Edmonton CPA | Is A Financial Statement Confidential?
Entrepreneurs may have been told by many people including their Edmonton CPA that they need to learn how to read their financial statements. However, this is no help if they do not know the financial statement is, or what information is held within it. Entrepreneurs should understand that financial statement is actually referring to a group of financial reports that when used together, can be very helpful in guiding entrepreneurs financial decisions.
There are three main components of the financial statements that entrepreneurs should know about. This is the balance sheet, the income statement and a statement of retained earnings. While the balance sheet is the most important document, entrepreneurs often are looking at the income statement only, because it is much easier to read. Edmonton CPA recommends that entrepreneurs learn how to read the balance sheet, and get into the habit of reading this first because it will show an overall snapshot of the financial position of the business. Once they have read and understood that, they can then move on to the income statement, which shows how profitable a business was in a certain period of time.
If entrepreneurs are only using the income statement in order to make decisions, they could be either spending money that they do not have, or are cutting spending when they do not have to. Since the income statement shows on the finances are in the specific time period, they need to understand that even if those few months that there looking at were extremely profitable or not, that does not necessarily tell them what the overall financial position of the business is. For example says Edmonton CPA, if an entrepreneur lost a significant amount of money in that period of time, but the entire rest of their year had been very profitable, that when income statement does not represent the entire business.
By looking at the balance sheet first, entrepreneurs can understand financial position of their business, and then looking at the income statement, can help them understand clear picture of their finances. Any time an entrepreneur goes to make a financial decision in their business, they should be eating their balance sheet first, and then looking at their income statement.
When business owners are learning the component parts of their financial statements, and how to read them one important thing that they should keep in mind, is that while there Edmonton CPA might refer to it as an income statement, their accounting software might refer to it as a profit and loss statement or a P&L. Business owners should keep in mind that this is a different name for the same report. By understanding this, they will be able to avoid getting confused.
Once an entrepreneur has learned how to read their financial statements, they should get into the habit of looking at those financial statements prior to any financial decision in their business. Whether they are deciding if they can afford to pay a bill, if they need to hire or laugh staff, or even if they can afford to pay themselves, their decision can be made much easier by reviewing their finances.
Edmonton CPA | Is A Financial Statement Confidential?
Many entrepreneurs understand that it is important to understand finances before making financial decisions says Edmonton CPA. However, one mistake that business owners can often make is believing that they can look at their bank account in order to understand how much money they have to work with. They look at their bank account, and make the assumption that they can pay a bill, run payroll, by and assets or pay themselves. However, if they do this, they may be putting their business at risk of running out of money.
The reason why entrepreneurs should not look at their bank account in order to make financial decisions is because their bank account will show exactly what is in their bank at that snapshot moment in time. But it will not show all of the payments that are scheduled to come out of their bank. For example says Edmonton CPA, if an entrepreneur has written a five thousand dollars check for a vendor, and it has not been cashed, that bank account will not represent the actual amount of money that an entrepreneur has to spend. They may look at their bank balance, and see that it is seven thousand dollars, and run their payroll which will end up bouncing that check.
Rather than looking at their bank account, entrepreneurs should understand that looking at their balance sheet will show them a more accurate representation of the money that they have in their business to use. Since the balance sheet will show a list of the assets as well as all of the liabilities, this is a document that can help entrepreneurs understand all of the finances that they have, with all of the scheduled payments taken into consideration. Therefore, an entrepreneur should get into the habit of reviewing their balance sheet as well as their income statement before making those financial decisions.
The financial statements of the business will show how profitable a specific period of time was. It will show all of the revenue that was generated and all of the expenses that were incurred. This will equal the net profit or the net loss of that specific time period. Therefore, entrepreneurs should not be looking at the income statement alone, because how profitable or not those few months were, may not represent the overall financial position of the business. However, entrepreneurs can use this information, especially on a six-month comparative basis, to see trends of the business. If they see that revenue has been going down steadily, even though they might have enough cash in their business to buy an asset, they might decide to hold off to see if the revenue can recover.
It is very important that entrepreneurs become very well acquainted with their financial statements, especially their balance sheet and their income statement. By learning how to read both of these financial reports, and then use that information to guide their financial decisions can help entrepreneurs not only avoid making mistakes, but use that information to help them grow and become even more profitable. The sooner they learn how to do this, the more their business is going to benefit.