Edmonton CPA | Organizing An Income Statement Is Beneficial
Even though many business owners lack basic business financial knowledge when they open their business according to Edmonton CPA. There is one thing that they can learn that will help them significantly. By learning how to read and organize their income statements. Business owners can learn what information they need. To make better and more informed financial decisions.
For example, many business owners think that they are going to be able to understand how much money they have in their business to use. Simply by looking at their bank statements. However this is not true.
The reason why it is not true, is because their bank statements just show how much money they have in their bank at the moment. Without taking into consideration things like electronic fund transfers that might be scheduled. Or checks that they have written. But have not cleared their banks yet.
If they simply look at their bank statement in order to determine if they have enough money to run payroll, by assets or pay bills. They may end up spending more money than they have to spend. Which could end up causing electronic fund transfers to have insufficient funds. And bounce checks that people have to cash.
This is why is incredibly important for business owners to look at their income statement. Because the income statement will show business owners how much money they have in their business to use. While taking into consideration all of their bills that must be paid.
Edmonton CPA says the first step to understanding their income statement. Is learning what the four main components of the income statement are. The first is at the top and is called revenue. Which is where an entrepreneur will account for all of the money that they have earned in their business.
Underneath revenue is the cost of sales. And these are all of the costs associated with the revenue that they have generated. If they have no revenue, they will have no cost of sales. The typical expenses that will be in this component will be material and labour.
Below cost of sales will be the general expenses of the business. And these are all of the expenses that a business owner will incur independently of selling products and services. These costs will be static from month-to-month. And include things such as office rent, administrative staff and bills just to name a few.
The last component in the income statement will be other income and other expenses. And many business owners are confused as to what information goes here. Edmonton CPA says all of the costs and income that comes into the corporation. But are not specifically related to the business itself go here.
For example, the corporate income tax will be listed as an expense here. And any income that the corporation is earning from investments can also go here as well.
When business owners understand what information goes on their income statement. They will be able to be more prepared to read this information. And use it to help them make more informed financial decisions in their business.
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Many entrepreneurs are very challenged when it comes to understanding basic business finances according to Edmonton CPA. And although the learning curve is very steep. They have to learn very quickly or put their business in jeopardy.
Not only is it important for business owners to know the information that gets put on their income statement. How it is organized makes a huge difference as well.
For example, if business owners have an income statement that is longer than one page. Not only is it more difficult to read and understand. But it will also take more time. Which is very difficult if an entrepreneur needs to use this statement prior to any financial decision.
How business owner can keep their income statement to a single page is by ensuring that they do not buy grow classify expenses. Edmonton CPA says many business owners think that by micro-classifying expenses. That they are developing a better understanding of their finances. But this is not the case.
By over classifying the expenses. Business owners are simply making their income statements longer than it needs to be. And harder to understand. In addition to that, if business owners are micro-classifying their expenses.
Not only will it take them a longer time to do their bookkeeping. But it will also be more likely to contain errors, which will impact the accuracy of their income statement overall.
Therefore, when business owners learn how to have broad expense categories. They will be able to have not only more accurate income statements. But ensure that it is just a single page that will be easy to read.
They also need to ensure that their income statement is organized accurately. And in the best way to understand. Edmonton CPA says that many businesses think that they should organize their income statement alphabetically, or chronologically. However arguably the best way to organize their income statement is in numerically descending order.
The reason why numerically descending order is best for the income statement. If so that the highest expenses can be listed at the top. And the least impactful expenses can be at the bottom. This way, if an entrepreneur wants to look for why they may have lower profit than they are expecting. They can look at the top of their income statement as to why.
By spending time minimizing the top of their income statement in terms of expenses. They will be able to have the greater impact on their bottom line. And have the best return on investment for their time. Even if they could significantly change the expenses that are at the bottom of their income statement. It would not have a great an impact on their expenses overall.
When business owners can not only organize their income statement well. But read it, they will be able to have the information they need. In order to make more informed financial decisions. That will be able to help them not only avoid problems financially. But use that information to proactively grow their business as well.