Edmonton CPA | Organizing And Understanding Income Statements
Many business owners fail to understand basic business financial literacy says Edmonton CPA. Especially when they are first starting out in business. This will cause them to make bad financial decisions. That could end up with them running out of money in their business.
In fact, industry Canada did a survey that found that 15% of entrepreneurs fail in the first year voting their business. 30% of entrepreneurs failed in their second year. While half of all Canadian entrepreneurs failed by their fifth year in business.
When asked why their business failed. 29% of these entrepreneurs said the reason why they failed was that they ran out of money in their business. By learning how to read their income statement.
This is owners will have a better chance of understanding their business finances. So that they can make better decisions and avoid running out of money.
The first thing that entrepreneurs can do is understand what information is on their income statement. Edmonton CPA says there are four main components, that a business owner should be familiar with.
The first is revenue, which is all of the money that an entrepreneur has brought into their business. Through selling their products and services. This is the gross amount, and no bills will be removed from this amount in this section.
The following revenue are the cost of sales. And these are the costs that are directly related to generating those products and services that they have sold.
An entrepreneur should keep in mind that if they have no revenue, they will not have cost of sales in that month. The typical expenses that they will have in this category will be material and labor. The labor can be independent contractors that they hire as needed. Or can be staff that is on their payroll.
Below cost of sales are the general expenses. And these are all of the expenses that a business owner will incur month-to-month. Whether they have sold products and services or not. These expenses will typically be static, and will occur on a regular basis.
Typical general expenses include rent, administrative staff, utility bills and office supplies just to name a few. Edmonton CPA recommends organizing these in numerically dissenting order. So that the largest expenses of the top of the list. So that an entrepreneur knows which ones will have the biggest impact on their bottom line.
Finally, the last category is other income and other expenses. And will be all of the income and expenses that the corporation has generated. But are not specifically related to the business. A great example of an expense that should appear in this category. Our corporate income tax that an entrepreneur has to pay. It is a legitimate expense. But not of the business.
A great example of income that entrepreneurs might generate in their corporation. But not be business income. Could be income from investments that the corporation owns.
By understanding what is in the income statement. Can help an entrepreneur learn how to read this important document. So that they can make more informed financial decisions in their business.
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It is very important that business owners learn how to organize and read their income statements early on in their business according to Edmonton CPA. So that they know what is going on in their business. So that they can make more informed financial decisions.
For example, they will be able to look at the revenue that they have generated and subtract the cost of sales and general expenses. In order to understand how much money they have in their business to spend.
Many entrepreneurs make the mistake of thinking that they can get the same information by looking at their bank balance. But this is not true. Their bank balance will show exactly how much money they have in their bank at that moment.
But the bank balance will not take into consideration payments that they have made such as electronic funds transfers and checks. That has been scheduled, but have not yet come out of their bank account yet.
By looking at the bank statement instead of the income statement. Can cause business owners to spend more money than they actually have. Causing things like checks and payroll to bounce.
One of the first things that business owners can do in organizing their income statement according to Edmonton CPA. Is ensure that there statement is no longer than one page. The reason why, is when it is one page it is a lot easier and quicker to read and understand.
So that when business owners look at the income statement before making any financial decisions in their business. It is a quick process that can help them gain clarity. If it is longer, not only is it more difficult. But it may because business owners to avoid looking at the income statement. Because it is too time-consuming.
How business owners can ensure that their income statement is a single page. Is avoiding over classifying various expenses. Many entrepreneurs think that there being very helpful by making any different expense categories. This is not true.
Instead, but it does is makes the income statement extremely long, and increases the chances of errors being made. As business owners are not sure exactly what category to put various expenses into.
If business owners do want to and up analysing all of the various expenses. Been ten CPA suggests putting all of those different categories into subaccounts. So that their income statement can remain simplified.
And if they do want to review all of the different categories. They can pull a different report from their accounting software. That will give them the ability to analyse the numbers they want says Edmonton CPA.
By understanding how is this owners can organize their income statement. Can help ensure that not only do they know what information is on its. They will be able to easily read and understand the information. So that when they go to make a decision, they can make the best decision they can. With the accurate information they have on hand.