Edmonton CPA | Reading An Income Statement
There are many different things that a business owner needs to learn financially in their business says Edmonton CPA. But one of the first things that business owners should focus on is learning how to read their income statement.
The reason why this is so important, is because this is a report that should be reviewed, prior to making any financial decision. The sooner an entrepreneur learns how to do this, the sooner they will be able to make better decisions.
One of the first things that business owners should understand is what information is on this financial report and in what order. The first section is at the top of the statement.
It is called revenue, and contains the gross amount of money that the entrepreneur has brought into their business through selling their products and services, or invoicing customers.
Below that is a section called cost of sales, and is where business includes of the expenses that a business owner has accrued as a result of making those sales. Edmonton CPA says a good way of looking at this is all of the costs that directly touched those products or services.
Typical cost of sales include material as well as labour. Regardless of if the labour is staff that is on payroll, independent contractors. If an entrepreneur has no sales, they have no cost of sales.
The third section is general expenses, and include all of the other expenses in an entrepreneurs business. These are all of the bills that an entrepreneur will have to pay whether they have generated sales in their business or not.
Typical general expenses include rent, administrative staff, bills and office supplies just to name a few. Not only are these expenses important to list here. But how they are listed is important. Edmonton CPA recommends that they are organized in numerically dissenting order.
That way, an entrepreneur will be able to see by looking at the top of the list, what the most significant expenses are in their business.
Below their general expenses is the fourth and final category. This is the other income and other expenses. These are all of the income or expenses that the corporation has generated. But are not specifically related to the operation of the business.
The owners salary should be listed here, because it is not an expense of the business. But can also include expenses such as corporate income tax. And include income such as income from investments that the corporation owns.
By understanding all of the information on the income statement, and how it is organized can help ensure that business owners can look at the statement and understand what it is saying.
This is very important to know, because a business owner should be looking at the statement in order to understand if they have the money in their business to make financial decisions. Whether those decisions are paying bills, or paying payroll.
The sooner an entrepreneur is able to look at the statement and understand what it says. Those business owners will be able to make more informed financial decisions in their business.
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Many business owners struggle with understanding their business finances says Edmonton CPA. That can negatively impact their ability to run their business. In fact, into it, the company that makes QuickBooks did a survey in order to find out how many business owners struggled with this.
But they discovered was that 80% of small entrepreneurs scored less than 70% on their basic business financial literacy test. This means there is a significant amount of entrepreneurs are running their business. Without understanding a lot of their business finances.
It can be very overwhelming for business owners to try to understand what they should learn first. However, Edmonton CPA recommends that entrepreneurs learn how to read their income statement first. Primarily because this is statements that they should be consulting before making any financial decisions.
The first thing that is important to note is that the financial statement should only be one single page long. The reason why, is so that it can be easy-to-read as well as easy to understand.
If the report was on several pages, it would take a longer time to read and therefore understand. Which would be difficult for entrepreneurs to do prior to any financial decision they need to make.
And what can help keep the income statement short is not over classifying their expenses. Many business owners think that adding several different categories to all of the various expenses that they have help them gain a better understanding of their finances.
However, that will not help them make any better decisions. And can actually end up with them wasting time, or making mistakes when categorizing their expenses. Which will result in poor information on their income statement?
And while many business owners still want to be able to categories their expenses. Edmonton CPA recommends using subaccounts to achieve that goal. So that their income statement can have very broad categories.
But an entrepreneur will be able to pull a report that they want. To be able to understand their expenses a bit better if they choose.
The next thing that the business owner should keep in mind is that they should have no more than three revenue accounts. While most businesses will have dozens if not hundreds of different products and services that they offer. Most of them will have the same kind of profit margin in them.
For example, a contractor can do anything from fix a person store, to building an entirely new house. And business owners might spend a lot of time trying to figure out the profit margin of each type of job that they can do.
However, instead of spending time on each product or service that they offer. Business owners should boil all of their different buttocks and services into three different revenue accounts based on profit margin.
So that they will be of the understand approximately how much money each customer will generate every time they walk through the door.
When business owners understand how to read their income statement better. They will be able to make better financial decisions. Which will help them stay in business by avoiding errors as well.