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E-Myth – “Why most small businesses don’t work & what to do about it”

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Edmonton CPA | Informed Financial Decisions Start With Reading Financial Statements

The one thing that entrepreneurs can do that can increase the effectiveness of their financial decisions is to learn how to read their financial statements says Edmonton CPA. In fact, into it who are the makers of QuickBooks did a survey of small business owners in order to test their knowledge of business finances. Out of all of the respondents, 82% scored lower than 70% on this test. This shows that many business owners struggle at understanding what they need to know in order to grow their business. Therefore, entrepreneurs are able to read and understand their financial statements, able to not only avoid making mistakes in their business financially, but being able to grow their business as well.

When an entrepreneur is talking about their financial statements with their Edmonton CPA, they should understand that there three reports that are suited in the term financial statements. They are the statement of retained earnings, the income statement and the balance sheet. While all these reports are very important to understand, not only should entrepreneurs learn to read them in a specific order, but they should learn to look at them in this order every time they use the information to make decisions in their business.

The first reports that entrepreneurs should look at and understand is the balance sheets. The reason why says Edmonton CPA is because this report is going to show entrepreneurs all of the assets that they have available in their business as well as all of the liabilities. This way, not only can entrepreneur use this report to determine if they have money in their business to be able to do things like pay staff and bills, but they will be able to see overall how successful the business is. For example, they might have many assets, but none of them are liquid. That might require a different approach to financial decisions.

Once an entrepreneur is comfortable reviewing the balance sheet, and using that balance sheet to make decisions, Edmonton CPA says they should start reviewing their income statement. This is the one statements that many entrepreneurs are most familiar with because of the way it is organized as well as information that is included in it. This initial the revenue, the direct cost of sales, the general expenses, and at the bottom have not income or net loss. While this sounds like an extremely important thing to be keeping track of in a business, it only deals with a specific frame of time. Therefore, is owner should take that into consideration that just because an income statement may show an extremely high profit, that does not necessarily mean that the business overall has that same profit.

Not only is it important for entrepreneurs to learn to read their income statement and balance sheet says Edmonton CPA. It is also important that entrepreneurs can understand those reports enough so that they can use the information to make better business decisions. They more effective they are at doing this, the greater chance they are of making great business decisions.

Edmonton CPA | Informed Financial Decisions Start With Reading Financial Statements

One big mistake that many entrepreneurs make when they are looking at their financial statements says Edmonton CPA is that they are looking at their income statement first. The reason why this is not a good idea, is because first of all, it is much harder to catch mistakes on the income statement that on the balance sheet. Second of all, how much profit has been declared on the income statement does not necessarily show an entrepreneur how much and assets they have overall. Therefore, that only is it important for entrepreneurs to be able to read their financial statements, but they do so in a very organized and measured way.

A business owner should be looking at their balance sheet first, that will give them an idea of the overall finances of their business. Next is his Edmonton CPA, they can look at their income statement. The reason why it is important to do this in this order, is to help entrepreneurs gain perspective. For example, if the income statement shows an extremely high net income, that means something very different if the balance sheet has a lot of assets honest and if the balance sheet as very few assets on it.

The kinds of information that an entrepreneur can start to make once they learn how to look at their income statement along with their balance sheet, is not just if they have the money to make payments or disperse funds. But if to determine things like how effective their marketing campaign has been, or if they need to start cutting expenses such as laying off employees. By learning how to read the financial statements in their business, entrepreneurs will get into the habit of reviewing these financial statements prior to making any financial decision in their business, rather than just waiting until they meet with their Edmonton CPA once a year.

Finally, the last report in the financial statement that they should look at is the statement of retained earnings. Essentially, this shows the dividends that have not been disbursed to the shareholders of the corporation yet. This will show the earnings of the corporation less the dividends that have already been paid over time. Edmonton CPA says businesses should understand that this means that it is a running total since the very beginning of the corporations beginnings. By understanding this, entrepreneurs who are looking to disburse dividends to themselves or any other shareholders will be able to look at this port to determine how much funds are available for that purpose.

By learning how to use their financial statements effectively can help entrepreneurs plan the growth of their business. This is more effective than simply avoiding making mistakes, but that is important as well. The sooner entrepreneurs able to do this in their business, the greater chance they have at not only avoiding the high failure rate of businesses in Canada, but being able to significantly grow their business as well.