Edmonton CPA | Learning To Organize Income Statements
Many entrepreneurs have a very difficult job of learning how to understand basic business finances says Edmonton CPA. And while they know they should be looking at their income statement. It is either disorganized, or several pages long. And can be very difficult to understand.
This is why it is extremely important for entrepreneurs to understand what information should be on their income statement. And how it should be organized. So that they can ensure that this report is not only easy-to-read. But easy to understand.
Having a well organized income statement. Means that business owners will be more apt to review this statement prior to making any financial decisions. Whether that is running payroll, paying bills, hiring staff, or even making purchases.
The first thing that Edmonton CPA recommends is understanding the four main components of an entrepreneurs income statement. Revenue is the first category, and will pay or at the very top of the statement. And shows the entire amount of money that an entrepreneur has brought into their business through selling products and services.
Below that is cost of sales, and all of the costs that are directly related to generating those sales. If an entrepreneur has no sales in their business in that month, they will not have cost of sales category. The expenses that are typically in this category include the material purchased to make the products.
As well as the labour needed to produce them. Whether that was an independent contractor that was hired on a one-off basis. Or staff that a business owner has on their payroll.
Underneath cost of sales will be the general expenses category. This will have all of the other expenses that a business incurs. These are all of the expenses not related to an entrepreneurs cost of sales. And will occur whether an entrepreneur has sales in their business or not.
Typical general expenses include rent or mortgage of the office space. Administrative staff salary, and our trays Asian of equipment. But also can include things like utility bills, Internet, phone and office supplies. Even the bank charges that they get every month can be included in this category.
And the last category is called other income and other expenses. And this is income or expenses that are generated by the corporation. But are not specifically related to the business itself. For example, investments that the corporation owns and produces an income belong in this category. As well as corporate income tax that an entrepreneur must pay.
It is very important that business owners understand that there salary goes into the other income and other expenses category. Because it is tax decision based on their lifestyle. And not a cost of sale or general expenses.
This is very important to put it here. So that an entrepreneur can see how much revenue their business is generating. Without having their salary taken out of the final number according to Edmonton CPA.
If an entrepreneurs ever going to apply for financing. This is also very important to have. Because financial institutions will want to see the revenue as high as possible. Which it will be if an entrepreneur has their own salary coming out of cost of sales or general expenses.
Edmonton CPA | learning to organize income statements
This is owners should learn how to read their income statement early on in their entrepreneurship according to Edmonton CPA. So that they can avoid making poor choices in their business.
Industry Canada did a survey and found out that not only did 50% of Canadian small businesses fail. But the second most common reason why these business owners failed. Is because they ran out of money.
Therefore, learning how to make more informed financial decisions. Based on reports like income statements. Can help business owners make more informed decisions. So that they can avoid making decisions that will cost them their business.
Aside from knowing the information on their income statement. Understanding how it is organized says Edmonton CPA is the next most important thing. Not only will organizing it help ensure that they can read it better. But it can help them when they need to make decisions in their business such as what expenses they should minimize.
Because of this, their income statement should be listed in numerically descending order. This means that all of the largest expenses will appear at the top of the list. While the least impactful expenses will appear at the bottom.
If an entrepreneur needs to minimize expenses. All they have to do is look at the top half of that list, knowing that those the expenses that impacts the bottom line the most. And even if they spend time demise in expenses on the bottom of the list. They are not going to impact their bottom line very significantly at all.
For example, fighting how they can save a certain percentage of their rent can increase their profitability. But spending hours trying to figure out how to cut their bank charges in half from fifteen dollars to seven dollars is not going to impact their business that much at all. And is not a good use of their time.
Also, Edmonton CPA says business owners should ensure that their income statement is only one page long. And they can do this simply by ensuring that they have very broad categories of expenses.
Many entrepreneurs think that they will be able to understand their business finances better if they are micro classified. But this is not true. All it does is makes their income statement longer, and harder to read. While increasing the likelihood of making mistakes.
By learning how to minimize their income statement into a single page. And how it should be organized. Can help business owners learn how to read this important document. Especially because they will need to review it are to making any financial decision in their business.
When it is easier to read and understand. Business owners can create the habit of looking at this statement every single time they need to make a business decision. So that they can make a decision that is most likely to help them grow their business. Help ensure that they are avoiding making decisions that could be negative in their business.