Edmonton CPA | How An Income Statement Is Organized Matters
A common scenario that Edmonton CPA fines when they sit down with entrepreneurs for the first time. Is even before they have owned their business for a year. Their finances are very disorganized. And they have already made some poor financial choices in their business.
The reason why business owners have this problem, is because they do not know basic business finances. And end up making many mistakes in their business.
This is why Edmonton CPA recommends all entrepreneurs learn how to read their income statement early on in their business. So that they can start learning how to make or informed, and therefore better financial decisions in their business.
If they read this important document before making any financial decisions in their business. Then entrepreneurs will be able to make better decisions, and avoid making choices that might cause them to run out of money in their business.
The first step to understanding their income statement is understanding all of the main components of their statement. Starting with the first section at the top is revenue. This is all of the money that an entrepreneur has brought into their business through invoicing clients, or selling their products and services.
The second section below revenue is cost of sales. And these are all of the costs that are directly related to creating products and services that they sell. If they have no sales, they will have no cost of sales. Cost of sales typically include supplies and material as well as labour needed to produce their products or services.
Underneath cost of sales is general expenses. And these are all of the other expenses that an entrepreneur will incur in their business. Before they generate any sales at all. These are often the most significant expenses that an entrepreneur will have.
And will have things such as rent of their office space, administrative staff salary, paying equipment leases and loans. But will also include things such as utility bills, phone and Internet, and even office supplies to name a few.
Below general expenses is a category for other income and other expenses. Edmonton CPA says that a business owner might bring money into their corporation that is legitimate expense or income. Her not necessarily related to the operation of their business.
This is where that income or those expenses can be put. This can include things like if an entrepreneur owns rental property. The cost associated with keeping up that property can go in this category. Along with all of the revenue they generate from renting that property out.
It can also include things like corporate income tax, income from investments that the corporation owns. But most significantly, this section should include the business owners salary as well.
The reason why the business owners salary gets put into this section. Is because it is a tax decision and not an expense of the business. And is very important that a business owner understands what revenue their business is generating independent of their salary.
By understanding how their income statement is organized. Entrepreneurs will be closer to being able to read this valuable document. In order to make more informed financial decisions.
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If an entrepreneur does not understand business finances, Edmonton CPA says that could end up with a disorganized income statement.
They can statement could be disorganized because a business owner has categories things incorrectly. Or they could have created so many categories that results in it being several pages long. And an income statement like this will not be able to help an entrepreneur avoid making poor choices in their business.
Since a business owner should be getting into the habit of reviewing their income statement prior to making any financial decision. The sooner a business owner can learn how to read and organize this important document. The sooner they going to be able to make more informed financial decisions in their business.
One of the first things that business owners should keep in mind, is that their income statement needs to be a single page long. Any longer, and Edmonton CPA says it can be very difficult for entrepreneurs to read it and understand it.
Or could take them a significantly long amount of time to understand what this report is saying. And when that is the case, they may skip reviewing the statement prior to making a financial decision in their business.
How business owner can ensure that there keeping their income statement short is by avoiding trying to add a lot of different categories to their expenses. By keeping their categories as broad as possible. Edmonton CPA says that entrepreneurs can ensure that their income statement stays with single page.
If business owners do want to look at those expenses closer, they can always use subaccounts to at detail to the information. Without impacting the length of their income statement. They will be able to have their income statement concise.
Then pull a different report from their accounting software. That can help them look more closely at their expenses if they wish.
Not only is it important that their income statement is one page. But it needs to be organized as well in order to make it easy to read. How an entrepreneur can do this, is ensure that their income statement is organized in numerically descending order. So that the largest expenses are shown at the top of the page.
If an entrepreneur wants to minimize their expenses. They can spend their time minimizing what is at the top of this report. Because those are going to have the biggest impact to an entrepreneurs bottom line.
Edmonton CPA says business owners should find that the most typical expenses are at the top of the list include things like rent, administrative staff and amortization of their equipment.
Expenses that are at the bottle of the list, will be the least impactful to an entrepreneurs bottom line. And while they may be able to minimize these expenses.
Business owners should not spend a whole lot of time doing this. Because their time will be better spent big them grow their business. Not minimizing small expenses.