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when business owners are not able to make the most informed financial decisions, accounting Outsourcing says it puts their business at risk. However, when business owners are able to not only understand how to read their income statements. But how to use that information, they can make more informed financial decisions in their business that can help them proactively grow their business as well as avoid making decisions that can negatively impact their business. It’s extremely important that business owners learn how to do this early on in their business. Because 15% of all Canadian entrepreneurs fail within the first year of their business. The sooner business owners can learn how to make more informed financial decisions, the sooner they’re going to be able to avoid the failure rate of businesses in Canada.
One of the most common mistakes that business owners make when it comes to their income statement is commingling their corporate expenses and income with their business expenses and income. When they do this says accounting Outsourcing, it makes a business owner be unable to determine how well their business is doing, or not. They won’t be able to see the revenue of their business compared to the expenses in their business, and make business decisions. Therefore, business owners need to understand that while it’s completely appropriate for their corporate information to be on the income statement. It needs to go at the bottom, and a category called other income and expenses. When they do this, business owners will be able to see the profitability of their business. But also be able to see what is happening in their corporation as well.
One of the most important reasons why business owners should do this is so that they can get financing when they need it says accounting Outsourcing. Before a bank or financing company will grant financing to a business, they need to see the income statements for the last few years of the business. If an entrepreneur is putting their corporate expenses in with their business expenses, it might make the business look like it is not profitable when it actually is. The financing company will not lend money to a business that is not profitable, and business owners can stall their business, by not being able to grow because they can’t get financing. This is why it’s incredibly important for business owners not only to understand what is a corporate expense, and where to put it on their income statement.
Another example of how business owners can end up making poor business decisions is if they put corporate income in with their business income. Accounting Outsourcing says that some business owners think that this is the appropriate place to put it. And others simply want to make it look like their business is doing better then it actually is. However, if business owners keep putting the corporate Revenue in with their business Revenue, they might think that they can afford to hire new staff or make purchases that they can’t actually afford. They can end up running out of money in their business which is the second most common reason why Canadian businesses end up failing.
When business owners how to redo their income statement, accounting Outsourcing says learning how it’s organized is of paramount importance. How it’s organized can help ensure that business owners understand what each section is communicating. And it can also help ensure that whether they are the ones that are doing the bookkeeping, or if they are Outsourcing it, they can communicate with their Outsourcing company to ensure that corporate income and expenses are categorized correctly. This can help ensure the accuracy of their income statements so that they can make the most informed decisions possible.
How an income statement is organized says accounting Outsourcing is this way: revenue of the business at the top. Business owners need to be very diligent and ensuring that only the revenue generated through normal means of business should be included here. This means that if a business has recently sold an asset such as Machinery, or a vehicle, this revenue is not included here. Since this is not the typical Bay that entrepreneurs generate income, it should go in the other income category.
Below revenue is where business owners will see the direct cost of sales, or also known as the cost of goods sold. This is where business owners all of the expenses associated with generating that product or service. Included here will be things like the materials needed to produce that product or service, supplies for the equipment needed to be used to make those products or services, and labour. Accounting Outsourcing says it doesn’t matter if the labor is through staff that have been hired. Or if the labor is independent contractors that an entrepreneur has hired on a less permanent basis.
Below the direct cost of sales, will be the gross margin which is the revenue with the direct cost of sales subtracted from it. Below that will be the overhead expenses, and these are all of the expenses of the business before an entrepreneur sells any product or service. This includes expenses such as utility bills, phone and internet bills, the rent or mortgage of the office, Bank charges, administrative staff salary if any, and office supplies to name a few. Business owners need to be extremely careful that they are not including corporate expenses here, corporate expenses belong in the other income and expenses category at the bottom.
Underneath the overhead expenses will be the net income from operations, which is all of the revenue that a business owner has left once they’ve subtracted all of the expenses whether they are overhead expenses or cost of sales. This is an extremely important number for business owners to pay attention to says accounting Outsourcing, because it will tell them if they have enough money in their business to make business decisions like paying staff, paying bills, or purchasing assets.
what business owners will find underneath the net income from operations is the other income and expenses, which is where all the corporate income and expenses should be listed as well as a typical revenue and expenses in the business. Accounting Outsourcing says that when business owners are able to understand how their income statement is organized, they will be able to read it better, as well as ensuring its accuracy, because they will know to either do the bookkeeping more accurately. Or they will be able to tell her accounting Outsourcing company what is a corporate income or expense that it can be categorized properly.
