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It is very important that entrepreneurs learn how to read the financial statements of their business says Edmonton CPA. The reason why, is because they will be able to make informed financial decisions much easier if they look at their financial statements. However, a study was done by into it, that showed that 80% of small business owners scored less than 70% on financial business literacy tests. This means, that there is a very high chance that they are going to be making some very big financial stakes if they do not learn this right away.
One of the first things that entrepreneurs should understand, is that there are three components of financial statement. Edmonton CPA says that they are an income statement, a statement of retained earnings and the balance sheet. It is very important that an entrepreneur is able to read each of these financial statements. However, many people are able to read and understand the income statement most easily, so they typically use that to make financial decisions and that would be a mistake. The recommendation is for entrepreneurs to look at and understand their balance sheet the first, and then look at their balance sheet and income statement at the same time in order to make financial decisions.
The second question that a lot of people have for their Edmonton CPA is what is a balance sheet. This is a snapshot of all of the assets as well as all of the liabilities for business at a certain particular moment in time. All of the assets of the business would lose things like all cash, all accounts receivable that need to be collected, all of the inventory, and then things such as property like vehicles, machines and buildings. The liabilities of the balance sheet would be accounts payable, all of the bills that an entrepreneur must pay, all of the loans that they owe.
Often, the next question that people have is what is an income statement. Edmonton CPA says that this statement covers a specific period of time, unlike the balance sheet which is a snapshot. This is going to outline how much money was generated by the corporation in a certain period of time, and are the expenses that were incurred. By subtracting the expenses from the money generated, equals how much money was made or not in that period of time. Many people wonder if an income statement is the same as a profit and loss, often called a P&L. This is correct, there two different names for the same thing. Most Canadians refer to it as an income statement, but software developers have typically called a profit and loss. Therefore, entrepreneurs should understand that if they hear income statement or profit and loss it is same thing.
If entrepreneurs are able to understand their financial statements, and specifically their balance sheet and income statement, they will be in a much better position to make more informed financial decisions. When they make more informed financial decisions, they will be able to not only avoid making mistakes that could be costly, but they will also be able to grow their business, and starts to make decisions that can help them grow and become successful. With the percentage of entrepreneurs that fail in business, if business owners can get into the habit of this right away in their business, they may be able to avoid the extremely high failure rate.
One of the biggest mistakes that entrepreneurs make, is that they either do not understand their financial statements, therefore they do not use them says Edmonton CPA. Or, they understand how to read the income statement, and use that alone in order to make financial decisions. Either way, both of these would be big mistakes. It is very important that business owners learn how to not only read all of their financial statements, including their income statement, balance sheet and statement of retained earnings. But they also learn how to read them in order to make financial decisions. Business owners may be able to avoid making mistakes financially if they learn this in their business.
Even though many people are able to read and income statement most clearly, they do not even understand what the information is on this financial sheet. Business owners should understand that an income statement to be organized this way: revenue be listed at the top, followed by a list of the direct cost of sales, next will be the gross profit, then the general expenses. There will be a total of the general expenses, and below that income from operations. This is often easy for entrepreneurs to read, but without looking at the balance sheet first, some very large errors can exist on this interim report. Therefore, it is important that entrepreneurs look at their balance sheet first, and catch any mistakes that can be easily found, and then move on to reading their income statement.
The next aspect of the financial statements that business owners should understand is what is the statement of obtained earnings. Edmonton CPA says that this is a cumulative balance of the income or profits left in the corporation. Since dividends are paid out of the retained earnings of the corporation, this is an important statements to read. One thing that business owners should keep in mind, is that this financial statement is going to be a running total of the retained earnings since the corporation was started.
The last most important thing that entrepreneurs need to understand when reading their financial statements, is that these ports should be limited to a single page so that they can be easy to read and understand. Since business owners should be reviewing these financial statements in order to make financial decisions almost every day, the easier they are to read and understand, the easier they will be for entrepreneurs to make decisions with.
Once business owners learn how to read and understand their financial statements, they will be able to avoid making financial mistakes as well, they will be able to use the information to grow their business, and learn what do to become successful. When entrepreneurs learn this skill, they will be more likely to be able to avoid making missteps that could cost them their business.
