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Edmonton CPA | Best Practices When Reviewing Financial Statements

Not only is it important for entrepreneurs to learn how to review their financial statements says Edmonton CPA. It is also important for entrepreneurs to learn how to review them to get the best information out of them. The more effective an entrepreneur be in reading and understand their financial statements, can help them make more informed financial decisions. Whether an entrepreneur is making small decisions like if they can pay a bill, or run payroll, or large decisions like should they hire more staff or purchase and assets these decisions can be much more effective when they are made after looking at the actual finances of the business.

One big mistake that entrepreneurs make when they start learning how to review their financial statements is that there looking at their income statement alone. The reason why they do this, is because the income statement is easy-to-read and very straightforward. Edmonton CPA says it lists the revenue, the direct cost of sales, the general expenses, show the gross profit of the business. These numbers are easy for entrepreneurs to understand. However the reason why it is a mistake to look at the statement alone, is because it only shows what the finances are during a specific time frame. This does not mean a positive or negative income on an income statement is going to be representative of the overall finances of the business.

However, entrepreneurs should become familiar with their balance sheets because that is where they are going to see the overall financial health of their business says Edmonton CPA. Entrepreneurs should understand that when they look at the balance sheets they will see a list of all of the assets in the business, all of the liabilities and the equity. In order for an entrepreneur to understand how well the business is doing, they simply need to look at the liabilities subtracted from the assets. Not only that, but the assets are also going to be listed in the order that it is easiest to be made liquid. Cash, bills that they are owed on, inventory, and then property. Business owners should be able to decipher by looking at this statements if they have a lot of money in their business, or not, or if they have a lot of assets but not a lot of it is liquid all should be taken into consideration.

Therefore, the first thing that an entrepreneur should do is review their balance sheet, and understand the overall financial health of their business. Then, by reviewing their income statement at the same time, they will be able to understand on a deeper level what is going on financially in their business says Edmonton CPA.

Since 50% of entrepreneurs end up failing within five years, the sooner an entrepreneur can earn how to read and understand their financial statements the better. By learning how to do this, an entrepreneur can make better and more informed financial decisions that not only can help them avoid making mistakes, make decisions that can help them grow their business as well.

Edmonton CPA | Best Practices When Reviewing Financial Statements

It is important for entrepreneurs to understand not only that there is a high failure rate of entrepreneurs in business says Edmonton CPA. But that 80% of small business owners lack basic business financial literacy skills. Therefore, it should be very easy to understand that the failure rates of entrepreneurs in Canada can go down if the financial literacy of business owners go up. To that end, it is recommended that entrepreneurs learn how to effectively read their financial statements and use that information to make decisions.

For example, since a balance sheet is going to show the overall financial health of a business in terms of all of the assets and liabilities in the business says Edmonton CPA. The income statement on the other hand is going to show how profitable the business is or is not during a given timeframe. How these two reports work together, is when an entrepreneur can understand the financial health of their business, compared to financial trends over specific months. Therefore, an entrepreneur might see that a specific timeframe was extremely profitable, but compared to their balance sheet, their business does not have a lot of money. Therefore, an entrepreneur might decide to not get financing yet, because they do not want to have to pay another bill that might be difficult.

Another example of how an entrepreneur can use a balance sheet together with an income statements to make an informed financial decision, is if they see that the income statement shows an extremely unprofitable period of time, however the balance sheet says that the business is in a good position says Edmonton CPA. An entrepreneur might be able to come to the conclusion that the reason why that timeframe was not profitable was because it was during the businesses slow time. Or, an entrepreneur might see that drop in income that correlates to the entrepreneur taking a step back from their advertising. They can make the decision that it is time for them to increase their advertising again.

Ultimately, the biggest take away is for entrepreneurs to learn it is important to make informed decisions. Edmonton CPA recommends that entrepreneurs not only get into the habit of reviewing their financial statements regularly, but they do that before making any financial decision in their business. When entrepreneurs can learn this, the quality of their financial decisions will go up exponentially. When entrepreneurs are able to improve the quality of their financial decisions, not only can they avoid making mistakes that will be costly, such as spending money they do not have. But also, Bill be able to make decisions like being able to tell if their advertising campaigns says Edmonton CPA. Or plan when they will be able to purchase assets that can help them grow. By learning this information, it can help entrepreneurs get informed financial decisions that can help them be successful.