Virtual CFO | Why Reading Balance Sheets Is Important
When entrepreneurs are making financial decisions in their business, itís very important that they review their financial documents in order to do so says virtual CFO. Itís important that business owners not only understand how to read their balance sheets, but also how to detect errors on those balance sheets so that they can help themselves make the best decision for their business possible.
Itís more possible that there are mistakes on interim financial statements and there are on year end financials prepared by their accountant says virtuals CFO. Because of that, business owners need to be able to catch errors and fix them, in order to avoid making financial decisions based on poor information. If entrepreneurs are reviewing their income statement first, itís less likely that they will catch the mistakes, because they are much more obvious on balance sheets. When business owners are looking at their balance sheet, they should ensure that it is a six-month comparative statement rather than each individual month of time, so they will be able to see friends and variances. These variances can often indicate errors, so itís extremely important. If business owners are looking at each individual month at a time, they may miss catching some errors.
When entrepreneurs are reviewing their balance sheets, they should understand what it would mean if they overstated money in their accounts receivable says virtual CFO. If an entrepreneur has overstated their accounts receivable, that means that it shows they are owed more money than is actually coming in. This is often because an entrepreneur has entered a duplicate invoice, or has made a typo. If an entrepreneur has understated your Accounts Receivable, the business is making more money than their balance sheet will show. This is usually due to a missing invoice, or an entry error when the business owner is entering invoices. It is extremely important that business owners review their statements in order to guard against these errors.
Business owners should also understand what it looks like when their accounts payable is understated. This is usually due to an entrepreneur not having entered all of their invoices yet. This makes business owners believe that they owe less money than they actually due, and that the prophet looks better than it actually is says virtuals CFO. The business owner has overstated their accounts payable, it shows on the income statement that a business owner is making less money than they actually do.
Business owners also need to understand that itís important to not just look at their bank balance when they are checking to see how much money their business has. The reason for that says virtual CFO is because if the business owner is looking at your bank balance, different payables may not have cleared, business owners think that they have more money than they actually do. Entrepreneurs always look at their balance sheet because that more accurately reflects the state of how things will be once all the payables are cleared. If a business owner looks at their bank balance, and may cause them to spend more money than they actually have which can create huge problems.
Entrepreneurs should place a high priority on learning how to read their financial statements, especially their balance sheets says virtual CFO. The reason is because this can help business owners understand the state of their finance in their business, which they will need to understand if they are going to make critical financial decisions in their business. Not all financial decisions can wait until the business owner has their year-end financial statements back from their accountant every year, by learning how to read balance sheets properly, business owners can help themselves make the best financial decisions for their business throughout the year.
Many business owners think that it is adequate to look at their income statement is, but the income statement may have errors on it that are extremely hard to catch. Virtual CFO says when business owners look balance sheets first, they will be able to catch errors a lot easier. Catching these errors can ensure that their accounting records have stayed up-to-date, and can help them make important decisions in their business. One of the first things that business owners should do is ensure that when theyíre looking at their balance sheet, that they are looking at a six-month comparative statement. The reason for this is because a business owner will have their attention drawn to any variances that donít make sense over time. If entrepreneurs are looking only at one month time is going to be much harder for them to see the experiences.
One way that entrepreneurs are going to be able to use their balance sheets in order to determine if there are any errors, is if they notice that the amount that the owe on their loans donít change from one month to the next. Which will CFO says this should cause a business owner to look for one of two possibilities, either the amount that should have been entered for the loan payment was entered into another account, which is causing other errors throughout the balance sheet, for example if it was entered in profit and loss it will show that the business made for less money that actually did. The second possibility is that the business owner didnít actually make the loan payment in that month, and they need to fix that there quickly. Not only is this an example of her that a business owner will be able to see easily on the balance sheet, but why itís important that they look at a six-month comparative statement as well.
Virtual CFO says that another way business owners can ensure that their balance sheets are correct or not, is that theyíre looking at the credit card balance from month to month notice that is also unchanged. While itís possible that the credit card balance will remain exactly the same from one month to the next, this usually is indicated of credit card charges that have been added to the balance sheet. This can cause a business owner to ensure that all charges have been added to the policy properly. if the business owner is only looking on their income statement first, they are going to miss this mistake.