Edmonton CPA | Learning About Income Statements
If business owners do not know how to organize their income statement, Edmonton CPA says that can lead to problems. Whether they might have a disorganized income statement. Or end up having income statements longer than a single page. This can significantly impact how a business owner can read this important statement.
In fact, business owners should get into the habit of reviewing their income statement prior to making any financial decision in their business. So that they will be able to understand what is going on financially in their business. And if they can afford to make those decisions or not.
In fact, when mistake that many business owners make when they are brand-new. Is thinking that they are going to be able to look at their bank statement in order to understand how much money they have in their business.
The reason why this is not a good idea. Is because the bank balance will show exactly how much money they have in their bank at that moment. Without taking into consideration things like payments that are scheduled to come out. Or checks that have been written and not cashed yet.
Edmonton CPA says that when business owners look at their bank balance instead of their income statement. In order to make financial decisions. They often end up making poorly informed choices. That end up having them spending more money than they can afford.
This is why it is extremely important that entrepreneurs understand not only how to read their income statement. But how to organize it as well.
The first thing that can help entrepreneurs learn this is understanding the four main components of an income statement. They should start at the top, where the revenue is going to be indicated. And is all of the money that an entrepreneur has brought into their business through selling their products or services.
Below that are all of the cost of sales, that are directly related to generating their products and services. Including material as well as labour. If they have no sales, they will have no cost of sales.
Below the cost of sales are the general expenses of the business. And these are all of the other expenses that a business owner will incur. And will have month-to-month regardless of if they are making any sales in their business or not.
Some common examples of general expenses include office rent, administrative staff, utility bills and office supplies just to name a few.
And finally, the last component of an income statement is the other income and other expenses. This is where a business owner should classify income and expenses that are legitimate. But are not necessarily related to the daily operation of the business.
This can include in expenses such as their corporate income tax. Or income such as investments the corporation might own. But the most important expense to put in this category is the business owners salary.
By putting their salary in the other income and other expenses category. Can help ensure that a business owner will be able to see the financial state of their business independent of the salary that they draw.
By learning how to read this statement first. Edmonton CPA says that business owners can start avoiding making decisions that negatively impact their business. So that they can stay in business longer, and learn what they need to do to succeed as well.
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Many business owners struggle with understanding business finances according to Edmonton CPA. And in fact, the company that makes QuickBooks, Intuit did a survey to find out how many struggle.
What they found with their survey was that 80% of small business owners scored lower than 70%. When asked to complete a basic business financial literacy test. This shows that there are a significant number of entrepreneurs. Who are running their business with large gaps in their knowledge?
This could be why so many entrepreneurs struggle with their business. Or why so many entrepreneurs go out of business because they have made poor financial decisions. And have run out of money.
To help ensure that is owners are able to make better financial decisions. Edmonton CPA recommends business owners learn how to read their income statements as early on in their business as possible.
It is not just enough to understand the information that is on their income statement. But how it should be organized as well. To ensure that they are able to understand it quickly.
This is why business owners should ensure that their expenses are listed in numerically descending order. So that their largest expenses are shown at the top of the income statement. While the smaller expenses are towards the bottom.
A business owner should be able to fold their income statement and half, and look at the information above the fold. In order to understand which expenses have the greatest impact on their bottom line.
If they want to minimize expenses, Edmonton CPA recommends focusing on the expenses that are at the top of the list so that they can make the most of their time.
If an entrepreneur spends a lot of time minimizing the expenses low that line. They might end up spending a lot of their time and energy on something that is only going to change their bottom line by a few dollars. This is why it is important to have their income statement organized.
Also, it is important that entrepreneurs understand that their income statement only be a single page. If it is longer than one page, it may be extremely difficult to read quickly. Or even hard to understand.
They can ensure that their income statement stays to single page. By keeping their expenses to broad categories. And avoid trying to classify them into a lot of different categories.
More categories there are for expenses, the longer their income statement will be. And the harder be to read and understand it. Also, it will take more time trying classify their expenses in a wide variety of categories. And an entrepreneur will end up making more errors, which will impact the accuracy of this important financial statement.
When business owners can learn not only what information is in their income statement. But how the information should be organized. Business owners will be able to better read and understand this statement. So that they can use it to help them make more informed financial decisions in their business.