Cfo Services | How To Review Profit And Loss Statements
There are many things that entrepreneurs should learn understanding their business finances says CFO services. When an entrepreneur can understand their financial statements, how to read them and what different terminology means, they can start learning the language of their business is which can help them be much more comfortable and knowledgeable when they need to make financial decisions in their business. Without this understanding, business owners may find it difficult to make the right business decisions, ones that will help them succeed in their business, and not cause their business any harm.
Business owners are learning how to read their income statements, one of the first things that they should understand is different terminology like what are the direct costs and what are the general expenses in their business. CFO services says that the direct costs in a business or all of the costs that a business owner will incur a price of doing their business. It is the cost of the labour and supplies that they need in order to provide the product or service that a business sells. On the other hand, general expenses are the overhead costs that exist whether a business owner is selling products or services or not. Those costs are generally rent, it been staff as well as office supplies for example.
Business owners often need to look at their direct costs and general expenses to see if they can save any money. They may look at their direct costs going up, and wonder if those costs are out of control, or not. If a business owner understands that as long as the direct costs go up proportionally with their revenue, they have nothing to worry about. CFO services says that if the direct costs are going up much higher than their revenue, then that is a good indication that they should be able to bring those direct costs down.
When looking at the income statement, business owners should organize the information so that it is in numerically descending order. CFO services says that this is so that the most significant financial information appears at the top of the report, with the least significant costs at the bottom. If a business owner is trying to save money in their business, they can spend the most amount of time minimizing cost at the top of the income statement because that’s where they’re going to get their highest return on investment. All of the expenses that appear at the bottom of the report, don’t add up to a significant amount, so I’ll business owner can be mindful of keeping those costs down, it’s going to have the least impact on the business to save those costs.
Cost minimization is extremely important task of a business owner so that there business can be successful and profitable, understand how to read their income statements and understand the difference between direct costs and general expenses can help business owners make decisions that can keep their costs lower, and the prophets hire.
Making financial decisions in business can be difficult says CFO services, and when business owners need to make decisions but they don’t understand how to read their profit and loss statements, that can leads to them making decisions that they don’t understand will impact their business negatively. Since 50% of all businesses close their business within five years, and 29% of those entrepreneurs will cite that running out of money was the reason their business closed. By helping entrepreneurs be more literate in their business finances, can help them avoid making bad financial decisions that can harm their business.
When reviewing their financial reports, CFO services recommends that entrepreneurs look at their balance sheet before they look at their income statement. The reason for this is because especially with interim statements, they’re not as stringently checked for errors, and there may be obvious errors on their income statement. If they can look at their balance sheet first, it will give them a much better idea of the financial health of their business. Once they review the balance sheet than their income statement, they built be able to see if there are obvious errors. This will help them reach their profit and loss statements, and help them make any financial decision they have.
It’s also important for business owners to know that when they are looking at their statements, it’s always most helpful to do a six-month comparison rather than each month individually. CFO services says that most businesses tend to have cycles, or seasons that have better revenue than others, and looking at the six-month comparison can give them a better idea of the overarching health of their finances. If business owners are only looking at one month at a time, it’s harder for them to see why certain months or low in certain months are high. Also, reviewing six months of time can help business owners see if there are any obvious errors. Business owners should understand that a six-month comparison can be quick and powerful tool for quick decisions.
While it might be very tempting for business owners to try and create many subcategories for their income statement, this is actually counter productive says CFO services. This is because too many subcategories can make an income statement too hard to read. The statement should be one sheet of paper, and to be easy to read so that it can be a powerful decision-making tool. If it’s too complex, it’s hard to read and hard to determine what the most important information to get from it on. Business owners can always choose to have the ability to run various subcategories under income statement when needed, but to leave it as simple as possible for the most part.
Becoming financially literate in their business can help business owners understand how to read their profit and loss statements which can in turn help them make financial decisions in their business that can significantly impact their business in a positive way.