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Edmonton CPA | how to read and understand financial statements

One of the most important things that an entrepreneur can do early on in their business according to Edmonton CPA is learn how to read financial statements. There are many reasons why, but ultimately, understanding the financial statements of the business can help entrepreneurs not only avoid making poor financial decisions. But it can also help entrepreneurs use the information to plan their growth proactively in their business.

Ultimately, when an entrepreneur hears from their Edmonton CPA that they should understand their financial statements, they should understand that this is referring to a group of ports. There is three parts that entrepreneur should nerve how to read that are going to help entrepreneurs make financial decisions. These are the statement of retained earnings, the income statements and the balance sheets. Not only is it important for entrepreneurs to read these, but it is important for an entrepreneur to use them before any financial decision that they make. Since entrepreneurs are typically dispersing payroll at least twice a month, and paying bills more often than that, that is how often they need to get to the habit of reviewing the statements.

The first financial statements that an entrepreneur needs to learn how to read is the balance sheet. The reason why says Edmonton CPA is because a fallacy will be able to show entrepreneurs the overall financial health of the business. When they look at the balance sheet, entrepreneurs should see that there is assets listed at the top in order of how easy it is to make those assets liquid starting with the liquid assets the cash. Next is the accounts receivable, inventory, and property including equipment and machines, vehicles and buildings and real estate.

Underneath all of the assets of the balance sheets Edmonton CPA says will be the liabilities of the business. This includes all of the bills that an entrepreneur owes on as well as all of their financial obligations including all loans and financing. Underneath that, an entrepreneur will see the equity listed as share capital and retained earnings. In order to verify that they balance sheet balances, an entrepreneur can simply take the total of the liability and equity and added together in order to equal the assets.

The reason why it is important to look at this specific financial statement, and so that entrepreneurs can gain a sense of how much money they have in their business to use. By looking at this report prior to dispersing any money or payroll, entrepreneurs can look at the cash available and make that determination. Edmonton CPA says that entrepreneurs made to get into the bad habit of looking at their bank balance in order to make that same decision. The reason why that is a bad idea, is because a bank balance will not take into account all of the payments that are scheduled to come out, checks that need to be cashed, and payments that need to be disbursed. By making a decision on how much money to spend based on a bank balance inputs a business at risk of running out of money or bouncing payments.

Edmonton CPA | how to read and understand financial statements

If entrepreneurs are not looking at the financial statements of their business prior to making a financial decision says Edmonton CPA they could be making mistakes. Mistakes that could put their business at risk of running out of money, Raven at risk of closing. Since 50% of all entrepreneurs fail within five years, and 29% of those failed entrepreneurs say that the reason why they failed is because they ran out of money. Business owners can specifically avoid that fate simply by reading their financial statement prior to making decisions.

Entrepreneurs should first understand their balance sheet before moving on to their income statement says Edmonton CPA. Another mistake that entrepreneurs often make is looking at their income statement first in order to make financial decisions. This also can end up with an entrepreneur making mistakes because while the income statement will show the profitability of a certain period of time, this does not inform an entrepreneur how profitable the businesses overall.

For example, if an entrepreneur sees that their income statement had an extremely profitable month, if they make the assumption that that means they have a lot of assets in their business, that can be an air. Perhaps, they extremely profitable month was simply paying off the huge liabilities that they had on the balance sheet. Perhaps an entrepreneur might make the assumption that a very income statement might mean that they do not have any assets in their business at all, they might lay someone off. Instead, one for month does not mean that a business is failing.

When an entrepreneurs looking at their income statement says Edmonton CPA, it will show them a list of all the revenue in that specific free of time, followed by all of the cost of sales which are all of the costs that have risen specifically through providing that product or service. Underneath that will be the gross profit which is the revenue minus the cost of sales. Underneath that, entrepreneurs will have all list of all of the general expenses such as rent, utilities, office supplies and administrative salary. These are all of the costs that an entrepreneur incurs whether they sell any product or services or not. At the end of this report, they are going to see the net income or net loss of their business.

By getting familiar with the financial statements in their business, can help entrepreneurs make more informed and better quality financial decisions in their business. Not only can this ensure that there being able to stay more profitable and avoid making decisions, but it can help them learn how to grow their business and be more proactive. The sooner that entrepreneurs can learn this says Edmonton CPA, the better impact they will be able to have on their business. Entrepreneurs should get to the habit of reviewing their financial statements prior to any financial decision so that they can improve their business.