Virtual CFO | Why It Is Important To Understand Balance Sheets
When business owners understand their penalties in their business says virtual CFO, they end up being able to make financial decisions that can help them grow their business, and avoid running into cash flow problems. Many entrepreneurs believe that they can make financial decisions when looking at their income statement, as they are easier to understand, but more important information is contained on the balance sheet, and can help business owners catch errors that exist on their financial statements. Since half of all entrepreneurs go out of the business before being open for five years, and 29% of those entrepreneurs say that the reason why they failed was because they ran out of money. Understanding how to read balance sheets in order to make great financial decisions can greatly impact businesses can help them avoid running out of money themselves.
One thing that business owners need to keep in mind when they are reviewing their balance sheets, is since they are only interest statements, there is chance that there are errors on them. Business owners that are used looking at the financial statements for their fiscal year end from their accountant, may not be used looking for errors, because accountant prepared statements contain fewer errors. Virtual CFO says that being able to find errors can help business owners corrects them, and ensure that their finances stay current throughout the year. By looking at their balance sheets six months of time, will help business owners catch errors, because theyíre going to be able to see any variances from month-to-month that donít make sense. Business owners are only looking at their balance sheets one month at a time, they can miss important information.
Examples of how business owners can catch errors using the balance statement is if business owners notice that there loan balances are not decreasing from one month to the next. Virtual CFO says that if they notice that there loan balance stays the same for certain period of time, they can mean one of two things, that the loom belts amount was not entered at all, I was entered incorrectly on the balance sheet. Both of those situations can end up triggering other errors throughout the balance sheet. If the business owner sees that, they should fix the loan balance entry, and then look for other entry errors. The other possibility of why a loan balance wonít decrease from month-to-month is if the business owner did not make that loan payment at all. Itís extremely important that business owners can mistake and rectify it, so that they donít default.
Keep throughout the year, it easier to prepare year-end financial statements. Virtuals CFO says that it also can help business owners can an understanding of their financial health in their business, so that they can make better financial decisions. The business owner sees that their business is starting to become less profitable, they can increase their marketing efforts, or let staff go. If they are noticing that their business is doing extremely well, they can ensure that there marketing efforts are working, as well as be able to afford hiring the new staff that they are going to need because their business is doing so well. By understanding how to read and correct their balance sheets, business owners can significantly help their business avoid cash flow issues are problem for so many other businesses.
As Albert Einstein was famous for saying, if you canít explain it simply, you canít understand it, virtual CFO says that business owners need to be able to simply understand their balance sheets in order to make important decisions in their business. Half of all entrepreneurs closer business within five years, and 29% of those entrepreneurs end up saying that the reason why they failed because they ran out of money in their business. If business owners can understand their balance sheet, they can by gauging the financial health of their business, business owners can decide whether to hire or lay off staff, or when the right time to make an asset purchase is, and to do so at a time that will cause financial distress to their business. Understanding the balance sheet can go a long way to helping business owners avoid the reason why so many entrepreneurs failed.
Business owners need to understand what is the balance sheet, and why they should look at it first. Virtual CFO says that suites show business owners how much cash business has. It indicates how much and payables are coming into the business, and what payments businesses made out. Bill she will be able to show the business owner what their entire reserves are, and the overall financial health of the business. Business owners typically donít if you their balance sheet simply because they donít understand how to read it. Instead, they think they can make financial decisions based on their income statement, because they can understand that. However, business owners should know that theyíre not going to be able to get an overarching picture of the entire business by their income statement. Also, critical errors that may be found on the balance sheets not be able to be discovered by looking at the income statement alone.
When business owners are looking to their balance sheets, virtual CFO says they should be looking at a six-month comparative balance sheet statement so that they can see six months at a time itís going on in their business. The be able to see if the business is trending, or if thereís any month that has any anomalies that donít make sense compared to other months. When entrepreneurs are only looking at one month at a time, they may miss this information. Business owners should see a six-month comparative balance sheet statement is a powerful tool.
I completely understanding balance sheets, business owners can start important financial decisions in their business, they can help them be proactive in avoiding cash flow issues in their business, which can help them be successful.