Edmonton CPA | Getting An Understanding Of Financial Statements
When entrepreneurs are new in business says Edmonton CPA they may be able to determine how much money they have in their business by looking at their bank balance. However, as an entrepreneur grows, it can become more and more difficult to understand the overall financial position of their business simply by looking at their bank account. The reason why, is because the more payments that a business owner schedules and the more checks that an entrepreneur writes affects the accuracy of the bank balance.
For example says Edmonton CPA, if an entrepreneur has written a five thousand dollars worth of checks and not all of them have come out of the business bank account yet they may not know how much money they have to spend. They might look at their bank balance and discover that they have ten thousand dollars in the bank. They may decide to run their payroll which is eight thousand dollars, and that ends up with them bouncing the rest of their checks. Therefore, entrepreneurs should learn early on in their business that they should not depend on looking at their bank balance in order to make financial decisions. And that a much better way of understanding the overall financial health of their business is to simply review their financial statements.
In order to review their financial statements effectively, Edmonton CPA says that entrepreneurs need to understand the three main components of their financial statements. This includes their statement of retained earnings, their income statement and their balance sheet. Business owners need to be able to look at each statement to read it and understand it. Then, once they have been able to do that, the next step is for them to use the income statements alongside their balance sheet in order to make those informed decisions.
An important thing for entrepreneurs to keep in mind, is that each of these reports, the income statement, the balance sheet and the statement of retained earnings will only need to be one page long. The reason for this is so that it can be much easier for an entrepreneur to read and then compared to each other. This way, it can be easy to understand and make financial decisions with. If an entrepreneur thinks that the reports need more information, they can always dive deeper into the finances of their business through a variety of other reports, looking at their accounting software, or making an appointment with their bookkeeper or accountant.
By learning not only why it is important to read and review their financial statements, but how to do it can help entrepreneurs make more informed financial decisions in their business. The bigger company grows, the more important this becomes. Therefore, best practices would be for entrepreneurs to learn how to do this early on, so that they can always be making good and informed financial decisions. This is important to do not only so that they can avoid spending money they do not have, but so that they can make great decisions like can they afford to buy an asset, hire staff, or how effective their latest advertising campaign is and if they should continue.
Edmonton CPA | getting an understanding of financial statements
Not only should entrepreneurs understand the importance of reading their financial statements says Edmonton CPA but the best way to go about doing it. There are three main component parts of the financial statements, not only is it important for entrepreneurs to understand how to read them, but the order in which they read them is important as well. In order to understand why, not only should business owners understand what component parts of the financial statements are, but what information is contained in each one.
The first financial statements that entrepreneurs should be reading is the balance sheet. This is going to contain a list of all of the assets and liabilities of the business for unspecific moment in time and not arranged. Edmonton CPA says that the assets are going to be listed at the top, in order of how easy it is to make those assets liquid. This means cash first, followed by Accounts Receivable, followed by inventory and then all of the property of the business including equipment, machines and real estate. The liabilities will be next including accounts payable and all loan and finance payments. At the bottom, an entrepreneur will see the equity of the business including the share capital and retained earnings. An entrepreneur should be able to add the liability and the equity together in order to equal the assets.
The second financial statements an entrepreneur should be looking at according to Edmonton CPA is the income statement. As opposed to the balance sheet that shows the financial position of the business on a specific date, the income statements covers a range of time. During this timeframe, the income statement is going to show how much money was generated and then what expenses were incurred. And business owner will be able to see how profitable that specific timeframe was or not by the statements.
Business owners should get into the habit of reviewing their balance sheet first, and getting an overall understanding of what the finances of the business are like, before looking at the income statement, and getting an idea of the profitability of this specific period of time. Edmonton CPA says one mistake that entrepreneurs often make, is simply look at the income statement in order to make financial decisions. The reason why this is not a good idea is because if entrepreneurs need to understand that the matter how profitable or not this one moment in time was, it may not have any bearing on the overall financial health of the business.
By understanding how important it is to read the various financial statements of the business and the right order is Edmonton CPA can help entrepreneurs use that information to make decisions. The earlier on in their business and entrepreneurs able to make better financial decisions, the greater chance they have and being successful in business.