Virtual CFO | Why It Is Crucial To Understand Balance Sheets
The importance of balance sheets canít be overstated in business since virtual CFO. Business owners are making critical financial decisions in their business, be able to clearly read their balance sheet will help them make financial decisions that can help their business grow, and avoid cash flow problems. Since half of all businesses fail within five years, and out of those failed businesses, 29% will say that they ran out of money is a reason why their business failed. Many entrepreneurs believe that they can make the same decisions based on their income statements, mostly because they find income statements much easier to read, but the most important financial information is on the balance sheet, so business owners should make it a priority to understand how to read and correct errors.
Business owners should understand the difference between balance sheets and income statement. While income statements can show business owners how will their business did not month, and all of the money that was made, it does not give an entrepreneur an overall view of the entire business. Virtual CFO says balance sheets will be able to show business owner the entire financial reserves of their business, what is to come into the business entirely, and how much cash and owner has their disposal. Not only does it contain more information on the business as a whole, business owners will be able to catch errors that may exist in their accounting based on looking at their balance sheets but not their income statements. Business owners should understand that their interim financial statements, since are not being prepared by their chartered professional accountants, may contain errors. Being able to review their balance sheets to watch for that important in being able to determine their businesses financial health.
Business owners are determining how much money they have in their business, they need to be able to get that information off their balance sheet rather than from their bank account. Virtual CFO says that this is extremely important because what their bank account says is going to be different and with their balance sheet says. Simply because the balance sheet will contain all of the payables that are scheduled to come out of the bank account and go into the bank account, while their bank statement will only show whatís been received or paid to date. For example, business owners that have written large checks, and those checks have cleared, they look at their bank account and think they have a lot more money than they do. If they look at their balance sheet, they will see the checks appear there, and understand that they donít have as much money to spend as their bank statement may show.
By understanding how to read their financial statements and especially their balance sheets, business owners can make better financial decisions for their business, that will help them avoid running into cash flow problems, which may contribute to them having to close their business because they ran out of money.
Anytime entrepreneur makes a financial decision without consulting their balance sheet, there increasing their likelihood of making a poor financial decision that could negatively impact their business says virtual CFO. If business owners donít make great decisions, increases the likelihood of running out of money in their business. Since half of all businesses fail within five years, and 29% of those failed businesses say that the reason they failed was because they ran out of money, business owners should be very mindful of making great to finance decisions always, in order to avoid cash flow problems or money.
Business owners to get into the habit of doing their balance sheet in order to make financial decisions, because their balance sheet will have the most important financial information on it, and then itís easier for business owners to catch errors in their accounting by looking at their balance sheet. Itís important for business owners to note that since interim financial statements are not being prepared by their chartered professional accountants, therefore there is a higher likelihood that there are mistakes on them. By understanding what to look for to catch mistakes, business owners can not only keep their accounting records cleaning, but they can make better financial decisions based on error-free data.
An example of how business owners can use the balance sheet in order to catch errors is when entrepreneurs look at a loan balances as they appear on their balance sheet says virtual CFO. Business owners should be looking to make sure that there loan balances decrease every month, as they pay down their bank balance. If they notice that the bank balance does not decrease from one month to the next month, that could mean a couple of things. The first thing is that the business owner failed to make the loan payment in that month, and itís important to catch so that they can fix the air. Or it could mean that the loan balance amount was entered incorrectly on the balance sheet, and is sitting in another account which is triggering other errors throughout the balance sheet. Anytime a business owner sees the loan balance not decrease from one month to the next, that should tell them that there are errors in the balance sheet that they should look for and fix.
Another example of how an error will appear on their balance sheet, says virtual CFO is if a credit card balance is unchanged from one month to the next. While it may be correct that the credit card charges of not changed, itís more likely that it appears this way of the balance sheet because the credit card charges have not been added to the balance sheet. This should tell the business owner that they may need to check to see what other entries or entered, or entered wrong. By knowing what to look for when it comes to errors in the balance sheet, can help business owners find those errors and fix them, so they have a better idea of whatís going on financially in their business.