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Accounting Outsourcing | Entrepreneurs Need to Learn to Read Income Statements


Not only is it important for business owners to understand how to organize their income statements accounting Outsourcing. But it’s also important that they understand how to read them as well so that they can make more informed business decisions. In fact, entrepreneurs need to be looking at their income statements before they make any financial decisions in their business no matter how big or small. Whether they are running payroll, paying bills, or if they are making large decisions like purchasing assets, obtaining financing, or hiring or laying off staff. These decisions can be made much more accurately if business owners not only can read their income statements better. But understand how they are organized, so they can ensure their accuracy.

The reason why it’s important for business owners to understand how their income statement is organized is so that they will be able to ensure their corporate expenses and income is not commingling with their business income or expenses. While business owners need to ensure that their corporate expenses and income are indicated somewhere on the income statement, the placements of those expenses and revenue is extremely important. If business owners have their corporate and business expenses and revenue commingling, they can end up with accurate financial statements but does not accurately reflect what’s going on in their business.

A great example of how this works is if an entrepreneur has investments in there Corporation says accounting Outsourcing. They might have losses associated with these investments in a given year. Maybe they’ve lost 10,000 or $20,000. If they put these losses in the expense section of their income statement, it might look like their business is not turning a profit, and is, in fact, losing money when this is not necessarily the case. The business might be profiting, but they cannot see it because of how their income statement is organized. They might make the unfortunate decision to lay off staff members, or not purchase an asset that they need in order to grow. This can cause a business owner to stall the growth of their business, or cause them to even start shrinking in size instead of growing.

Another example of how this can negatively impact business is if they have that same investment, but it ends up turning a $20,000 profit in a given year says accounting Outsourcing. If they put this income on their business income. What this will end up doing, is making the business look like it is extremely profitable. Business owners might purchase assets, hire staff, or moving to a larger building that is more expensive and not actually is able to afford it. Therefore, business owners should always ensure that while their corporate expenses belong on the income statement. Where it belongs is of utmost importance.

In order to ensure that business owners are able to make the most informed financial decisions, they should be able to read and understand their income statement and know how it is organized. Whether they do the accounting themselves or get in the sourcing business, they need to be able to articulate what is a business expense and revenue and what is a corporate expense and Revenue in order to ensure their income statements are as accurate as possible.

Accounting Outsourcing | Entrepreneurs Need to Learn to Read Income Statements

Many business owners lack financial literacy that is needed for making the most informed business decisions says accounting Outsourcing. In fact, this is such a problem that intimate, the makers of QuickBooks desktop and QuickBooks Online did a survey in order to find out what’s the financial literacy was for entrepreneurs and small businesses in Canada. What they discovered, was an overwhelming majority of the respondents, 82% to be exact scored less than 70% on the test. They were asked questions such as what is a balance sheet, how to increase the cash flow in a business, and what is an accrual. This means that most small business owners and entrepreneurs and Canada have a large knowledge gap when it comes to business finances. In order to help them make the most informed financial decisions possible, one thing that entrepreneurs should learn is how to read their income statements.

The reason why it’s so important to read the income statement says accounting Outsourcing is because this is the document that business owners need to be reading in order to make informed business decisions. In fact, before a business decision is made regarding any finances in business, and the entrepreneur should be looking at this statement first. In order to understand if they have enough money in their business to run payroll, to pay their bills, or if they need to hire more staff, or lay some stuff off. This can help them understand if they need to grow their revenue, or cut their expenses. It’s such an important tool, that before a business owner makes any financial decisions and their business, they should be looking at this document.

However, many business owners don’t know how to read an income statement, and so they don’t. It can be very easy as long as they know how it’s organized. Accounting Outsourcing says business owners will find the revenue of their Core Business at the top, underneath that will be the direct cost of sales, which is all of the expenses related to providing their product or service. Materials and labour should be the only costs here. Whether the labor is Staff or independent contractors that they hire it doesn’t matter it belongs in this category. Below that is the gross margin, which is the total business owners will get by subtracting the direct cost of sales from the revenue.

Below that will be all the overhead expenses in the business says accounting Outsourcing. These are all of the expenses that a business owner will incur just by opening the doors to their business. It’s extremely important that business owners do not put any corporate expenses here. Only the expenses that relate specifically to their Core Business. Examples of the expenses that should be listed here will be things like the rent or mortgage of their office space, the wages of their administrative staff, office supplies, Bank charges, utility bills, and phone and internet costs.

Blow all of that will be the section called net income from operations. What this is, is the revenue that is left over once they do cost of sales and the overhead expenses have been subtracted from it. This is one of the most important numbers that are business owners need to be looking at in order to determine how much money they have to use in their business.