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

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Edmonton CPA | Are Understanding Financial Statements Necessary

It is very important that entrepreneurs learn how to read the financial statements in their business says Edmonton CPA. The reason why, is because it can help business owners understand how much money they have in their business so that they can decide to make purchases, pay staff for themselves, or if they need to generate more revenue, or engage in some Accounts Receivable phone calls. Industry Canada says that 29% failed entrepreneurs say that running out of money was the reason why their business failed. Business owners can avoid this fate simply by learning how to read their financial statements, and using the information prior to making decisions involving money.

In order to start learning how to read financial statements, Edmonton CPA says business owner should first understand that when they refer to financial statements, there are actually three reports that they are referring to. These reports are this statement of retained earnings, the income statement and the balance sheet. Not only is it important for entrepreneurs to understand is what they are referring to, but they need to be able to read each of these reports and then use the information to make their decisions. One good thing about that is, that each of the reports is only limited to a single page. This is done so that it can be not only easy to read and understand, but easier to compare to each other to guide and entrepreneurs financial decisions.

The second thing that an entrepreneur needs to keep in mind when they are learning about their financial statements says Edmonton CPA is that there is no difference between what an income statement is, and what a profit and loss statement is. The reason why there is confusion, is because most accountants and business owners in Canada call the report an income statement, however it is listed on most accounting programs as a profit and loss statement or PN to L. Therefore, business owners should not get confused especially if they are doing their own bookkeeping about what the differences between a profit and loss statement or what it income statement is.

Once an entrepreneur understands this, they should start learning about what a balance sheet is because it is the first report that they should look as never they are reviewing their financial statements. The reason why says Edmonton CPA is because is going to show an overall picture of the financial health of the business. This report lists all of the assets of the business, all of the liabilities which include all loan payments and financial payments as well as all of the bills that entrepreneurs owes on. Finally, the equity will be listed at the bottom that includes the share capital and retained earnings. A business owner will be able to look at their balance sheets in order to determine if they have enough money in their business to make a purchase or disburse payments.

Ultimately, it is very powerful for business owners learn how to read their own financial statements. Once they learn how to do that, they will be able to use that information to make informed financial decisions in their business as well as understanding why they cannot make that purchase yet, and what they can do to save up for it.

Edmonton CPA | Are Understanding Financial Statements Necessary

One mistake that many entrepreneurs have made, especially when their new in business is to look at their bank statement in order to determine if they have money in their business says Edmonton CPA. The reason why this is not a good idea, is because they bank account balance will not shown entrepreneur how much money there is the business after all of the payment disbursements and check payments have cleared. However, the balance sheet can show entrepreneurs that, which is why it is important to read that as well as all of the other financial statements such as the income statement and statement of retained earnings.

Many entrepreneurs start looking at the income statement in order to make financial decisions in their business says Edmonton CPA. The reason why, is because it can be very easy to read with the revenue listed at the top, followed by direct cost of sales, general expenses and ending in the net income or loss in the business. However this would be a mistake for several reasons. First reason is because income statement only shows information for specific frame of time, typically a month. Therefore, the recommendation is for entrepreneurs to look at the income statement as a six-month comparative statement. That way, they will be able to look at six months at a time, and easily spot trends or anomalies.

The second reason is because it is going to only show the profitability of a certain period of time, not the overall financial situation. For example, an extremely profitable income statement might not mean that an entrepreneur has a lot of assets on their balance sheet. By understanding this, Edmonton CPA says that business owners can start gaining an understanding of their business finances, which will help make more informed decisions in their business about how to spend their money.

The last financial statement report for entrepreneurs to learn how to read is the statement of retained earnings. This is a cumulative balance of all the dividends that have not been taken out of the business. Evidence CPA says this is getting entrepreneurs running total since the day the corporation was started. When an entrepreneur is ready to start dispersing dividends to shareholders, this report will become very important.

When entrepreneurs understand how important it is to read their financial statements, they will be able to learn the information. By making more informed financial decisions, entrepreneurs can increase the chances of staying in business longer, and growing their business. Since there such a high failure rate of entrepreneurs in Canada, business owners can significantly increase their chances are learning how to read and utilize their financial statements in business.