Edmonton CPA | How To Read Financial Statements
If entrepreneurs do not know how to read their financial statements, they may end up making costly financial decisions says Edmonton CPA. In fact, into it, who is the company behind the accounting software QuickBooks did a survey of small business owners in order to understand how financially literate they were in business finances. 82% of entrepreneurs that took the test scored less than 70%. This means, that is significant amount of entrepreneurs are lacking a lot of key information about their finances in business.
When entrepreneurs hear the term financial statements, they should understand that this is going to be a group of reports that they receive either from their Edmonton CPA or their bookkeeper. These reports will include a balance sheet, an income statement as well as the statement of retained earnings. All of these reports are important to know what information they show, and how to read them. The balance sheet is going to show the overall financial picture of the business, at a specific moment in time. The income statement on the other hand shows the profitability of a business in a specific period of time, usually over several months. Lastly, the statement of retained earnings shows accumulative balance of the prophets that have been left in the corporation.
Quite often, entrepreneurs are able to easily read and understand an income statement because it has a list of the revenue, the direct cost of sales which shows in the gross profit their income statement also shows the general expenses of the business, and entrepreneurs can understand all of these terms, and what they mean. However, it is recommended that entrepreneurs not only do not start with this income statement, but that they only review it once they have read and understood their balance sheet. The reason why, is because while the income statement can show the profitability of a specific period of time, that does not necessarily represent the overall financial health of the business.
The balance sheet on the other hand will show an overall picture of the financial health of the business. It lists all of the assets in the business, in the order that they can be made liquid. This means it will show all of the cash, all of the accounts receivable that an entrepreneur is owed, a list of all of the inventory they have in their business, and any property that they own including vehicles, sheens and real estate. Below that, Edmonton CPA says it will list all of the liabilities of the corporation including all of the bills that an entrepreneur owes their vendors, and all of the loan payments that they need to make. Ultimately, the total of the liability and the equity will equal the assets.
By learning how to read the balance sheet first, and then review the income statement alongside the balance sheet, entrepreneurs can start to gain an understanding of the overall financial health of their business. When they understand this, it will be able to make informed financial decisions that can help them run their business more efficiently and effectively.
Edmonton CPA | How To Read Financial Statements
Entrepreneurs may not know how important it is to review their financial statements on a regular basis says Edmonton CPA. They meet with their accountant, and look at the financial statements then, but do not review them in the interim. This can end up with an entrepreneur not understanding the overall financial health of their business, which can cause them to make big mistakes. It is important that entrepreneurs not only learn how to read their financial statements, but learn how to use those statements in their business decisions.
Many entrepreneurs are familiar with the information on the income statement. This lists all of the revenue generated within a specific time period, followed by a direct cost of sales. These are things like subcontractors, and materials needed to generate that revenue. Below that, will show the gross profit of the business, all of the revenue the direct cost of sales removed. Next, the income statement will show the general expenses of the business that an entrepreneur will incur whether they have sold any product that month or not. This includes end, utilities, office supplies and administrative staff salary. At the end of this report, entrepreneurs will see how profitable their business was during those months or not.
One mistake that entrepreneurs often make, is they review their income statement, and think that that represents their business as a whole. If they had a very profitable few months represented in their income statement, they may believe that that means their entire business is doing very well. However, Edmonton CPA says business owner should not make the assumption that one good or bad period of time in their business presents the overall financial health of their business.
For example, an entrepreneur might see that the income statement shows a loss, and so they end up laying off staff. However, the overall financial health of the business is very very positive, and they actually needed that staff in their business. Therefore, Edmonton CPA recommends entrepreneurs review their balance sheet first and then review their income statement. If they learn how to do this, they will be able to make much better financial decisions in their business so that they can not only avoid making mistakes, but know what they need to do to grow their business.
Since many entrepreneurs lack a lot of financial literacy in their business, the sooner a business owner can learn these skills, they more likely they are going to be to be able to grow their business, and succeed. In fact, Edmonton CPA says that entrepreneurs have an extremely high failure rate. In fact, 50% of all Canadian entrepreneurs will fail in business by their fifth year. And anything that an entrepreneur can do to avoid that high failure rate can significant in helping them succeed in their business.