Accounting Outsourcing | Understanding Income Statements
Many entrepreneurs start their business with a very low level of business financial literacy says accounting Outsourcing. In fact, Intuit who is the company that makes QuickBooks did a survey of entrepreneurs in Canada. They ask them questions like what is a balance sheet, how to increase the profits of a business, and what’s on an income statement. Out of all of the small business owners that responded, 82% scored less than 70% on the business financial literacy test. This is an incredibly high number of business owners that don’t know a significant amount about business finances. Therefore, they might make mistakes that can be very costly. In fact, not understanding the finances might have the business owner commingling corporate income and expenses in with the Core Business income And expenses. what this will do, is make it difficult for business owners to understand what the profitability of their business is, and what they’re going to need to increase their revenue and grow. Therefore, business owners will be able to have a better idea of their Core Business finances when they understand what should be put on their income statement and where.
The first thing that accounting Outsourcing says business owners need to understand is what is the other income and other expense section on their income statement? Business owners, I should understand how an income statement is organized in order to understand that answer to that question. The revenue of the business should be at the top, which needs to be all of the revenue generated by The Core Business. That is followed by the direct cost of sales, which should be supplies and materials as well as the salaries of the employees or contractors hired to carry out the work. If a business owner has no Revenue, then they will not have a direct cost of sale. After that, it is the gross margins, which very simply shows what’s the revenue is minus the direct cost of sales.
When looking at the income statement, accounting Outsourcing says after the gross margin will be all of the overhead expenses of the business. The two largest overhead expenses that a business owner is going to have is the rent or mortgage of the business and the administrative salaries of the business. Other overhead expenses include all of the utilities, phone bills, internet bills office supplies to name a few. After the overhead expenses, then a business owner will see the net income from operations. This is all of the revenue added together with all of the expenses of the business subtracted. This is the number that business owners are going to be most interested in seeing when looking at the profitability of the business and whether they need to increase their revenue.
At the end of the net income from operations, will be the section for other income and other expenses. This is where legitimate expenses and income of the corporation should go when they don’t relate to the Core Business. Things such as taxes, profit and loss from Investments, and the sale of large assets. By keeping these separate, business owners will be able to gain an understanding of what’s the overall profit of their business is, and what the profitability of their corporation is separate.
Accounting Outsourcing | Understanding Income Statements
If business owners are not sure how to read their income statements, they might make mistakes when telling their accounting Outsourcing where to put various income and expenses on the income statement. The reason why certain income and expenses should not go in that the revenue or the expenses of the Core Business, is because they are Revenue are expenses that don’t relate to the business that’s an entrepreneur conducts. By keeping these separate, a business owner will be able to start to understand the revenue of their Core Business, the profitability, and whether they need to increase the revenue, expenses, and what they’re going to have to do to grow their company periods
The reason why it’s important for business owners to separate income from their corporation from their business is that it’ll make it very difficult to understand the overall income of their business. For example says accounting Outsourcing, if the business owners corporation owns a rental property the revenue they generate from the rental property legitimately belongs to the income statement because it’s owned by the corporation. However, business owners should not make the mistake of thinking that the rental income should be included in the revenue of the business Itself. By keeping these separate, business owners will be able to see what’s their business is doing a lot better. The rental property could also have things such as condo fees, utilities, parking costs, that’s all should be listed in the other expenses as well.
When business owners are looking at their income statement, accounting Outsourcing says that business owners need to understand if they should focus on their net income or if they should focus on the income from operations. Accounting Outsourcing recommends that business owners look at income from operations because the net income will also include one-time events that aren’t necessarily representative of what is truly going on in the business. Such as the business might have sold a large asset, that is not how they generate their income. even though it is the income of the core business, since it’s not common and come of the Core Business, it should also be included in other income and expenses.
Business owners also need to understand that their investment income needs to be separated out from the core business as well. Because although the Investments are owned by the corporation, the Investments also don’t have anything to do with the core business. For example, if the core business is a plumbing company, the Investments of the corporation have no business being in the revenue or expenses of the Core Business.
Business owners need to be doing this early on in their business says accounting Outsourcing, so that they can use the income statement to make informed financial decisions in their business. Whether a business owner needs to grow their revenue, or cut expenses, these decisions will be made much easier when they’re able to avoid commingling business expenses and Revenue with corporate expenses and Revenue. It’s also going to help business owners create a business plan every year that can help them grow the profits and revenue of their business so that they can become a larger company.