Edmonton CPA | Components Of An Income Statement
Business owners may underestimate the importance of their income statement according to Edmonton CPA. Partially because they do not know the role that it plays in understanding their business finances. But also because it may be difficult for them to understand how to read the statement. Therefore they do not try.
However, the income statement is an extremely important port. That can help entrepreneurs not only understand the financial position of their business. But when they use this statement in order to make financial decisions. They will be able to not only avoid making financial decisions that will be limiting. But they will also be able to use this information proactively to grow their business.
For example, many new entrepreneurs think that they should be able to use their bank balance in order to figure out how much money they have in their business to use. However, this is not true because while the bank balance shows exactly how much money is in their bank account at that moment. It will not show how much money is in the bank that they can use.
Edmonton CPA says if entrepreneurs have checks that are waiting to clear, or electronic fund transfers that are scheduled. If they think they can spend all of the money that is in their bank account. They might end up spending more money than they can afford. And will bounce checks or payroll for example.
However, by using the income statement, business owners can determine if they have the money in their business to hire new staff, run payroll, or by assets. And if they do not have the money to do those things.
They can strategize on how to save money they need to buy those things. Or how they can bring that revenue into their business. Whether it is by engaging in collection calls. Or even going out and generating more revenue. So that they can make those financial decisions.
By understanding how to use an income statement. Business owners can start to understand why they need to learn to read this statement. And what information is contained within it.
The first thing that they should understand are the four main components of the income statement. Starting with the revenue of their business. Which specifies how much money they have brought into their business through selling their products and services.
Underneath revenue is cost of sales, which is all of the invoices and bills that an entrepreneur has generated through creating the products and services they sell. The most important thing to remember about this. Is if they do not have any sales, an entrepreneur will have no cost of sales.
The third category is general expenses. Which are all of the other expenses that a business owner will incur in their business. Whether they sell products and services or not. Edmonton CPA says that typical general expenses can include a wide variety of things including office rent, administrative staff salary, as well as utility bills and bank expenses.
Finally, last category will be for other income and other expenses. That include income and expenses that the corporation has incurred. But is not specifically related to the business itself. Such as corporate income tax, or income from investments that the corporation owns.
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Business owners should take into consideration the importance of learning basic business financial literacy according to Edmonton CPA. Because many business owners are challenged when it comes to understanding business finances. Which ends up with them making some poor financial decisions in their business.
For example, industry Canada has discovered that half of all Canadian entrepreneurs fail in business. And that the second most common reason why business owners fail. Is because they ran out of money in their business.
By learning how to read their income statement. As well as organize the information in their income statement. Entrepreneurs can learn more about their business finances. And help them make better financial decisions. That not only can help them avoid problems. But help them grow their businesses as well.
Not only is it important to know the information that goes on the income statement. But Edmonton CPA says it is also important to understand how to organize this information as well. The recommendation is for entrepreneurs to organize their income statements in numerically descending order.
The reason why numerically descending order is important. Is so that the largest expenses can come to the top of the income statement. Making it very easy for business owners to understand what is the highest expense of their business. And what they can spend time minimizing. In order to have the greatest impact to their bottom line.
It is also important to understand that a properly organized income statement will end up being a single page long. And the reason why this is important. Is because one page is going to be easier to read as well as understand.
This will be helpful for entrepreneurs when they review this statement hard to making any financial decision in their business. If it is longer than a page, not only will it be difficult to read and understand. But it will also take a long time to read. And be inconvenient for entrepreneurs.
How to ensure that their income statement stays to a single page. Is to ensure that they keep their expense categories very broad. Many entrepreneurs think that they are going to have a better understanding of their business finances. If they put their expense categories to many smaller, separate categories.
However, this is going to be helpful. Because not only will it make the income statement longer, and harder to understand. But also because it will increase the time it takes to do the bookkeeping. And increase the probability of making errors.
By learning how to organize the income statement. As well as keep it to a single page, Edmonton CPA says business owners will be able to learn how to read the statement better. And use it to make more informed financial decisions. That can help them grow their business.