Edmonton CPA | How To Organize An Income Statement
Many entrepreneurs are learning how to understand their business finances as they run a business for the first time says Edmonton CPA. Which can be very overwhelming. However, learning what an entrepreneur needs to understand first. Can significantly help them gain an understanding quickly. So that they can start making better business decisions.
Common problems that entrepreneurs often have, is that they end up with a long, several page income statement. That is very hard to read. Or their income statement is very disorganized. And on both accounts, it can be very difficult for business owner to be able to read this financial report and understand what it is saying.
In fact, a business owner should actually be able to look at their income statement and not only quickly understand what it is saying. But also review this report prior to making any financial decision in their business. So that they can understand if they can afford to make that decision or not.
Therefore, understanding all of the information that is actually on this income statement is of paramount importance to be able to read it easily says Edmonton CPA. There are four main components of an income statement that a business owner should understand.
The first component is the gross revenue of the business. In this will be the first section of the income statement. This is all the money that an entrepreneur has brought into their business by selling their products and services to customers.
The next component underneath that is the cost of sales. And the most important thing to keep in mind but this section. Is that these are only the costs and expenses directly associated with creating those products or providing the service.
Edmonton CPA says that this means the expenses in this category will typically only be material and supplies as well as labour. The labour could be from an entrepreneur’s own staff who work on generating those products or delivering the service. Or it could also be independent contractors that they hire on an as-needed basis.
The third category is a general expense. And these are all of the expenses that an entrepreneur generates before they have any sales in their business. With cost of sales, if an entrepreneur does not generate sales in their business. They will not have any cost of sales. But with general expenses, this is often referred to as the cost not nor has to pay to simply open the doors to their business.
The general expenses are typically the rent of the office space, administrative staff, utility bills and office supplies just to name a few. All of the administrative staff expenses that belong here, are for staff that do not deal with products or services.
And finally, the last category is other income and other expenses. And while the business owner’s salary belongs here. So that they can understand how well the business is doing before they get paid. But can also include other income such as investment income the corporation generates. and other expenses such as corporate income tax.
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One of the first things that Edmonton CPA recommends entrepreneurs do is learn how to read their income statements. The reason why this should be one of the first things they learn. Is because this can help them make informed financial decisions earlier on in their business.
Industry Canada did a survey and found that 15% of all small business owners in Canada failed within their first year of business. And 29% of those failed entrepreneurs said running out of money was the reason why.
By helping, entrepreneurs learn how to read their income statements. Can significantly increase the number of entrepreneurs who can make better financial decisions. And help more entrepreneurs avoid failing within the first year of their business because they run out of money.
Not only is it important for an entrepreneur to understand the information that has on their income statement. But how it is organized is just as important as well. Many business owners think that their income statement should be in alphabetical order. But this does not help them understand all of the information very well.
Edmonton CPA says instead of alphabetical order, entrepreneurs should list their expenses in numerically dissenting order. Because that can show entrepreneurs where their largest expenses are. Simply by looking at the top half of their income statement.
While expense minimizing can be a very important activity. If an entrepreneur spends their time focusing on the top half of the report, can help ensure that the time they spend minimizing those expenses will be worth their time because they will greatly impact their bottom line.
If an entrepreneur spends a lot of time minimizing expenses below that line, such as bank charges or cell phone bills. Even if they can cut that expense in half, it is not going to end up affecting their bottom line very much. And is not something that entrepreneurs should spend a significant amount of time working on.
Not only should their income statement be organized in numerically dissenting order. But business owners should also ensure that their income statement is kept to a minimum of one page and no longer than that. The reason why, is so that it can be more easily read and understood.
The quicker it is to read, the more likely business owners will actually review this statement prior to making any financial decisions in their business. It will help ensure that the decisions they make are good ones.
If their financial report is longer than one page, it might be very difficult to read, or hard to understand because of the multiple pages. And business owners may end up not wanting to take the time reading this report to make their decision.
They can keep their income statement shorter by ensuring that they do not over classify all of their expenses into several different categories. If they find that it is very important to have all of the various expenses broken down to a greater degree. Edmonton CPA recommends that entrepreneurs use subaccounts instead.
By understanding not only the information on their income statement. But how the information should be organized can help ensure that entrepreneurs are better able to read and understand this information. So that they can make better business decisions.