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Cfo Services | Why It’s Smart To Understand Profit And Loss Statements
When dealing with the financial health of their business, CFO services that entrepreneurs should understand the financial reports in their business in order to help them stay on top of their business finances so that they can make important financial decisions that can help them stay profitable, and avoid running into cash flow issues.
One of the first things that entrepreneurs should learn when they are reviewing their income statement, is that since their interim statements may have more errors in them, because they are not a strictly checked as their year-end statements from their accountant, is that they should look at their balance sheet first before looking at their income statement. This is because since there may be errors, by reviewing the balance sheet first, can help the business owner understand where they are currently at in their business. Once they look at their income statement, they will have a better overall picture of the financial health of their business.
When it comes to looking at their income statement says CFO services, this is owners should understand several things. Their income statement should be listed in numerically descending order in order for the most significant costs to the business at the top of the list. The least significant expenses will appear at the bottom of the list. If an entrepreneur is serious about reducing the costs in their business, they should spend far more time effecting change on the items that appear at the top of the list. Examples of things that will appear at the top the income statement are rent and administrative staff. Things that appear at the bottom of the list will be items such as utilities and bank fees.
Business owners should also note that the power in the income statement, is that it is a simple to read, one-page document. Business owners should business the urge to try and put as much information into that report as possible by including too many subcategories. This is definitely a case of too much information is not a good thing, business owners should ensure that their income statement is simple to look at and read, in order to be able to make impactful decisions based on it.
It’s also important to note, that when business owners are looking at their income statement, if they see a negative number on this, it’s usually a mistake. I understanding this, business owner can figure out why there is mistake, fix it and move on. Since interim statements are less likely to be completely accurate, this is usually the reason for that error.
When business owners can understand what’s going on in their business says CFO services, they will be able to understand how to reduce their expenses and reduce their costs in order to help their business stay profitable. This can help the business significantly avoid cash crunch issues that affect so many entrepreneurs in Canada today.
There so many important financial decisions that a business owner needs to make throughout their year says CFO services, that being able to understand profit and loss statements, can help business owners understand where their business is financially, that can help guide them to make the right financial decisions for their business.
When reviewing their profit and loss statement, entrepreneurs should see that asset purchases do not belong on that statement says CFO services. The reason for this is because even though the asset may have been purchased in a single month, the overall cost of it is to be advertised in the business over a set number of years. It appeared on the profit and loss statement in a single month, and make that month look like it was extremely poor, when that may not of been the case at all. Since an asset purchase will amortize in the business over the next several years, it should not appear on the profit and loss statement.
Business owners should also understand, that the principal portion of the loan won’t appear on the income statement either. CFO services says that even though the loan payments doesn’t appear on the income statement, business owner needs to remember to make those payments on a regular basis, but that the interest of that loan payment does appear on the profit and loss statement. The principal will show up on the balance sheet and is going to reduce the loan balance on the balance sheet over time.
When taking into consideration the expenses of the business, it’s important that a business owner understands very clearly that their own salary does not count as an expense of the business. This is because a business owner should not use their own salary as a way of determining the underlying success of their business says CFO services. It’s important that the business owner keep the salary that they make out of their business expense and to take into consideration how successful the business is based on the revenue it generates minus the other bills they must pay.
Since so many of the interim statements that a business owner will get, are not as strictly checked as their year-end statements, business owners need to understand that whenever they are looking at various interim statements, that there is always a chance that there are errors in them. They should be able to understand how to look for errors, and help he needs to organize their statements, in order to watch for those errors. When a doing that, is by always looking at their profit and loss statement is a six-month comparison. This way, they will be able to see trends, but also if there are any obvious errors. By looking at their profit and loss statement is a month-to-month document, it’s much more difficult for business owner to see if there were any bizarre anomalies that need to get addressed.