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

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Virtual CFO | Why Reviewing Balance Sheets Is Important

Business owners should get into the habit of regularly reviewing their balance sheets as virtual CFO. The reason why, is because business owners can gain a deeper understanding of the financial health of their business simply by reviewing their balance sheet. Since half of all entrepreneurs close their business within five years, and 2010% of those businesses say that the reason they close their business was because they ran out of money. Redeeming and understanding balance sheets can help business owners gauge the financial health of their business, they can help guide their business decisions, to avoid running out of money and help them grow their business.

One of the most important reasons why business owners should be reviewing their financial statements regularly, is to help them avoid. Interim financial statements may have errors on them, that can be very time intensive to fix if a business owner waits until their fiscal year end and have their accountant fix those mistakes. Thereís a high chance says virtuals CFO that those mistakes are harder to fix, because the business owner canít remember certain circumstances a year later. By staying on top of errors, and fixing them in the moment, can help business owners have more accurate financial records in their business, that can help them make better financial decisions.

An example of what business owners should be reviewing on a regular basis is the individual transactions in their shareholder loan account. Virtual CFO says that this is extremely important to review regularly, not only because if corporate expenses have been attributed to shareholder loan account, business owners end up paying personal taxes on business expenses. The reason why this is so bad is because personal tax in Alberta tops out at 48%. Small business tax in Alberta is currently at 11%. Business owners who end up paying personal tax on business expenses, are paying 37% more tax than they need to. For this reason, itís important that business owners review their shareholder loan account regularly, and remove all items that are business expenses. If business owners wait until year end to do this, they may forget what certain expenses are, and end up paying higher tax.

Business owners should also understand when there reviewing their balance sheet what their corporate tax accountant should look like. Many business owners get concerned when they review their interim statements and see that it is a negative amount, even though they have been paying their tax instalments every month. Virtual CFO says that business owners should understand that if they prepay a liability as making tax instalments on corporate tax is technically, this ends up looking on interim financial statements like a negative number that grows larger every single month. When the tax bill comes in in the 12th month, itís then added to the balance sheet, which zeros out the negative number.

By understanding how things look on the balance sheet, can help business owners significantly in looking for errors, and making financial decisions based on the information they see.

Business owners are making any decisions in their business, they should be utilizing as much information from as many sources as they can in order to make an informed decision says virtual CFO. This is especially important in business owners are making financial decisions in their business. If they are not reviewing their financial statements, they may be making poor business decisions that could end up forcing them into a cash flow problem. Since half of all entrepreneurs 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, avoiding cash flow issues is vitally important to entrepreneurs.

Many business owners review their income statements, most often because they are very easy to understand. However, business owners should actually learn how to read their balance sheet for a few different reasons. The information that exists on the balance sheet is much better and much more complete than the information on the income statements, and itís also possible to catch errors that may exist in the business is accounting looking at their balance sheet. Itís much less possible for business owners to be able to find errors based on the information in their income statement. Virtuals CFO says that business owners can very easily learn how to read their balance sheet, and gain great insight to their business on the information.

One of the most important things that business owners should do when they are reviewing their balance sheet is to ensure that it is a six month comparative statements. This way, business owners are going to be able to see very clearly if there have been any anomalies in one month that donít exist in any other months. Virtual CFO says that this will help business owners figure out if this is been an error, or if something strange happened in that month that is visible on the balance sheet. Itís also a powerful tool for businesses to be able to see how the business is trending. If their business is growing over time it will be obvious on the balance sheet, and they can make decisions based on this information.

When business owners are reviewing their balance sheets, they may have questions as to why the cash on their balance sheet is different than their bank account statement. The reason for this is virtual CFO is because the amounts on their balance sheet have been taken into account all of the payments that are scheduled to come out of the account and all of the payables that are coming in, for example totals that have been made of their debit machine that havenít yet been deposited into their account. If entrepreneurs make decisions based on information in their bank account, they risk bouncing payments, as the checks that they have previously written get cashed.