Edmonton CPA | Income Statement Organization
Because many entrepreneurs struggle with understanding basic business financial literacy, Edmonton CPA says knowing the first things to learn is important.
And while there are many different things that can be valuable for small business owners to learn. In order to help them understand basic business finances. Learning how to read their income statement should be top of that list.
The reason why, is because they should be reviewing this important document before making any decisions in their business that are financial base. Including paying bills, running payroll and making purchases.
In fact, if business owners think that they are going to be able to make these financial listed without consulting their income statement. They can end up making bad choices, that cause them to run out of money in their business.
The first step in understanding how to read their income statement is understanding the four main components on this financial report. The first one is the revenue of the business. And should include all of the money that an entrepreneur has brought into their business through selling their products or services.
Below revenue is cost of sales. And an easy way to think of this says Edmonton CPA. Is if an entrepreneur has no sales. They will have no cost of sales either. These are all of the costs that are directly related to creating those products or services.
And typically, the cost of sales will include things such as supplies and materials that an entrepreneur needs to purchase in order to generate those products. Or the labour they need to pay for to generate the products or services that they sell.
It does not matter if the labour is staff that an entrepreneur pays salary to. Or these are independent contractors. If this is the cost of generating those products or delivering the services. This gets included in the cost of sales.
Following cost of sales are the general expenses of the business. And this is all of the rest of the expenses that an entrepreneur pays in their business. These are all of the costs that are associated with operating their business, they are not related to sales.
Even if an entrepreneur did not generate any sales in their business. They would have these costs. Which remain fairly static from month-to-month. Edmonton CPA says typical general expenses include things such as rent, administrative staff, bills and office supplies just to name a few.
And finally, the fourth component is other income and other expenses. These are all of the income or expenses that an entrepreneur’s corporation generates. The not necessarily related to the day-to-day operation of the business. Or sale of their products.
Other income could be income generated by investments that the corporation owns. And other expenses can be things like corporate income tax. However, it is very important that business owners put their own salary into this section. And not cost of sales or general expenses.
The reason why, is because their salary is tax decision. And not a cost of the business or of sales. And by keeping it in the section. Can help ensure that an entrepreneur can understand their business is doing financially, independently of the money they take out of their business.
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That small business owners their business finances quickly says Edmonton CPA. Because that can help them avoid making costly mistakes in their business. In fact, industry Canada did a survey and found that 15% of all entrepreneurs in Canada failed within the first year of business.
When looking at the reasons why Canadian entrepreneurs failed. They discovered that 29% of these failed business owners said that the reason why they failed was because they ran out of money. Therefore, helping business owners make better financial choices. Can help business owners avoid this common problem. Learn how to stay in business longer.
Before an entrepreneur makes any financial decisions at all in their business. Edmonton CPA recommends that they review their income statement. This way, they will be able to see how well their business is doing financially. And if they can afford to make financial decisions in their business or not.
Whether they are paying bills, buying assets, or even running payroll. A business owner should get the habit early on of reviewing their income statement to see if they can afford to make these decisions.
If they do not have money in their business to be able to make those decisions. Then they can come up with a plan on how they are going to be able to afford it. Whether they are going to do collection calls. Or revenue-generating activities such as sales calls.
By being able to see what is going on financially in their business. Can help ensure that they do not end up making financial decisions that could cause them to run out of money in their business.
Not only understanding what is on their income statement, but how it is organized is important. Edmonton CPA recommends that entrepreneurs ensure that their income statement is in numerically dissenting order. So that they can easily see the expenses that impact their bottom line quickly.
If they fold their income statement in half, and look at all of the information above the fold. Should show them all of the expenses they have that impact their finances the greatest. And if they decide on minimizing their expenses. Those are the ones that they should spend their time on. Because it can make a huge difference to their business.
However, how it is organized is not the only important consideration. And business owners should ensure that there financial statement is not longer than one page.
How they can do that is avoiding trying to over classify their various expenses. By being broad as possible With the classifications. That only can that help them save time and avoid mistakes.
But it can help ensure that their income statement is just a single page. Which will be easier to read and understand. In order to make those important financial decisions with.