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In order to help entrepreneurs understand how to read their financial statements, Edmonton CPA says business owners should first understand all of the various component parts of the financial statements. In fact, when an entrepreneur here is financial statements, they should understand that it is referring to a group of financial ports that they can either get from their accounting software, or could be supplied to them from their accountant or bookkeeper.
The three reports that entrepreneurs should look at from their financial statements are: the income statement, balance sheets and the statements of returned earnings. Not only are these important reports to review, but the order in which an entrepreneur reviews them is important as well. Entrepreneur should be reviewing the balance sheet first, not only because it contains an overview of the finances of the business, but because entrepreneurs can catch mistakes easiest on this report. The income statement is the report that needs to be looked at next, because it shows the profitability of a specific timeframe. Lastly, an entrepreneur should be reviewing the statement of retained earnings, in order to see what the dividends are in the business that have not been dispersed.
Once an entrepreneur understands what three reports are, they should understand each of the reports, and what information is contained on each one. Edmonton CPA says that entrepreneurs should understand that while the balance sheet shows the overall financial health of the business, it is laid out very specifically. They should see the assets listed at the top, and in order of how easy it is to make those assets liquid. This means it starts with the cash, moves to Accounts Receivable, inventory is next, followed by the property of the business including machinery, equipment, vehicles, buildings and real estate. Next down on list, will show the liabilities of the business. These are all of the bills that an entrepreneur has to pay, including all loan and finance repayments and accounts payable. Finally, an entrepreneur will be able to see the equity in the business including share capital and retained earnings. A business owner should be able to add up the liability and the equity in the business and equal the assets. Edmonton CPA says this is why it is called a balance sheet.
The statement of retained earnings is only important for the entrepreneur to look at if they are going to pay themselves dividends. However, since many entrepreneurs do, Edmonton CPA says it is important to know how this is laid out. This report shows accumulative balance of all of the prophets that have been left in the corporation. This does not include all of the dividends that have been taken out. Since dividends are taken out of retained earnings, this is going to show a running total since the first day the corporation started, and will list all of the dividends less what have been paid out over time.
By understanding each of the financial statements, Edmonton CPA says that entrepreneurs can start to develop an understanding of how to use this information to make informed financial decisions in their business. The sooner they can understand this, the greater chances of an entrepreneur making great financial decisions.
The reason why so important for entrepreneurs to learn how to read their financial statements says Edmonton CPA, is to help them make informed financial decisions. In fact, into it did a survey of small business owners in order to stand how much they understood about their business finances. 80% of the respondents scored less than 70% on this test. In addition to that, business owners should take a consideration that the failure rate for entrepreneurs in Canada is at 50%. Therefore, it stands to reason that when an entrepreneur is able to increase their business financial literacy, they should be able to increase the chances that they will succeed in business.
It is important that when an entrepreneur here is the term financial statements from their Edmonton CPA they know what that means. This means there are three reports that are included in the financial statements each that need to be read and understood separately from each other, before being used in conjunction with each other to make decisions. They will have the balance sheet, the income statement and statement of retained earnings.
An entrepreneur is often very familiar with the income statement, but they need to understand that they cannot use this statement alone in order to make financial decisions. One of the first reasons why, is because this report only deals with a specific timeframe. Therefore, it can tell a business owner a lot of great information about the profitability of that time, it is not going to give them an idea of how profitable the business is as a whole.
When an entrepreneur looks at their income statement, Edmonton CPA says that they should notice at the very top will contain the revenue. This is all of the money that the business brought in for the time represented on the income statement. Next on the list, will show the direct cost of sales. This includes all of the expenses that were incurred as a direct result of selling the product or service. This means subcontractors, and materials. The next on the list, will show the gross profits. This is the revenue subtracted the cost of sales.
However, it is important for an entrepreneur to know that there is additional expenses in the business other than the direct cost of sales. Because of that, Edmonton CPA says next on the list is all of the general expenses, which are all the expenses that an entrepreneur will have regardless of if they sold a product or not. This includes expenses like rent, utilities, office supplies and administrative staff. At the bottom, it is going to show the net income, or net loss. While it is important for entrepreneurs to understand how profitable this timeframe is, they need to understand that how profitable or not a specific timeframe is, does not necessarily indicate how profitable the business as a whole is.
By understanding all of the various reports that are represented in a financial statement, entrepreneurs can learn how to read them. By reading them and using that information to help them make informed decisions, can help entrepreneurs not only avoid making errors, but help entrepreneurs know what they need to do in order to help them grow their business.
