Edmonton CPA | Effective Ways To Review Financial Statements
If entrepreneurs are able to learn how to review the financial statements says Edmonton CPA, they will be able to make more informed financial decisions that can help them grow their business. This is very important for entrepreneurs to learn early on in their business, so that they can avoid making the mistakes that cause entrepreneurs to fail. In fact, industry Canada says that 15% of entrepreneurs fail in their first year, 30% fail by their second year, and 50% fail by their fifth year in business. The sooner entrepreneurs can learn how to make more informed financial decisions, the sooner they will be able to avoid making mistakes that can cost their business.
In order for entrepreneurs to learn how to review their financial statements, they should first understand what the financial statements include. Edmonton CPA says that this is a term for a grouping of financial reports including the statement of retained earnings, the income statement as well as be balance sheet. It is very important for entrepreneurs to learn how to review and understand each one of those three reports, and once they know how to read them, they can then start reading those reports together in order to make more informed decisions.
Not only should entrepreneurs understand these reports, but if they are able to use them prior to making any financial decisions. No matter how big or small the financial decision is, it will be improved upon by looking at the facts before an entrepreneur makes it. The first thing that entrepreneurs should understand, is that the balance sheet should be the first report that an entrepreneur looks at. This is going to tell business owners what the overall financial position of the business is as well as being able to catch anomalies. By looking at this information first and understanding the overall financial position of the business can help entrepreneurs gain an overall understanding of if the business is making money or not.
Once an entrepreneur has read and understood their balance sheet, and caught and fixed any errors, then they should look at their income statement alongside their balance sheet in order to gain a deeper understanding of what is going on financially in the business. Since the income statement is going to show how profitable a certain period of time is in their business, business owners should keep in mind that matter how profitable or not those months were, they need to be considered alongside the overall financial health of the business.
An example of this, is if an entrepreneur sees that the overall financial health of their business is very positive, and yet the income statement shows that they were not very profitable in a certain time period, entrepreneur can decide not to lay off staff, because that period of time was during typically slow. In their business.
When entrepreneurs understand their finances better, they make more informed decisions says Edmonton CPA. The sooner a business owner can learn this, the sooner they can not only avoid making costly financial mistakes, but the sooner there able to be proactive in running their business, learning what they can do to be more profitable and make more money.
Edmonton CPA | Effective Ways To Review Financial Statements
Many entrepreneurs know that it is important to make informed financial decisions says Edmonton CPA. However, they may have a lot of different opinions about what an informed financial decision is. A business owner should get into the habit of reviewing their financial statements not just at their year-end. But intermittently throughout the year. By reviewing these financial statements on a monthly basis, and using that information to inform their financial decisions, can help entrepreneurs.
When entrepreneurs are new in their business, they often believe that they can find out the financial position of their business simply by looking at their bank statement. This would be a huge mistake, because especially as the business grows, and entrepreneurs understand that the amount of money that is showing in their bank account is not necessarily representative of the money that they have to spend. For example, if a business owner has several outstanding checks that have not been cashed, by looking at the bank balance, they may end up believing that they have more money to spend than they do.
However, Edmonton CPA says that entrepreneurs can understand how much money they have to use in their business by looking at their balance sheet. The balance sheet will list all of the assets in the business starting with cash, going to account receivable, followed by inventory and then property. Its listed in the order of how easy it is to make those assets liquid. Next, an entrepreneur will be able to see the liabilities of the business including all accounts payable and loan payments they must make. If an entrepreneur wants to know how much money they are read to spend in their business whether it is to run payroll, pay bills or even purchase assets, their balance sheet can help them make that decision.
However, business owners should not simply look at their balance sheet prior to making financial decisions. Edmonton CPA says it is important that business owners look at their income statement after they have read and understood their balance sheet. The reason why, is because the income statement will show how profitable certain periods of months were in the business. By understanding these two reports, entrepreneurs will be able to understand what is going on financially in their business, so that they can make more informed business decisions.
If entrepreneurs are not looking at any information prior to making financial decisions, Edmonton CPA says they could risk making poor decisions. Since 29% of all entrepreneurs that fail say the reason why they fail is because they ran out of money, entrepreneurs can avoid that by learning how to make informed financial decisions. The sooner they can develop the skill, the more successful they will be in running their business.