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When this happens, business owners can more easily make bad business choices. Which often results in them being unable to afford paying bills. Or not having enough money to be able to pay the employees that they have.
In fact, according to a study done by into it, the makers of QuickBooks. They found that 80% of small business owners scored less than 70% on a basic business financial literacy test. In order to help entrepreneurs make better choices, they need to understand their finances better.
One of the first things that will be recommended to entrepreneurs when they go see their Edmonton CPA. Is learning how to organize their income statement. Because this is the financial statement they will need to look at prior to making any financial decision in their business.
There are four main components of an income statement starting with the revenue. All of the revenue here will be the gross amount of money that an entrepreneur brings into their business through invoicing their customers. Most important thing to understand about the revenue. Is that no bills will be removed from this amount on the income statement.
The second section of an income statement is the cost of sales. These are all of the costs directly related to a business owner’s sales. And if there are no sales, there will be any cost of sales in their business. This typically refers only to their materials and supplies purchased for those sales. As well as the labour used to generate the products that they sell.
The section that comes next is the general expenses section. And this is for all of the rest of the costs associated with running their business. The expenses that quickly are in the section include rent or mortgage of the office space, administrative staff. As well as utility bills and office supplies just to name a few.
And finally, the last section of an income statement is other income and other expenses. These are for all of the different expenses or income that the corporation might generate. But they are not necessarily related to the running of the business. A great example is an entrepreneurs salary should go here. Because it is not an expense of the business. But also can include things like investments that a business owner is paying for. As well as corporate income tax.
When entrepreneurs can understand how their income statement is organized, not only can they keep all of their revenue, and expenses sorted. They will be able to be better able to look at their income statement in order to make financial decisions in their business.
When is is owners meet with their Edmonton CPA. Being able to have a meaningful conversation about the finances of their business is important. Because not only should an entrepreneur be able to understand their business finances during these meetings. But before they make any financial decisions in their business at all.
By learning how to organize their income statement, entrepreneurs will not only be able to understand their finances. But also make more informed financial decisions. So that they can not only avoid making mistakes financially in their business. But use the information to help them grow their business as well.
The reason why many entrepreneurs struggle with understanding their business finances according to Edmonton CPA. Is because they do not have any previous business ownership experience. Which is why it is very important for them to start understanding things like their financial statements. And especially their income statement.
The need to be able to understand their income statement, so that they can look at it before they make any financial decisions in their business. Whether it is paying bills, running payroll, or making purchases. Reviewing their income statement allows them to understand if they can afford to do that. Or if they need to generate more revenue in their business to afford it.
One of the first things that Edmonton CPA recommends all business owners do. Is ensure that they keep their income statement to a single page. If it is longer than that, it is much harder to read and understand. And when that is the case, many business owners will not review it every time they make financial decisions in their business.
How business owner can keep their income statement to a single page. Is by avoiding over classifying all of their expenses. Many business owners think that they are being very diligent in classifying their expenses. So that they can better understand their finances.
But what it is of doing, is making it much more difficult to understand, as well as makes their income statement much longer and harder to read. For example, instead of having one category for office supplies. Entrepreneurs might try to break it down into several different categories.
But understanding exactly how their spending all of their office supplies budget is going to significantly help them understand their finances. However, Edmonton CPA says there are ways around this. That can keep the income statement short. But allows entrepreneurs to categorize their expenses.
By using subaccounts, business owners can put as much detail as they want into their expenses. So that they keep their income statement organized, and short. But if they do want to review all of the different subaccounts, they can run a separate report, so that they can analyse that data if they wish.
In many business owners often make the mistake of putting their own salary into the direct cost or general expenses section. And while this seems like it should be put into of those two categories. An owner salary is not necessarily an expense of the business. And they should be able to understand how much money they are making in their business before they get paid.
Which is why it is extremely important for business owners to put their own salary into other income and expenses. Especially if they are ever going to apply for financing. The financial institutions will typically want to know how much money the business is making before the owners take their salaries.
By understanding their income statements better. Can significantly help entrepreneurs make more informed financial decisions. That can help them when their business more successfully.
