Edmonton CPA | Helping Entrepreneurs Organize Their Income Statement
Entrepreneurs face many challenges when they open the doors to their business according to Edmonton CPA. And understanding their business finances is one of them. In fact, a business owner may not realize how important their income statement is. And may end up making poor financial decisions because of it.
Industry Canada did a survey and found that while half of all Canadian entrepreneurs failed in business. The most common reasons were very surprising. 29% of all failed entrepreneurs said that they failed because they ran out of money in their business.
If business owners are not using their income statement. Or if they do not know how to organize it efficiently. The may very well be making decisions that are causing them to run out of money in their business.
When business owners look at their income statement, that should show them the financial state of their business. So that they can decide if they have the money to make financial decisions. Such as running payroll, paying bills or purchasing assets.
The first thing that entrepreneurs should learn is what the main components of an income statement is. So that they can be more likely to read this financial report accurately.
The first section of the income statement which will appear at the top is for revenue. This is the gross amount of money that an entrepreneur is bringing into their business through invoicing clients. Or selling their products and services to their customers.
Below revenue is for cost of sales. Edmonton CPA says this is for all of the expenses directly related to producing those products and services. And will typically only include supplies and material and labour. The labour can be staff that an entrepreneur runs payroll for. Or could be independent contractors.
The third section on the income statement is for general expenses. These are all of the expenses that are not related to producing the products or services that they sell. And even if they sell nothing in a given month. They will have these expenses.
Some typical examples of general expenses include rent, administrative staff, paying equipment leases, bills and office supplies. These expenses are generally going to be very static from month-to-month. And should be listed in numerically descending order.
And finally, the last category is for other income and other expenses. This is for all of the income and expenses of the corporation. That are legitimate corporate expenses. But are not necessarily related to the business. For example, it might include income from investments that the corporation owns.
And can also include expenses such as corporate income tax that an entrepreneur needs to pay. But is not necessarily related directly to their business. Edmonton CPA says it is very important that an entrepreneur puts their own salary in this category.
So that they as well as financial institutions. Can look at the income statement and see how much money the business is making. Independent of the owners salary.
By understanding how their income statement is organized. Can help entrepreneurs read this important document. And use that to their advantage. To make better and more informed financial decisions.
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It is very important that entrepreneurs learn how to make great financial decisions early on in their business says Edmonton CPA. Especially since 15% of all entrepreneurs fail within their first year of business.
Edmonton CPA says they often see business owners several months into their business ownership. And find that they have an extremely long and disorganized income statement. That even if they were trying to use to make more informed financial decisions. Would not help business owners understand what is going on financially in their business.
It is very important that entrepreneurs learn how to organize their income statement. Not only so that it is more readable. But so that they can keep it to a single page. So that they will be able to read it and understand it very quickly.
The first thing that business owners should do. Is ensure that their income statement is listed in numerically descending order. This way, they will be able to see the largest expenses at the top of their income statement, and the smallest expenses are at the bottom.
Business owners should always be looking at their expenses to ensure that they are reasonable. However many business owners are not sure which expenses they should worry about minimizing. And often spend a lot of time and energy. Minimizing expenses that are not going to impact their bottom line very much.
This is why having their income statement organized in numerically descending order is beneficial says Edmonton CPA. So that they can look at the top items of their income statement. The understand that those are having the biggest impact to their bottom line.
The expenses that are likely impacting their bottom line the most will be their rent or mortgage for their office space. As well as administrative staff and equipment amortization. If they can minimize those expenses, it will greatly impact their bottom line significantly.
If entrepreneurs focus on the wrong expenses. They might spend hours of their time trying to figure out how to minimize office supplies expenses, bank charges, or cell phone bills. When even if they are successful in significantly reducing those costs. It is not going to make a huge difference to their bottom line.
Once entrepreneurs have organize their income statement. They also should ensure that they are keeping the income statement to a single page. They can do this by avoiding trying to over classify all of their expenses.
Many entrepreneurs think that this is very helpful in analysing their expenses. But instead, Edmonton CPA says all this does is make it more confusing. And the larger number of categories lengthens their income statement. Until it is an unreadable length.
Therefore, business owners should avoid micro-classifying expenses. But if they do want to analyse those numbers. They can use subaccounts that can go into greater detail. So that they can look at their income statement and understand it simply and quickly. But also print off a subaccount report. If they do want to analyse those numbers as well.
By understanding how to organize their income statement. Can help entrepreneurs not only understand their business finances better. Use that information to make better and more informed financial decisions.