Edmonton CPA | How Important Our Financial Statements
Important financial statements are says Edmonton CPA. However, many entrepreneurs make the mistake of only reviewing their financial statements with their accountant after their year-end is complete. In fact, a survey was done of small business owners in order to determine how much information they had about their basic finances of their business. 80% of respondents scored less than 70% on this test. Therefore, helping entrepreneurs learn what they need to do to make informed financial decisions in their business is an important goal.
Edmonton CPA recommends that entrepreneurs look at their financial statements as often as they make a financial decision in their business. Since many entrepreneurs typically run payroll two times month, or every two weeks that so often they recommend entrepreneurs are getting updated financial statements. Whether these are from a bookkeeper, or if an entrepreneur is pulling the information from their accounting software it is important that business owners do this. The reason why, is because this is the only way an entrepreneur will be able to determine how much money they have to utilize in their business.
The three component parts of a financial statement are the balance sheets, the income statement and statement of retained earnings. Edmonton CPA says many entrepreneurs are familiar with the income statement, because it is written in a way that is easy to understand. However, business owners should actually start with their balance sheet first. The reason why, is because the balance sheet shows the over all health of a business is finance where is the income statement only shows that for specific range of time.
In order to read and understand the balance sheet, entrepreneurs should understand that it has three sections that include a list of all of the assets in the business including cash, all of the liabilities in the business in the form of unpaid bills and loan payments. And finally all the equity in the business. This includes the share capital and retained earnings. An entrepreneur should be able to add the liability and the equity together and equal the assets of the business. This shall balance which is why it is called a balance sheet.
When an entrepreneur is going to make a financial decision, if it is a decision to pay their staff, or pay some bills, or to purchase something, by looking at the balance sheet, an entrepreneur will see all of the cash they have available. If an entrepreneur makes the mistake of looking at the bank balance, it may not have taken into consideration all of the funds that are scheduled to be disbursed, and all the check payments that need to be cashed.
By starting with helping entrepreneurs we the balance sheet in order to understand how much money they have is a great place to start says Edmonton CPA. Business owners should get to the habit of reviewing an updated balance sheet prior to making any payments so that they can get used to reading the information. By doing this alone, entrepreneurs will be able to significantly improve the quality of their financial decisions.
Edmonton CPA | how important our financial statements
If entrepreneurs are not utilizing financial statements to make financial decisions in their business Edmonton CPA says that they could be putting their business risk. In fact, the failure rate of businesses is so high in Canada with 15% of all entrepreneurs feeling in their first year. 30% of entrepreneurs will fail by their second year, and 50% of entrepreneurs will have failed by year five. Therefore, it should be considered extremely important to help entrepreneurs learn to read and use their financial statements.
Once an entrepreneur has gotten into the habit of reading their balance sheet, which will show them the overall health of their business financially. An entrepreneur should then look at their income statement. The income statement shows the profitability of the business within a certain range of time. While this is important to know, without comparing that to the balance sheet, might give entrepreneur the wrong idea about how profitable their business is. For example says Edmonton CPA, a business might be very well-off, but have just experienced a very unprofitable couple of months, due to the natural slow period Of the business. Or, an entrepreneur might see that ability was extremely increased on an income statement, and make the assumption that the business is doing really well, but the balance sheet might show that they have virtually no money.
Once an entrepreneur is used to reading their balance sheet, and start looking at their income statement, but only can they avoid making financial stakes, but they can start planning better as well. For example, using the information to determine how effective their last marketing campaign was, so that they can do it again, or make changes to it. By learning how to use this information, business owners can be proactive in growing their business, and using the information to guide their business.
Finally, the last financial statement components that business owners should be aware of is the statement of retained earnings. This is a cumulative balance of all of the prophets that have been left in the corporation. If an entrepreneur has not dispersed any dividends, they will all be listed here. This is a running total since the first day the corporation was started, minus all of the dividends that have been paid out. If an entrepreneur is planning on dispersing dividends to a the shareholders, this is an important report to look at, because they will not know how many dividends they have earned in the business that are left disburse with looking at this report.
Helping entrepreneurs understand the differences between the various financial statements and how to read them is very important says Edmonton CPA. Learning how to do this can make all the difference to entrepreneurs running a business, or learning how to run a profitable business. The sooner in their entrepreneurship they can do this, the higher likelihood they will have of being able to grow their business as well as avoid making grave mistakes. With how important this is, business owners should do this right away in their business so that they can increase their chances of success.