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

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Cfo Services | Profit And Loss Statements Explained

Since 50% of all entrepreneurs go out of business within five years, and 29% of these failed businesses say that running out of money is the reason why their business failed says CFO services. Because of this, business owners can significantly impact this percentage by learning their financial statements, how to avoid them, and how to make better business decisions because of them. If there able to make better business decisions, they will be able to impact their business in a positive way, grow it, avoid running out of money, and avoid being the statistic of the 29% of entrepreneurs who ran out of money in their business.

The first thing that business owners should do is understand what they need to look at says CFO services. The first thing that they should do is look at their balance sheet and then they should look at their income statement. The reason for this is because since the interim statements that they get will not be as strictly checked for errors the way their year-end statements are, business owners can look at their balance sheet first in order to determine if there statement has any errors in it. Knowing how to identify errors is going to be a key to read their financial statements. Reviewing balance sheet first should be considered the quality assurance process.

It’s also important to note that if business owners see any negative numbers on their income statement, that usually indicates an error. CFO services says that business owners should understand that there is only very few instances where a negative number should occur on an income statement, therefore when they see that, they should be reasonably certain that it’s an error that needs to be fixed. This will help them avoid making a decision on the income statement that is incorrect.

Also CFO services says that entrepreneurs should review their income statements in the six-month chunk. This is because it will be much easier to see errors, anomalies as well as trends. If their business is on an upward trend, they can make this financial decision to increase what they’re doing because it’s working. If their business is in the downward trend, is owner should understand that they need to change something, or kick their marketing entire year. Business owners should understand that the feeling the statements six-month comparison can be a quick and powerful tool.

Another helpful hint helping business owners learning the financial statements, is that they should look at the previous year before they look at the current year business. They can see where they used to be, and see where they are now. It should be increasing, and if not, business owner can change direction in their business easily. If it is increasing, business owners should be understand that whatever they’re doing is working to do more of it, or perhaps they have now increase their business to a great degree that they can afford to buy equipment that will help them continue to grow.

When business owners are unsure of what their financial statements are, chances are very low there making informed financial decisions in their business says CFO services. Even though business owners are very busy, they should make the time to learn how to read their financial statements, so that they can make informed decisions have a greater chance of positively impacting their business. Since 50% of entrepreneurs close their business before reaching five years in business, and 29% of those failed businesses who want to say that the reason why their business failed was because they ran out of cash. As Warren Buffett, the great investor said, accounting is the language of business. Helping entrepreneurs learn that language, can help them become successful.

An important tool that business owners can use in order to learn about their financial statements says CFO services, is that their income statement can be an extremely powerful decision-making tool. What makes it a powerful tool, is because it can be very simple which means it is easy to read, and easy to pull information from. Business owners have to resist the urge to try and increase significantly the information on that list. Business owners often believe that by creating several subcategories, they can make the income statement be even more useful. Unfortunately this is counterproductive, business owner needs to be able to see that the income statement is on one page, and be very easy to read.

Another important aspect of the income statement says CFO services, is that the way it is organized. The most efficient way of organizing the statement is not alphabetically as many business owners believe, but by numerically descending order. When it’s organized in this manner, the most significant costs to the business fall at the top of the page, while the insignificant costs are at the bottom. If a business owner wants to impact their business finances very quickly, all they have to do is simply look at what items on the top of the list can be reduced. Examples of what will typically be at the top of income statements, includes administrative salary as well as rent.

Business owners should understand that an easy way to check to see if the income statement has any errors on, is by looking for negative numbers. If they see negative numbers anywhere on the sheet, is usually a very good indication that there’s been a misclassification and an error. By being aware of that, they will be able to help as quick glance income statements is correct or needs to be worked on.

By understanding how to read their financial information, most business owners will be more armed for making great business decisions to positively impact their business, which can help them avoid running out of money in their business, and helping their business grow even more than they were able to before says CFO services.