Virtual CFO | Why Understanding Balance Sheets Is Important
When entrepreneurs are going to make significant or critical financial decisions in their business, they should be ensuring that they are basing those decisions on the facts says virtual CFO. If business owners are making those decisions without verifying the accuracy of their balance sheets or income statements, then they risk making financial decisions that are not beneficial to their business. Since half of all entrepreneurs close the doors to their business within five years, and 29% of those entrepreneurs say that the reason why they failed in business was because they ran out of money itís extremely important for all business owners to make the best financial decision that they can on current and error-free financial statements.
Business owners should first understand that the reason why they are potentially our mistakes on their interim financial statements, is because since those interim financial statements were not prepared by a chartered professional accountants, there is a higher degree of probability that those interim statements have mistakes in them. Thatís not a problem unless business owners are unable to review those balance sheets and find the errors. Virtuals CFO says that errors can be very easy to catch once a business owner knows how to catch them.
Business owners should first start reviewing their financial documents with the balance sheet. Since itís going to be much more difficult to catch errors looking at income statements, business owners should start with their balance sheets, and then review their profit and loss statement second. One of the first things that business owners should be mindful of when they are looking at their balance sheets for errors, is that when they look at those else sheets six months at a time, is going to help draw any attention to the variances that may indicate errors. Business might be seasonal, or have an extremely busy., But anytime a business owner sees a bizarre anomaly on their six-month comparative balance sheet, that should indicate to them that they should investigate further. It might mean that there is a reason for the variance says virtual CFO, or it might indicate a mistake. This should be considered a powerful tool to help business owner catch mistakes.
Business owners should also understand why the cash on their balance sheet is going to look different than the cash in their bank account. The reason for this says virtual CFO is because the balance sheet is going to be subjected to any uncleared items. Checks that a business owner has sent out, or deposits they made, or photos from their debit or credit machine that takes a couple of days to deposit, all can attribute to things showing up on their balance sheet that doesnít necessarily show up in their bank account yet. When a business owner is making a decision financially, they should consult with their balance sheet, because that would be an accurate representation of their finances once all of the uncleared items have cleared. If the business owner looks in their bank account, it may show that they have a lot of money or not, when thatís not necessarily the case because they are either sending out a lot of checks or waiting on a lot of amounts to be deposited into their account.
Entrepreneurs are often tasked with making financial decisions in their business such as if they should purchase assets, hire new staff, or whether itís necessary for them to lay off staff says virtual CFO. A lot of these critical financial decisions canít wait for the business owner to reach their fiscal year end, and then wait another six months for them to get their year end financial statements prepared. When a business owner needs to make a financial decision in their business, sometimes itís extremely important that they make that decision quickly. The financial health of their business may depend upon it. For example, if they have been seen a decline in business, they may opt to not purchase that assets, or how to let a couple of people go in order to have the money for the future.
One of the first things that business owners should understand is while they may want to review their income statement first, itís much harder to catch errors on income statements, so they should look at their balance sheet first. Virtual CFO says that itís extremely important that business owners understand that the reason why there could be errors or mistakes on their interim financial statements, is because since they are not being prepared by chartered professional accountants, there is a higher degree of probability that there is mistakes. When business owners get their year end financials, thatís prepared by chartered professional accountant who has verified the arithmetically correctness of the numbers so they are less likely to be incorrect. Once a business owner reviews the balance sheet to verify the correctness of the numbers, then they can look at the profit and loss statement.
Many business owners may not know even what a balance sheet is says virtuals CFO. Business owners should understand the balance sheet speaks to their reserves and what is set to come into the business. Itís going to help a business owner determine how much cash they have, what peopleís are coming in and what payables are going else. Just because a business owner has a good month or a bad month doesnít indicate the overall financial health of their business.
Once they know what a balance sheet is, and what contain errors, virtual CFO says business owners need to be able to look at your balance sheet six months at a time period. The reason for this is because business owners are going to be able to look at six months at a time, and if thereís any extremely high peaks are extremely low values, they should be able to see that easier on a six-month comparative statement, then one month of time. That will allow them to ask the question if that is an error, or to figure out what was happening in the month to cause such an extremely high peak or such a low value.