decision in their business says virtual CFO, no matter how big or small, a business owner should be reading their balance sheet, to ensure that the financial decision that they are making is in their businesses best interest. Since half of all entrepreneurs are forced to close their business within five years, and 29% of those entrepreneurs say that the reason why their business failed was because they ran out of money. Being able to avoid running out of money by making great financial decisions is of paramount importance to business owners. Many entrepreneurs believe that reading their income statement is going to be enough in order for them to make that decision, but this isnít true. Business owners canít get all of the important information they need to make financial decisions based solely on their income statement. They need to be able to read and understand their balance sheet in order to make the best financial decisions a can of the business.

Business owners may wonder why they need to look at their balance sheet instead of their income statements. Virtual CFO says that while income statements are easy to understand, they donít speak to the overall financial health of the business, only how well the one month did over the next. If business owners want to understand how financial decision is going to affect the entire business, they need to be looking at the balance sheet. Balance sheet is also going to be able to help the business owner find if there are any mistakes in their financial statements that need to be fixed, so that they can keep financial records in their business.

Business owners should upwards of looking at their balance sheets on a six month comparative statement, because are going to be able to see any variances month-to-month that donít make sense. If a business owner only looks one month of time, itís not going to give them enough of the view of the month, to be able to see how the business is trending, or if there are any anomalies that donít make sense. Anomalies can be indicative of errors that need to be fixed, or unique situations that happened in their business. Being able to definitively know that, is important for business owners.

One great example of how business owners can use a financial statement to catch errors, virtual CFO says that by looking at their credit card charges, can be a trigger. If the business owner sees that credit card charges have not changed from one month to the next when theyíre looking at their six month comparative balance sheet, this might indicate to them. It may mean that the credit card charges havenít yet been added to the balance sheet says virtuals CFO. If a business owner only looks on their income statement first, they are going to miss this year.

When business owners are making financial decisions in their business throughout the year, they are basing decision on how financially so that their business is says virtual CFO. If they are not doing the research and reviewing their balance sheets, they wonít actually understand how the financial decision can impact their business. Since 50% of all businesses close the doors to their business before they have been open for five years, and 29% of those entrepreneurs say that the reason why their business failed was because they ran out of money. Business owners learning how to make great financial decisions in their business can go a long way in improving the statistic, and helping business owners from closing the doors to their business due to running out of money.

Business owners should understand why cash looks different on their balance sheet than in their bank account. Many business owners look only at their bank account and they are making financial decisions and this can be very problematic says virtual CFO. The reason for that is because the bank account will not show payments that are scheduled to come out, or scheduled to go into the. Balance sheet will however show everything thatís supposed to be coming out and going into the bank account whether it has cleared or not. If a business owner has recently written a large check but it has not yet been cashed, if youíre looking only at their bank account, is going to show them as having more money than they actually do. Business owners should into the habit of always keeping their balance sheet current, so that they always know how much money they have to work with in their business.

If the business owner has over or understated Accounts Receivable, and affecting their balance sheets greatly. And over stated Accounts Receivable will show a business owner that they have more money coming into their business then they actually do. Over stated Accounts Receivable errors often happens is virtuals CFO because business owners have duplicated an invoice, or entered it twice. Understated Accounts Receivable shows a business owner that they are not making as much money as they actually are. Itís usually an error that occurs because an entire invoices missing, or it was entered incorrectly.

Business owners also need to understand what happens when the accounts payable is overstated or understated says virtual CFO. If the accounts payable is understated, is an error that is probably due to all of the invoices not entered, so it makes a business owner think that they owe less payments than they actually do and that the prophets looks better than it actually is. If business owners have in overstated accounts payable, is going to show that they are making less money than they actually are. Business owners should always be very mindful when theyíre entering accounts receivable and accounts payable, and to them correctly, and have a double check system in place so they know that theyíre entering them properly.