Edmonton CPA | An Organized Income Statement Is Easier To Read
Many entrepreneurs struggle with understanding their basic business finances when they first open their business according to Edmonton CPA. And even if business owners try to use their income statement to understand their business finances. If it is disorganized or longer than one page. No matter how much they might try, it is very difficult to read and understand if it is not one page and organized.
One of the first things that Edmonton CPA suggests, is for an entrepreneur to understand the four components of their income statement. So that they will be more likely to understand the information when they look at their statement.
Starting from the top, a business owner will see the revenue category. Which includes all of the money that an entrepreneur has brought into their business through selling their products and services.
Underneath revenue is cost of sales, which will be directly related to the costs associated with producing their products and services. Edmonton CPA says typically they will have the material purchased to produce those products and services. As well as the labour that a business owner needed to pay for to produce them. The labour can be staff that is on payroll or independent contractors.
The third category is the general expenses. And are all of the other expenses. That are not associated with cost of sales. General expenses are incurred whether an entrepreneur has generated sales or not. And will be fairly static from month-to-month.
Business owners should take into consideration that these are some of the largest expenses that they will incur. And will include things like the rent or mortgage of their office space, the salaries of their administrative staff, and amortization of their equipment.
But can also include a lot of little expenses. Such as their phone, Internet and utility bills. As well as bank charges and office supplies just to name a few.
Below they general expenses are the other income and other expenses. And many business owners are not sure what this category includes. But very simply puts, is all of the income or expenses that the corporation has generated. But are not specifically related to their business.
For example, if a corporation owns investments in those investments generate an income. That should be listed here. But expenses as well including corporate income tax should belong in this category as well.
When the most important things for business owner to keep in mind. Is that they are salary blogs in this category. Because it is neither a cost of sale or general expense. Because they are the owner. How much they get paid is essentially a tax calculation. And based on an entrepreneur’s lifestyle as well.
By understanding these components. Can help a business owner understand what they are looking at when they review their income statement. So that they will be more likely to be able to understand the information. And know what it is saying when they review it prior to making financial decisions in their business.
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80% of small business owners scored less than 70% on a basic business financial literacy test according to Edmonton CPA. Which shows that there are many entrepreneurs who lack financial knowledge in business.
This can cause all sorts of problems. Including entrepreneurs making poor financial decisions. That might end up with them running out of money in their business very quickly in their business ownership.
In fact, according to industry Canada. Calf of all Canadian entrepreneurs end up failing. And the second most common reason why is because they ran out of money.
Edmonton CPA suggests that if entrepreneurs learn how to read their income statement better. As well as keep it organized they would be better able to understand this statement. So that they could make more informed financial decisions in their business.
For example, many business owners think that they are going to be able to understand what is going on in their business. If they look at their bank statement in order to make financial decisions. While this seems like it would work. It is not accurate.
Because the bank account shows exactly how much money they have in their business at that moment in time. But not necessarily how much money they have in their business to use overall.
For example, a business owner might have scheduled electronic fund transfers, or have written several checks that only some have cleared. If they look at their bank balance. They will not see what electronic fund transfers are waiting to clear. Or wet checks a business owner is still needing to clear.
This will have an entrepreneur who uses their bank statement to make financial decisions. make decisions that could end up having them run out of money. By spending money that was not free to spend.
This is why learning how to read and organize an income statement is important. However it is not just important for an entrepreneur to know what information is on an income statement. How it is organized is just as crucial.
For example, Edmonton CPA suggests listing the expenses in numerically descending order. So that business owners can see very easily what are the main expenses of their business. And what are not very impactful to their bottom line.
If an entrepreneur ever needs to minimize expenses. They will be able to very easily see which expenses are the ones they should spend their time and energy minimizing. In which expenses they should not worry about.
Edmonton CPA also recommends that entrepreneurs keep their income statements to a single page. So that it can be easier to read and understand. And how they can do that is to avoid creating many different expense categories.
Many business owners think that they are being very clear and help them understand their business finances easier. But instead of making their income statement better to read. There making longer, which is harder to read and understand.
Therefore, business owners need to understand not only the information that is on their income statement. But how to organize it so that it is easy to read. They can use the information easier.