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E-Myth – “Why most small businesses don’t work & what to do about it”

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Edmonton CPA | Organized Income Statements Are Easier To Read

By the time entrepreneurs have their first meeting with Edmonton CPA, they often already have a very disorganized income statement. Which prevents them from being able to understand their business finances.

While many entrepreneurs make some bad financial choices in their business. Within be able to recover ends meeting with their accountant. Not all business owners are so lucky. And end up failing in business in their first year of ownership.

This is why it is incredibly important for all business owners to learn about business finances early on in their business ownership. And one of the first things that they should learn is how to read and organize their income statement.

They should get into the habit of reviewing this financial document. Prior to making any financial decisions in their business. Whether it is paying bills, running payroll, or purchasing assets. So that they know if they have the money in their business to do those things.

If a business owner does not have the money, they will be able to do things like engage in collection calls. Or some income generating activities. So that they can bring in the money they need to make those decisions.

The first thing that Edmonton CPA recommends for entrepreneurs. Is understanding the four main components of their income statement. So that they will be able to understand the statement easier.

The first section at the top of the statement is revenue. And is all of the money that an entrepreneur has brought into their business through selling their products and services.

Below revenue is cost of sales. And if an entrepreneur has no revenue, they will not have any cost of sales. These are typically the materials supplies used to produce the products and services they sell. As well as the labour they pay for to produce them. Whether it is staff, or independent contractors.

The third section is general expenses. And are all of the expenses that are not related to cost of sales. These are static expenses. And will occur every single month other an entrepreneur has sold products or not.

Typical general expenses include things like rent of the office space, administrative staff. As well as utility bills, the Internet, phone, office supplies and even bank charges can be included in this section.

Business owners should ensure that these general expenses are listed in numerically dissenting order. So that the largest general expenses that they have can fault of the top of the list. So that they will be better judges at what expenses should be minimized in order t impact their bottom line better.o

And finally, Edmonton CPA says the last category is for other income and other expenses. And these are for all of the different expenses and income that are legitimately earned by the corporation. But are not necessarily related to the business.

For example, corporate income tax would be an expense in this category. While income earned from investments owned by the corporation are examples of income that should be included here.

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Business owners need to understand business finances according to Edmonton CPA. So that they can avoid making costly business decisions. In fact, many entrepreneurs make bad business decisions early on in their business. And can never actually recover from their choices.

Intuit’s, the makers of QuickBooks did a survey. In order to find out how many small entrepreneurs understood basic business financial literacy. 80% of all of the small business owners who responded. And it up scoring less than 70% on a financial literacy test. Showing Edmonton CPA how many entrepreneurs have an extremely large knowledge gap while running their business.

This is why it is extremely important for business owners to learn how to read their income statements. So that they can make better financial decisions early on in their business.

One of the first things that business owners can do, is learn how to organize their income statements. So that they will be better able to read and understand the information contained within it. One of the first things that Edmonton CPA recommends, is ensuring that the statement is just one page long.

A business owner can achieve this by ensuring that they do not over classify all of their expenses. Many business owners do this because they think it is going to help them better understand their finances. Or help them make better decisions. But that is not what happens.

The many categories, and up making the income statement very long and difficult to read. While the increased number of categories ends up increasing the number of errors that an entrepreneur will have in categorizing expenses. Making the income statement less accurate overall.

By classifying all of the expenses very broadly. Can keep their income statement short and easy to read. However, Edmonton CPA recommends entrepreneurs using subaccounts and their accounting software.

If they want to go into more detail about the nature of their expenses. That way, they can pull different reports that will allow them to analyze those numbers. While ensuring that their income statement is still readable.

It is also very important for business owners to understand where their salary should fall on the income statement. And any entrepreneurs think it should go in cost of sales or general expenses. Since they work in their business. But this is not where it should go.

Entrepreneurs’ salary should go in other income and other expenses. Since what they get paid is a tax decision. And often based on the entrepreneurs lifestyle.

When they put their salary in other income and other expenses. They will be able to see the overall revenue of their business. Not what they pull out of the business clouding that number.

Which is especially beneficial if they are ever going to apply for financing. Their financial institution will want to see revenue of the business. Without the entrepreneurs salary. And putting it in other expenses will ensure that that is very easy to see.

When entrepreneurs learn how to organize their income statement. They will also be better able to read this important report. So that they can make more informed financial decisions in their business. That will help them not only avoid making bad decisions. But also help them grow their business proactively as well.