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If entrepreneurs are not able to read their financial statements, they may make significant financial errors says Edmonton CPA. Therefore, one of the most important things that a business owner can learn early on in their business, is how to read the three main components of their financial statements and learn how to use that information to make decisions in their business. Intuit’s, who are the makers of QuickBooks surveyed small business owners to test them on their knowledge of basic business financial literacy. They discovered that 80% of the respondents scored 70% or less. That means that there is a significant amount of entrepreneurs who lack the skills to be able to make great and informed financial decisions in their business.
One of the first things that business owners should learn in order to help them understand how to read their financial statements is what the main three components of their financial statements are. They will see that the three main components are an income statement, balance sheet, and a statement of retained earnings. Often, entrepreneurs have enough knowledge to be able to read and understand their income statement, and make their financial decisions based on this report. Edmonton CPA says that if this is the only thing they are doing, they still do not have enough knowledge to be able to make informed financial decisions. Their recommendation is for entrepreneurs to read and understand their balance sheet first, and then look at their income statement alongside their balance sheet.
In order to help an entrepreneur understand how to read these components of financial statements, business owners should understand the information is on each one. The balance sheet is going to show all of the assets, liabilities and equity in a business for a specific moment in time. The total of the liabilities and the equity together should equal the assets. This is why it is called a balance sheet.
The income statement on the other hand covers a specific period of time Edmonton CPA says that an income statement will show how much money was generated in that specific period of time as well as all of the expenses that were incurred in that period of time. One thing that entrepreneur should understand when it comes to their income statement, is they might there be referred to as a profit and loss statement, they should understand that this is a different name for the same report. In fact, many accounting software programs will call the income statement a profit and loss.
When entrepreneurs are able to read and understand both their income statement as well as their balance sheet, they will be able to use this information to learn how to make more informed financial decisions. Edmonton CPA says that this can help entrepreneurs not only avoid making mistakes, but use this information to start growing their business as well. Since 29% of failed entrepreneurs say running out of money was the reason why their business failed, learning how to read these financial statements and use them can help entrepreneurs avoid this in their business.
Many business owners are learning how to run a business for the first time says Edmonton CPA. Because of this, there is a lot of information that they do not have about how to make financial decisions. Therefore, it is very important that they learn early on how to read their financial statements so that they can make informed decisions early on in their business. By doing this, they will be able to not only avoid making mistakes, but be able to start making informed decisions that can help them grow their business right away.
One of the first things that entrepreneurs should understand, is when they hear the term financial statements, this is a term for a group of reports. Three main components of the financial statements of the business are the balance sheet, the income statement as well as a statement of returned earnings. Often, is owners are familiar with the information on their income statement and believe they can make financial decisions with this report alone. However, Edmonton CPA says while an income statement can show an entrepreneur how much money a business has made or lost in a specific period of time, the balance sheet that is going to show the entrepreneur what all of the resources their business has to work with.
One of the most important things that entrepreneur should understand about the statements according to Edmonton CPA is that they should all be a single page. The reason for that is so that they can easily be read and understood. The recommendation is for entrepreneurs to use these statements any time they make a financial decision in their business. This can be quite often, therefore it is very important so that business owners can review the reports as often as they need to make those decisions. If an entrepreneur wants more information at a later date, they can always look deeper into their business financials. But, the purpose of the statements is to help guide and entrepreneurs financial decisions, so therefore they need to be a single page.
Edmonton CPA says the balance sheet is the most important of all of the financial statement components, and should be the first place for entrepreneurs to look when reviewing their financial statements. One of the reasons why, is because there can be some mistakes in the interim financial statements of the business, therefore if entrepreneurs can review the balance sheet first, they are able to often catch mistakes so that when they review the balance sheet along with their income statement, they will have a better idea of the financial position of their business.
Learning how to read financial statements of the business is so important that entrepreneurs will be able to vastly improve their decisions when they learn how to read them. By doing this early on in their business, business owners can become more likely to grow their business, and avoid making some of the mistakes that new entrepreneurs often make that can be quite costly.
