Edmonton CPA | Learning To Read And Income Statements
Many entrepreneurs struggle with understanding their business finances according to Edmonton CPA. And this is mostly because they have never had business ownership experience before. Or that they have never had any business financial experience at all.
And while many business owners are learning as quickly as they can, the fact that they are learning as they are running a business. Means that the learning curve is very sharp and unforgiving.
This is why it is extremely important that entrepreneurs understand what they should focus on first in learning in their business. So that they can be more successful in making the right decisions and avoiding problems as soon they can.
Edmonton CPA recommends that entrepreneurs learn how to read their income statement as one of the first things they learn how to do. The reason why, is because business owners should get into the habit of reviewing this financial document prior to making any financial decisions in their business.
This will let them know if they have money in their business to be able to make those bill payments, or run payroll. Or even if they can afford to purchase and assets. Or what they are going to need to do in their business to afford those things.
Whether they have to engage in some collection calls, to bring money into their business. Or perhaps they need to generate more revenue, which would require an entrepreneur going out on sales calls.
Or if an entrepreneur simply needs to make a plan on how they are going to feel to save up money to purchase assets. Regardless of the decision they are making, it can be made much more adequately when they are basing their financial decision on financial realities of their business.
The first thing that a business owner should do is understand what four components are on the income statement to begin with. The first component that will be at the top of their income statement is revenue, which is all of the money that an entrepreneur has brought into their business by selling their products and services or invoicing customers.
Below revenue is cost of sales, which are all of the costs that a business owner incurs if they have sold products or services. If they do not make any sales, they will not have any cost of sales.
These costs are typically things like supplies and material, as well as labour. And while it does not make a difference if the labour is an independently hired contractor, or staff. This is all of the labour that was required to generate those products or service.
The next category is general expenses. And these are all of the other expenses that an entrepreneur incurs in their business, independent of their sales.
Typical expenses that are put into this category include rent, administrative staff, utility bills and office supplies just to name a few. These expenses should be listed in numerically dissenting order, so that it is easier for an entrepreneur to see what their largest expenses are.
And finally, the last category will be other income and other expenses. For all of the other income and expenses that an entrepreneur might incur. That are not directly related to their dates they operations. This can include things like income from investments the corporation owns. As well as corporate income tax.
By understanding how to organize and read their income statement. Edmonton CPA says business owners will make far more informed financial decisions. That can help them avoid making financial mistakes. That can be very costly.
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Often, by the time an entrepreneur has one of their first meetings with Edmonton CPA. Not only are their finances already very disorganized. but they have already made some significantly poor financial choices. And are already facing financial hardship in their business.
This is why it is extremely important that business owners learn how to read their income statement early on in their business. Not only so that they can ensure that they are putting the information correctly into this report.
But so that they can use this report to make more informed financial decisions. That they can avoid making costly financial errors.
One of the first things that business owners should understand about their income statement. Is that it should be no longer than one page. This way, an entrepreneur will be able to easily review the statement. And understand the information within it.
A business owner should be reviewing this income statement before making any financial decisions in their business. Whether it is running payroll, paying bills or even making a purchase. So the easier they are going to be able to review this statement, more likely they are going to do it consistently.
The way that an entrepreneur will help ensure that they can keep their income statement to one page according to Edmonton CPA. Is by ensuring that they are not over classifying their expenses.
Many entrepreneurs assume that they are providing even better information, and ending up with a more complete income statement. But what happens if they over classify their expenses. Is not only of a more apt to make more mistakes when they classify this information.
But all of the different categories on their income statement makes it longer, and ultimately harder to read. If business owners truly want to categorize all of their different expenses. Edmonton CPA recommends using subaccounts.
So that their income statement can be synced. While they have the ability to pull a new report, and get the detail in the categories they want.
It is also very important that entrepreneurs understand that when they are classifying their own salary. That they do not put this into the direct cost or general expenses section. The reason why, is so that business owners can understand how much money their business brings in independent of the money they take out of their business.
This is because an entrepreneur’s salary is typically a tax strategy, or driven by their lifestyle choices. And should not be considered an expense of the business. By putting it into the last category on their income statement.
Which is the other income and expense section. Can help ensure that the business owner understands how much money they are making in their business, before drawing a salary.
When business owners learn how to read their income statement. Only will they be able to keep it much more organized. But also, they will be able to use that information to make more informed financial decisions in their business. That will be able to help them not only avoid making mistakes. But help them grow their business as well.