Edmonton CPA | Keeping Income Statements Organized
Some entrepreneurs may not know exactly where to start when it comes to learning about business finances says Edmonton CPA. However, the income statement is a great place to start.
The reason why business owners should start understanding their income statement. Is so that they will be able to use this document to make guided business decisions. Specially ones that are financial in nature.
This document will help business owners understand how much money they have in their business. And by looking at this document prior to making financial decisions such as payroll, hiring staff, or paying bills. Can significantly help a business owner understand if they have the money to make that decision.
Since 29% of all failed entrepreneurs say that running out of money was the reason why their business was not successful. Edmonton CPA says that by learning how to make better and more informed financial decisions. Can help entrepreneurs avoid this problem that many business owners have succumbed to.
The first thing that business owners need to learn when it comes to reading and understanding their income statement. Our what the four components make up an income statement.
Revenue is the first component, and will appear at the top of the income statement. And is the gross amount of money that an entrepreneur has brought into their business. Through sales of their products and services.
Below revenue is the cost of sales, and if an entrepreneur has had no revenue, they will have no cost of sales. These are the costs that directly touch the products and services that an entrepreneur has sold. Including material and labour. Labour can be either staff that is on payroll, or independent contractors as needed.
The third category is the general expenses. And unlike cost of sales. General expenses are the bills that an entrepreneur will have regardless of how many products and services they have sold in their business.
The general expenses will be fairly static from month-to-month. But can represent some of the largest expenses that the business owner will have in their business. Expenses can include things such as rent and administrative staff. But also small things such as bank fees, utility bills and even office supplies.
The last component of their income statement are the other income another expenses. And while many business owners are confused is the information that goes in this category. These are all of the expenses and income that the corporation has incurred. But are not specifically related to the business.
Such as if an entrepreneur’s corporation owns a rental property. The income as well as the expenses related to that rental property would go in this category. Because it is not directly related to their business says Edmonton CPA.
One of the most important things that a business owner needs to keep in mind. Is that their salary goes in this category. Because it is a tax strategy driven by lifestyle choice rather than a expense of the business.
When business owners understand the information in their income statement. Will be able to help them understand how to read it. And then ultimately use that information to make more informed financial decisions in their business.
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Business owners often struggle with making financial decisions says Edmonton CPA. And this is mostly because they do not understand business finances. Especially when they are starting out in business.
However, when business owners learn how to read their income statement. They will be able to use that information to make more informed financial decisions in their business.
A great example of this says Edmonton CPA. Is if business owners are to use their bank statement in order to make financial decisions. They might end up spending far more money than they have. Which could cause them to run out of money in their business and fail.
The reason why, is because if an entrepreneur has checks that are waiting to be cashed, or electronic fund transfers that are waiting to clear. The bank balance that they see will not take those payments into consideration.
It could cause an entrepreneur to spend far more money than they actually have. But by looking at the income statement, a business owner will be able to see how much revenue they have generated, and how much in expenses they generated. So that they know how much money they have to spend.
This will help an entrepreneur significantly. If they want to see if they have enough money to run payroll. But they do not have enough money, they will be able to engage in revenue-generating activities. Or collection calls. So that they can increase their business. To have the money to make payments they need.
How they can organize their income statement is important to understand what is being said it is an important financial document says Edmonton CPA. For example, Edmonton CPA recommends that an entrepreneur ensures that their income statement is organized in numerically descending order.
This way, an entrepreneur can see the expenses that are impacting their bottom line the most at the top of the report. And the expenses that are not making a big impact towards the bottom.
If an entrepreneur needs to minimize some of their expenses. All they have to do is look at the top half of their income statement, and know what is going to be worth their time and effort in minimizing.
It is also very important that entrepreneurs ensure that their income statement is kept to a single page. And they can do this by ensuring that there expense categories are very broad. The more expense categories that an entrepreneur creates. And the longer their income statement is. Making it harder to read.
But also, the more expense categories that an entrepreneur has on their income statement. The more likely they are to make mistakes when creating this statement. Which will not help them be able to use the statement accurately as well.
By keeping their income statement organized. Business owners will be able to learn how to read this important document. That will allow them to make more informed financial decisions. That can help them grow their business significantly.