Edmonton CPA | Learning To Read And Income Statements Is Important
Many entrepreneurs struggle with understanding basic business financial literacy according to Edmonton CPA. Which causes them to poor financial decisions in their business. That can end up negatively impacting their business. Even causing them to go out of business.
Industry Canada shows that there are many entrepreneurs that go out of business in Canada every year. 15% of all entrepreneurs fail with their first year of business ownership. While 30% fail in year two, and 50% have failed by their fifth year in business.
The second most common reason why. Is because these business owners have run out of money. And affects 29% of all failed entrepreneurs.
This is why Edmonton CPA recommends entrepreneurs learn how to read their income statements early on in their business. So that they can learn how to make better and more informed financial decisions. And do with that early on in their business, so that they do not negatively impact their business.
By understanding all of the components that are on an income statement. Can go far in helping an entrepreneur read their income statement. And be able to use the information to make decisions.
The first section of an income statement is revenue. And includes the gross amount of money that entrepreneur has brought into their business through invoicing, and selling their products and services.
The second section of an income statement is the cost of sales. These are all of the costs that are directly related to sales of the products and services. If they do not have any sales in their business that month, they will not have any costs either.
Typical cost of sales include supplies and materials needed to produce those products or services. And the labour used to make them. The labour can be staff that is on payroll. Or could also be independent contractors.
Underneath cost of sales are the general expenses. And these are all of the rest of the expenses that an entrepreneur will have. These are the expenses that are not related to generating the products and services. Therefore an entrepreneur will have these every month in their business. Whether they have generated sales or not.
Some typical examples of general expenses include rent or mortgage of the office space, paying administrative staff, and things like utility bills, phone and Internet. As well as office supplies can be included in this category.
Finally, the last category is for other income and other expenses. And this is income or expenses that the corporation generates. But are not specifically related to the business.
A great example of income that could go in this category. Would be income brought in from an investment owned by the corporation. While a typical expense could be something like corporate income tax that a business owner has to pay.
Also, a business owner should get into the habit of putting their own salary in this section. Because what they get paid is often a tax decision, or based on the entrepreneurs lifestyle. And not a cost of sale or general expenses.
Also, if business owners put their salary in this category. They as well as they are financial institutions will be able to see how the business is doing. Without having the owners salary impacting the revenue of their business.
By understanding how to organize the income statement says Edmonton CPA. And what components are on it. Can help an entrepreneur ensure that everything is categorized properly. So that they can make better decisions. Because they will know much more clearly the financial state of their business.
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Many entrepreneurs struggle with understanding their business finances says Edmonton CPA. And this can cause them to make poor decisions in their business. That can even cause them to run out of money, or have to close their business.
In fact, into it, who is the company that makes QuickBooks. Wanted to find out how much small business owners struggled at understanding basic business financial literacy.
Out of all of the small business owners who took the survey. 80% and up scoring less than 70% on this test. Showing them that many business owners struggle quite a bit with understanding their business finances.
However, Edmonton CPA recommends that entrepreneurs learn how to read and organize their income statement. Very early in their business. So that they can make more informed financial decisions.
One of the first things that they should do, is understand that there income statement should be organized in numerically descending order. So that their largest expenses can be at the top of this statement.
By listing it in numerically descending order, and then folding their income statement in half. Will show an entrepreneur exactly what expenses are worth minimizing. And what expenses do not impacts the bottom line very significantly.
Many business owners struggle with understanding what expenses they need to worry about minimizing. And often end up trying to save money on their phone bill, or their bank charges. When minimizing those types of expenses. Is not going to make a big impact to their bottom line.
Whereas rent, administrative staff and amortize Asian of leases. Are going to have the largest impact to an entrepreneur’s finances. And the time spent minimizing those, can make a huge difference to an entrepreneur’s finances.
The next thing that business owners should understand is how to keep their income statements to a single page. The reason why this is important says Edmonton CPA. Is so that it can be much easier to read and understand.
Since an entrepreneur should be looking at this report before making any financial decision in their business. The easier it is to read and understand. The more likely they are actually going to look at this report before making a financial decision.
How they can keep it to a single page, is to avoid over classifying all of their expenses. By keeping the expenses very broad. Keeps the income statement to a single page. And also keeps it a lot simpler to understand.
When business owners try to over classify various expense categories. Not only does it take them more time to do and read. But it increases the chances of making mistakes in those categories. That will impact the accuracy of their income statement.
By understanding how to organize their income statement. Can help entrepreneurs learn how to read this financial report much easier. So that they can make more informed financial decisions in their business. And do that earlier on, so that they will be less likely to make mistakes. That would cause them to go out of business.