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

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Accounting Outsourcing | Learning To Read Income Statements

Business owners need to understand how important it is to learn how to read their income statements correctly says accounting Outsourcing. They needed to be able to read their income statements before making any business decisions no matter how big or small. For example, business owners need to be looking at their interim financial statements prior to running payroll, paying bills, hiring or laying staff off, or purchasing assets. Since business owners should be running payroll every two weeks on average, they need to be looking at their income statements at least every other week. If they are inaccurate, or out-of-date, they could end up making the wrong business decision, thinking it was the right one based on what they saw on the income statement. Therefore it is very important that business owners learn how to Ensure their income statement is accurate.

One of the first reasons why business owners end up with inaccurate income statements is because they are putting the income of their corporation mixed in with the income of their core business. Accounting Outsourcing says this is wrong because what’s the corporation is doing is different from the Core Business. A great example of this is if a business owner has a rental property that’s the corporation owns, and they get rent checks. By putting the rent checks as revenue in with the core business, business owners might end up with an income statement that looks like the business is exceptionally profitable. However, it might not be that profitable, it’s might end up to business owners paying bills, paying staff, or buying assets that they can’t afford. This will have business owners run out of money in their business very easily by making this mistake.

Another way that business owners can make the wrong Financial conclusions by not properly separating out income and expenses from their corporation is if a business owner again has a rental property, and are given a special assessment for $20,000. By putting that expense in the business expenses can make the business look extremely unprofitable says accounting Outsourcing. This might lead to a business owner coming to the very difficult decision to lay staff off or to not purchase the assets that they so desperately need to grow their business. Because of this, they might end up stalling the progress and their business, and end up going out of business because of it. This is why business owners need to learn to keep their corporate income and expenses separate from that of their Core Business.

When do its owners are able to understand where other income and expenses should be listed on the income statement, it will help them ensure that they keep it separately if they are doing their own bookkeeping. If they are sending out there bookkeeping to an accounting Outsourcing company, then they are going to need to easily communicate to the accountants that it is corporate income or expenses so that’s the accountants can put it in the appropriate place in the Income statement.

Accounting Outsourcing | Learning To Read Income Statements

Many entrepreneurs do not know enough business financial literacy to keep them from making mistakes says accounting Outsourcing. And while business owners need to be looking at their income statement every other week in order to make informed financial decisions, if they don’t know how to read their income statements, they might end up making the wrong decisions, that put their business at risk.

When business owners are looking at their income statements, they should see that the revenue of their Core Business should be listed at the top. The only things that should be listed here since accounting Outsourcing are all of the payments that customers made to a business for their products or their services. All other Revenue should not be listed here.

Underneath the revenue, business owners will see the direct cost of sales, which directly relates to all of the things that a business owner has to buy or pay for in order to generate the product or service that they sell. Some examples of the direct cost of sales would be labor, whether they are direct employees of the business, or if they are independent contractors. As well as the supplies and materials that an entrepreneur needs to buy in order to create the products or deliver the services.

Underneath the direct cost of sales is the gross margin, and what that is says accounting Outsourcing is all of the revenue of the business minus Direct the cost of sales. underneath that, is all of the overhead expenses of the business. Business owners need to take notes that these are all of the expenses that are incurred by way of opening the doors to do business. The only expenses that should be listed here are the ones that are directly related to opening the doors to the business. And as such, these are all of the expenses that will be incurred without making a single sale. Examples of overhead expenses will be the wages for all administrative staff, the rent or mortgage of the office space, utility bills, phone and internet bills, Bank charges and office supplies to name a few.

Underneath the overhead expenses will be the next income from operations and will show a business owner all of the money that they have left once they have taken away all of the expenses. Accounting Outsourcing says this is where many business owners should end up looking at their income statements in order to make financial decisions in their business.

Underneath the net income is the other income and expenses category, which is where business owners should put all of the income and expenses from their corporation including income from rental properties, profit and loss from Investments, and their own salary.

Accounting Outsourcing says the sooner business owners are able to understand this, the sooner they’re going to have accurate income statements, and the sooner they’re going to be able to make the right decisions in their business financially. Business owners need to learn this early on, because in order to get financing or to sell their business they’re going to have to show a very long history of profitability, which may not be possible if they are commingling their expenses.