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Cfo Services | Why It’s Important To Understand Profit And Loss Statements
Business owners often require help when it comes to understanding their business finances, in order to make the best financial decision that they can says CFO services. Without completely understanding how to read their reports, can leave them without the proper tools or knowledge on how to make the best financial decision for their business. Since 50% of all businesses close their business within five years, and 29% of those businesses say that they ran out of cash. If business owners want to avoid running out of cash in their business, making great financial business decisions can go a long way in helping them in this quest.
One of the first things that business owners should understand is when they are reviewing their income statement, they should generally be listed in numerically descending order. CFO services says that is because the most significant costs will then appear at the top of the page. The items that are most likely to be at the very top are rent and administrative staff. If business owners are trying to reduce the costs in their business, they should spend more time on the top of their income statement because reducing those costs are going to give them a higher return on investment. CFO services says that if they look at all of the items there at the bottom half of their income statement, while it is important to control those costs, they will only be able to affect a small amount of cost savings on the entire bottom half. Items that are most typically going to be listed at the bottom half of the income statement will be things like bank fees and phone bills.
Another way for business owners to control costs in their business is to look at direct cost. CFO services says that direct cost is a direct expense of producing the products and services that there business cells. These costs generally include labour and supplies. If a business owner isn’t selling any products or services, then those costs won’t exist in their business. Business owners can also look at general expenses, which is the overhead of their business that a business owner is going to have to pay whether they have jobs in the system or not. CFO services says that those expenses are often rent, and administrative staff.
If business owners are looking at the direct cost in their business, they may see that direct costs are going up, and they may believe that their costs are out of control. CFO services says that it’s important for business owners to understand that as long as their direct costs are going up proportionally with revenue, there is no problem. The more products or services that a business owner sells, the more those direct costs are going to go up, so as long as they’re going up at the same rate as their revenue is going up, there’s no problem.
Understanding how to read their income statement can help business owners reduce cost in their business. This can go a long way in help making their business, or profitable for years to come.
It’s often important for business owners to make financial decisions in their business before their year end statements from their accountant are due says CFO services. Because of this, entrepreneurs should understand how to read their profit and loss statements, in order to understand financially what is going on in their business. This can help them reduce costs in their business as well as know if their business can withstand purchases that are necessary, if they should hire more people, or that people go. As Warren Buffett, the great investor was famous for saying, “accounting is the language of business”.
When looking at their expenses, it’s important that entrepreneurs separate their own salary from all other expenses in their business CFO services says that it’s important that the business owner’s salary is kept away from the activity of the business. Because a business owner should not utilize their salary as a way of determining the underlying success of their own business. Since their salary that they take out of the business is essentially a tax decision based on tax minimization strategy for their family, it’s important that a business owner understands that their salary isn’t part of the business expenses.
Also it’s important to note that asset purchases should not be indicated on the profit and loss statement of the business. This is because they need to match the expenses to their revenue and that the asset that is purchased in the business is going to benefit the business for as long as it is useful so that asset should actually amortize in the business over the next several years, whichever is the life of that piece of equipment. If the asset does appear on the income statement, then it will look like there’s been a huge deficit in the month it was purchased, even though that may not have been reflective of how successful that month actually was says CFO services.
It’s also important to note that the principal portion of the loan will also not appear on the income statement. However CFO services says that the interest will appear on the profit and loss statement. The principal will show up on the balance sheets, and be reduced on the balance over time as the entrepreneur pays back the loan. It’s very important that a business owner understands that even though they must make a loan payment, it is not going to appear on the income statement.
This way, business owners can understand what their financial reports look like, and why says CFO services. This can help determine if there are any mistakes on their financial statements, and what their financial health of the business looks like, which can help guide them in important financial decisions.