Income Statements Make Informed Financial Decisions | Edmonton CPA
Even though many business owners struggle with understanding basic business finances according to Edmonton CPA. If they simply learn how to read and organize their income statement. They will be able to make more informed financial decisions in their business. And be able to make those decisions early on in their business.
This is especially important, when looking at the success rate of entrepreneurs in Canada. According to industry Canada. 15% of Canadian small businesses fail in their first year of business ownership. While 30% fail by year two, and 50% fail by five years in business.
This shows how important it is for entrepreneurs to learn how to make better financial decisions earlier on in their business. By learning how to read their income statement. This is possible. Even if entrepreneurs are still learning business finances.
The four main components of an income statement are important to understand. And starts with the revenue of the business. This component is at the very top of the income statement. And will include all of the money that the entrepreneur has brought into their business by selling their products and services.
Below revenue is the cost of sales. And these are all of the costs that are directly related to creating the products and services that an entrepreneur sells. If a business owner does not have any sales in that month. There will be no cost of sales. Most often the costs in this category include material needed to make the products and the labour took to produce them.
Low cost of sales are the general expenses. These are all of the expenses that an entrepreneur will incur. Whether they have sales in their business or not. Business owners will find that these expenses are typically static from month-to-month. And are often the most costs that a business owner will incur in their business.
The most common expenses in this category can include things like administrative staff salary, rent of the office space. But can include smaller things such as utility bills, office supplies and bank charges.
The fourth and final category on the income statement our other income and other expenses. This will be for expenses and income that a corporation has brought in. That are not necessarily specifically related to the business.
An example of an expense that belongs in this category would be the corporate income tax. And the income that might belong here according to Edmonton CPA. Would be if the corporation owns investments. That earn an income each month.
One of the most important things for business owners to note is that their salary should go in this category. Because their salary is a tax decision. Not a cost of sale or general expenses. No matter how much the entrepreneur might work in their own business.
By putting it in other income and expenses, the business owner will be able to see how much revenue they have in their business. That is independent of their salary. Which will help them understand how much salary they can take. But also help a financial institution understand how much revenue they are generating in their business as well.
By understanding the component parts in their income statement. Can help entrepreneurs learn what they need to know to start understanding their income statement according to Edmonton CPA.
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It is very important for business owners to make informed financial decisions in their business according to Edmonton CPA. So that they can avoid making decisions that put their business in jeopardy.
When business owners are learning how to read their income statement. It is important that they understand what component parts there are in its. But also how the information should be organized. To help them be able to read it.
Edmonton CPA recommends that entrepreneurs ensure that the expenses are listed in numerically descending order. So that they can be able to see more easily. The expenses that are impacting their bottom line the most.
If they need to minimize expenses, all they need to do is fold their page in half and look at the expenses that are on the top half of the income statement. As those are going to more greatly affect their bottom line.
If the expenses are not in numerically descending order. It can be a lot more difficult for an entrepreneur to understand what the largest expenses in their business are. Or what they should do about them.
Many entrepreneurs might spend a lot of time and energy trying to minimize things like phone bill, or bank charges. And no matter how much money they can save in these categories. It is not going to greatly impact their bottom line very much at all.
The next thing that business owner should do. Is to ensure that their income statement is just a single page long. The reason why, is that it can be read easily, as well as understood quickly.
This is especially important when business owners consider they must be looking at this document prior to making any financial decisions in their business. The easier it is to read, and the quicker it takes. The more likely they are going to stick with this practice. And use the income statement before making any financial decision in their business.
Edmonton CPA says how an entrepreneur can keep it to a single page. Is to avoid micro-classifying expenses. Many business owners think that this is going to help them understand their finances better. But all it does is makes their income statement longer than a single page.
And when they have many different expense categories. They will spend a lot of time trying to ensure that they put the expenses in the right category. Which increases the tendency to make mistakes on the income statement.
Therefore, it is very important that entrepreneurs start with an organized income statement. So that learning how to read it is an easier prospect. Because of this, expenses should be in numerically descending order. And in broad categories. So the income statement can be much easier to read and understand.