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

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Edmonton CPA | effective strategies for reading financial statements

The reason why many entrepreneurs do not read their financial statements on a regular basis says Edmonton CPA is because they do not know how. They review these reports with their accountant at the year-end, and they may even be getting these reports sent to them by their bookkeeper at least once a month. However, if entrepreneurs do not understand these reports, it will impact their ability to make informed financial decisions in their business.

Thing that entrepreneurs can learn it comes to reading and understanding their financial statements is what exactly is referring to when they reference financial statements. There are three reports that are included in the financial statements that an entrepreneur needs to be concerned with. These are the statement of retained earnings, the income statement and the balance sheet. While all of the more important, the balance sheet is the most important to look at first.

When looking at the balance sheet, business owners should first understand what information this report is covering. This is showing entrepreneurs the overall financial health of the business by reporting on all of the assets that exist in the business, against all of the liabilities that exist in the business. At the end of the report, Edmonton CPA says entrepreneurs will be able to see the equity in the business. If an entrepreneur adds the liability up with the equity, it should equal the amount that is indicated in the asset section. Should all balance out, which is why it is called a balance sheets.

When looking at the balance sheet, entrepreneurs should see that it is organized in a very specific way including being on one page. Edmonton CPA says the reason why it is on one page is very deliberate, and is so that entrepreneurs can easily read and understand the report. Entrepreneur should be getting into the habit of reviewing this report before they make any financial decisions in their business, and therefore it needs to be very easy to look at quickly, and get a lot of information from it.

The balance sheet will show a list of the assets in order of how easy it is to make liquid. For example, this includes cash first, accounts receivable next followed by the inventory of the business. At the end is all the property of the business including equipment and machines, vehicles and real estate and buildings. Edmonton CPA says that next will show a list of all of the liabilities of the business. This includes all bills need to be paid as well as all payments that need to happen including on loans, and finances. The end of the report will show all the equity in the business which is all of the share capital and retained earnings. An entrepreneur should be able to look at this, and see if the liabilities are larger than the assets or not.

By understanding the balance sheet first, can help entrepreneurs understand the overall financial health of their business. All other financial decisions can be made easier by understanding this position. The sooner entrepreneur can do this in their business, they greater chance that they will have at making more informed financial decisions that can benefit their business.

Edmonton CPA | effective strategies for reading financial statements

If entrepreneurs are not reviewing their financial statements prior to making any financial decisions says Edmonton CPA, they are inadvertently putting their business at risk. For example, they need to be able to understand if they have the money in their business to make purchases, be able to look at the financial statements of the business to be able to tell if there revenue is increasing or not, or how effective they are marketing strategies are. They can understand if they need to start generating more sales, or if they need to be engaging in accounts receivable.

Ultimately, Edmonton CPA says that entrepreneurs should first learn how to read their balance sheet and then move on to understanding their income statement. What information is on the income statement is all of the revenue, direct cost of sales and general expenses of the business for a specific timeframe. This information is going to show the overall net income or net loss in the business just for that period of time. Entrepreneurs often look at their income statement in order to make the financial decisions of their corporation but that would be a mistake. The reason why, is because matter how well a business performed in a specific timeframe or not, that does not necessarily equate to how profitable the overall business is.

For example, Edmonton CPA says that if a business has had an extremely profitable month, that does not mean the entire year of the business has a lot of assets in it. On the other hand, if an entrepreneur has had an extremely poor month and a low income statement, that does not necessarily mean that they have no assets in their business. It is important for an entrepreneur to read and understand both reports in order to gain a true understanding of what is going on financially in their business.

Ultimately, these are the two most important reports of the financial statement that an entrepreneur should be looking at. Unless that is if the entrepreneur is starting to disburse dividends to shareholders. The statement of retained earnings is the port that is going to show cumulative balance of all of the income or profits that have been left in the corporation. Any dividends that have already been dispersed are not included in this report. Therefore, an entrepreneur needs to view this report in order to determine if they can afford to disburse dividends are not.

Ultimately, business owners should be learning how to read and utilize the financial statements of their business so that they can make informed decisions. The sooner they can do that, the higher likelihood of not only making mistakes are, but also the greater chance they will have at be able to proactively grow their business as well. With how important that is to businesses, entrepreneurs should do this as early on as possible.