Edmonton CPA | Reading Income Statements Well
It is very important for entrepreneurs to learn how to read their income statements says Edmonton CPA. Because this is the document that will tell this is owners the financial state of their business.
Many entrepreneurs assume that they will be able to look at their bank balance in order to understand how much money they have in their business to spend. But this is not true. And many business owners start out by doing this, and when they are small, it is easier. But quickly becomes challenging the more transactions they have in their bank account.
For example, many business owners think that they can look at their bank balance in order to understand how much money they have to use. However, if they have scheduled payments through electronic fund transfers. Or if they have written a number of checks. But those checks have been cashed.
The bank balance will show exactly how much money is in their account at that time. But not necessarily how much money they have to use. The income statement on the other hand. Shows entrepreneurs how much money they have to use. Because of see their revenue and all of their expenses in one document.
By learning how to not only read but organize their income statement. Help ensure that they can use this document to help them spend their money better. Help making errors according to Edmonton CPA.
The first thing that business owners need to learn is the information that is on their income statement. The revenue is at the top, in the first section. And will include all of the roast amounts of money that the entrepreneur has brought into their business by selling their products and services.
Below that is the cost of sales. Which is all of the expenses that an entrepreneur has incurred by generating those products and services. Typically, these will include material and labour. But that labour is an independent contractor, or staff that is on an entrepreneurs payroll.
Underneath cost of sales is the general expenses. And these are all of the expenses that occur every month. Whether an entrepreneur has sold products or not. These often make up the largest expenses that an entrepreneur has. From rent of their office space, to administrative staff, and things like utility bills, bank expenses and office supplies says Edmonton CPA.
Finally, the last component of an income statement are the other income and other expenses. And in this category, a business owner will have all of the income and expenses that are generated by their corporation. But are not necessarily directly related to their business.
An example of an expense that should belong here is the corporate income tax. And as typical example of income could be income from investments that the corporation owns. Business owners salary should also be included in this category. Because it is neither a cost of sale or general expense.
It will help them and financial institutions see the revenue of the business. Without minimizing the revenue that is shown. By including the entrepreneurs salary in there is well.
Understanding the information in the income statement is important. So that business owners can learn how to read it. And use that information to make more informed financial decisions.
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It is extremely important for entrepreneurs to understand their business finances according to Edmonton CPA. So that they will be able to make informed financial decisions in their business.
Many entrepreneurs struggle with understanding basic business finances. And 29% of all failed Canadian entrepreneurs attribute their failure to running out of money in their business. The sooner business owners are able to make better decisions. The sooner they can avoid this problem. Which is the second most common reason why entrepreneurs in this country fail.
By learning how to organize and eventually read their income statement. Business owners will be able to understand the information on their income statement. And read it better and more accurately. So that business owners will be able to use that information prior to making financial decisions.
The first thing that Edmonton CPA suggests. Is organizing their income statement in numerically descending order. So that the most impactful expenses will lend at the top of the list. While the expenses that impact the business leased fault of the bottom of the page.
If an entrepreneur needs to minimize expenses. And they will be able to look at the top half of the list. And see what items are going to be worth their time to minimize. And what expenses are not going to impact very much to minimize.
Not only should they have their income statement organize this way. The income statement should be no longer than a single page as well. So that it can be easy to read. And quick to understand.
Since business owners should be getting into the habit of reviewing their income statements prior to making any financial decision. Easier it is to read and understand. The more likely there going to actually do this. So that they can make better financial decisions in their business.
How to ensure that it is a single page. Is by minimizing the categories that they put their expenses into. Many business owners make the assumption that more categories will help them better understand their finances. But all it accomplishes is making their income statement several pages long. And harder to read and understand.
If a business owner does want to be able to understand their expenses. They can use subaccounts in their accounting software. Which will allow them to pull that report whenever they want. While keeping their income statement smaller and easy-to-read.
Whether business owner is running payroll, paying bills, making decisions like if they can afford to hire staff. Or if they need to lay staff off. And even if they are going to purchase assets. Edmonton CPA says business owners need to review their income statement.
Before making any of those decisions. So that they know if they have the money in their business to make those decisions. And if not, what they need to do in order to bring that money in. So that they can afford to run their business the way they want.