Edmonton CPA | How To Organize Income Statements For Clarity
Even though many entrepreneurs struggle with understanding basic business finances according to Edmonton CPA. There are several things that business owners can do right away. That can help them learn how to make better business decisions.
Learning how to read their income statement is one of the most important things that a business owner can do. So that they can be able to make more informed financial decisions. And not only avoid making decisions that could be negative to their business.
But using the income statement can also help entrepreneurs be proactive. And help them know when to increase revenue in their business. So that they can purchase assets, and achieve their goals as well.
The first thing that Edmonton CPA recommends when learning how to read and income statement. Is understanding the four main components within that financial document.
Revenue will appear at the top of their income statement. And is a gross amount of all of the money that an entrepreneur has brought into their business through selling their products and services.
Below revenue will be the cost of sales. And these are all of the costs that are directly related to generating the sales. If an entrepreneur has no sales in that month, they will have no cost of sales. Most common expenses in this category will be material and supplies. As well as the labour needed to produce products or services.
There category is general expenses. And unlike cost of sales, that if there is no sales there is no expenses. General expenses are static month-to-month regardless of if an entrepreneur has sold products and services or not.
General expenses are likely going to be they highest expenses that an entrepreneur will have in their business. And can include things such as rent, administrative staff salary, and things like phone bills and office supplies.
And the last component on the income statement is the other income and other expenses. These are all of the income or expenses that are going to be incurred related to the corporation. But not necessarily the business.
Edmonton CPA says of typical expense that could be listed here would be the corporate income tax. Meanwhile an example of income that belongs here. Would be if the corporation owns investments. That are generating an income, that amount could be here.
One of the most important things for the business owner to keep in mind. Is that the owners salary belongs in other income and other expenses. And not cost of sales or general expenses.
The reason why owner salary belongs in this category. Is because it is a tax decision that is driven by and entrepreneur’s lifestyle choices. And not an expense of the business.
If a business owner is ever going to apply for financing. They will want to see what that revenue is without an entrepreneur’s salary. So getting into the habit of keeping it out and into the other expenses category. Can help ensure that they are increasing their chances of getting approved for financing in the future.
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Many entrepreneurs struggle with understanding their business finances says Edmonton CPA. And could contribute to the high number of entrepreneurs that fail in Canada.
Industry Canada says that half of all Canadian entrepreneurs end up failing. And the second most common reason why, that affects 29% of these failed entrepreneurs. Is that they run out of money in their business. And that is why they are not successful.
By learning how to read their income statement. Entrepreneurs can help avoid making decisions that put their business at risk of running out of money.
For example, Edmonton CPA says many business owners think that they are going to be able to understand their business finances. If they look at their bank balance. But this is simply not true. The bank balance may show exactly how much money they have in their business accountant at that moment.
But their bank account will not take into consideration the electronic fund transfers that they might have scheduled. Or the checks that they have sent out to their suppliers. But have not been cashed as of yet.
This might so important to learn how to read and income statement according to Edmonton CPA. So that entrepreneurs can understand how much money they have in their business. While taking all of the expenses that they have incurred into consideration.
One of the most important things that a business owner needs to understand is how to keep their income statement to a single page. So that it can be easy to read, and easy to understand as well.
If the income statement is longer than a single page, not only is it a lot more cumbersome to understand. But a business owner might not take the time to review this document prior to making financial decisions in their business.
How business owner can keep their income statement to a single page. Is by avoiding creating micro-classification of their expenses. The more expense categories they have, and the longer their income statement and that being. But also the longer it will take them to do their bookkeeping. And the instances of making mistakes on their income statement go up.
They should ensure that they keep their expense categories very broad. However if an entrepreneur wants to look at they expenses in greater detail. Should use subaccounts in their accounting software. So that they can pull that report if they want. While ensuring that their income statement is still very readable.
By having broad expense categories. Business owners can ensure that their income statement is a single page long. So that they will have a better time reading as well as understanding the information. That will be able to help them figure out if they have the money to make those financial decisions.
And if they do not have the money, they can come up with a plan on what they need to do. Whether it is revenue-generating activities, collection calls. Or just making a plan on how to save money to purchase that asset they to grow their business.