Edmonton CPA | How To Read An Income Statement
One of the biggest problems that Edmonton CPA sees when they sit down with entrepreneurs for the first time. Is that they have extremely disorganized finances. And they have made several that business decisions. Leading to them either running out of money, or not being able to afford things like paying their bills or their staff.
This often stems from not only not understanding their business finances. But disorganized income statements. Because entrepreneurs do not know what information should be included in their income statement. Where should be categorized. As well as understanding how to organize their income statement as well.
Business owners should understand exactly what information is on an income statement. As well as what order the information is organized in. So that looking at this important financial report is significantly more meaningful.
The first section of their income statement is the revenue. This is all of the money that they have generated in their business through selling their products and services to customers. This is a gross amount, and will have no expenses subtracted from this amount in the section.
The second section of their income statement underneath the revenue is cost of sales. Edmonton CPA says these are only the costs that are directly related to generating the products or services that an entrepreneur has sold.
An easy way of thinking about cost of sales is that if an entrepreneur does not have any sales in their business. They will not have any cost of sales. These things are typically material or supplies and labour, regardless of the labour is staff or independent contractors.
Then below cost of sales are general expenses. And these are all of the other expenses in the business. These are what an entrepreneur will have to pay for if they have generated any sales in their business or not. It is important to note that these expenses typically will not fluctuate very much from month-to-month. And are fairly static.
General expenses typically include things like utility bills, phone and Internet, and office supplies. But also include larger expenses such as rent of the office space, administrative staff and paying leases on equipment.
one mistake that many business owners make according to CPA is understanding which staff salaries go in cost of sales and go in general expenses. While the staff who are directly related to generating the products or services belonging cost of sales. If they do not touch the product, and generated income whether there are sales or not. These are administrative staff and belonging general expenses.
And the last category on the income statement is other income and other expenses. These are all of the expenses and income that the entrepreneur’s corporation generates. But are not directly related to the day-to-day operations of the business. This can include things like investments that the corporation has, corporate income tax as well as the owners and salary.
By understanding all of the different information that is on the income statement. Edmonton CPA says a business owner can significantly help a business owner look at this one-page report. And be able to easily understand the information that it is communicating. Entrepreneurs can make more informed financial decisions in their business.
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Many entrepreneurs struggle with understanding their basic business finances says Edmonton CPA. In fact, the company that makes QuickBooks, Intuit did a survey in order to find out how many entrepreneurs struggle.
What they discovered, was that 80% of the small business owners that responded to their survey. And it up scoring less than 70% on a basic business financial literacy test. Showing how many entrepreneurs lack vital understanding of business finances.
One thing that can significantly help entrepreneurs understand their business finances better. As well as make more informed and therefore better financial decisions. Is learning how to read their income statement.
One of the first things that business owners should know, is that their income statement should only fit one page. If it is longer than that, it is much more difficult to quickly read it and understand it.
Since business owners should be reviewing this important document prior to making any financial decisions in their business. The easier it is to read and understand, the more likely business owners will do this consistently.
The next thing that business owners should understand is that the way their income statement is organized is very important. While some entrepreneurs like to have their income statement organized alphabetically. Edmonton CPA recommends having it in numerically descending order.
That way, all of the largest expenses will appear on the top half of their income statement. And the least significant expenses will be at the bottom. The reason why that is important, is that an entrepreneur can focus on the top half of the page.
Knowing what expenses are worth their time and effort in minimizing. And which ones do not truly affect their bottom line in any significant way.
In order to ensure that there income statement is just a single page, business owners should avoid over classifying their expenses. While many business owners think that this is going to help them understand the information better.
What over classifying their expenses actually does, is makes it more confusing to understand. As well as increases the chance of making mistakes when classifying all of the various expenses. And will make their income statement longer than a single page. Which is ultimately much more difficult to read and understand.
Edmonton CPA says business owners can use subaccounts if they truly find the need to go into greater detail on their expenses. So that their income statement can be as simple and organized as possible. But then an entrepreneur will have the ability to run a separate report that will show them all the detail that is important to them.
By understanding not only the information that is on their income statement. But how it should be organized. Help ensure that entrepreneurs will be able to understand how to read their income statements better. So that they can go on to make more informed financial decisions in their business.
Doing this, will help ensure that business owners can not only avoid making errors that can be very costly in their business. With that they can also use this information to help them increase the revenue and grow their business.