Edmonton CPA | Should Business Owners Organize Income Statements
When business owners are brand-new in their business says Edmonton CPA. They may not even know what an income statement is. Or understand how or why they should organize one.
However, the sooner an entrepreneur can read and income statement. And keep it organized. The more likely they are going to be at being able to make informed financial decisions in their business.
In fact, many entrepreneurs struggle with understanding their business finances. As proven by the company behind QuickBooks, Intuit. Who conducted a survey of small business owners. And discover that 80% of these small businesses. Scored less than 70% on a basic financial literacy test.
That extremely high number of business owners that had a large knowledge About business finances. Show how important it is for business owners to learn business finances. And a great place to start is their income statement.
By learning how to read their income statement. Not only can entrepreneurs avoid poor financial decisions. That could potentially cause them to run out of money in their business. But also learn how to be proactive in their business as well.
A great example of this, is if an entrepreneur thinks they are going to be able to use their bank statement in order to make financial decisions. He might find out that they are actually spending more money than they have.
The reason why according to Edmonton CPA. Is because the bank balance shows exactly how much money the business owner has at that moment in their account. This is not representative of the money that an entrepreneur has to use.
If they have electronic fund transfers, or checks that are waiting to be cashed. The amount of money that shows up in their bank account. Is not indicative of how much money they have to spend. If they spend more money than is available. Not only will they end up bouncing checks, but they might end up running out of money in their business.
Instead, Edmonton CPA says learning how to read and income statement is a lot more functional. Because this will show all of the revenue that an entrepreneur has. As well as all of the expenses that they have incurred in that month.
So they will be able to make better financial decisions based on how much money they actually have to use in their business. They might find out that they do not have the money to run payroll. Or purchase and assets. And can come up with a plan on how they are going to save money for these assets.
Or what they have to do to bring the money in to be able to pay their payroll, or bills. There is doing some collection calls to bring money that they have invoiced into the business. If they need to engage in some revenue-generating activities. Such as sales calls. To increase the revenue they have their business. To make those financial decisions.
This shows how important an income statement is to entrepreneurs. That can help them not only avoid making poor financial decisions. But help them be proactive in growing their business as well.
Do You Need Help When Looking For An Edmonton CPA?
Once an entrepreneur understands how important their income statement is says Edmonton CPA. They should learn how it should be organized. So that they will be better able to read the document. And use it to make more informed financial decisions.
One of the first things that Edmonton CPA recommends. Is understanding how to keep their income statement to just a single page. If it is longer than one page, not only is it more difficult to read and understand.
It will also take longer time to read. And if an entrepreneur is expected to use this statement before making any financial decision in their business. The less likely business owner will be at looking over this document. In order to save time.
The best way to ensure that their income statement stays to a single page. Is by ensuring that expenses are broadly categorized. Many business owners think that there being extremely prudent at creating many different categories for all of the expenses that they have.
But instead of being easier to understand finances. Makes the income statement longer. And increases the chance that an entrepreneur will make mistakes on categorizing their expenses.
Edmonton CPA says that if entrepreneurs truly want to analyse the types of expenses that they have. Instead of making many categories in their income statement. They can use their accounting software to create subaccounts.
So that they can analyse those numbers if they want. While ensuring that their income statement stays to single page. This way, the business owner has the best of both worlds. And their income statement will be more accurate.
It is also very important that entrepreneurs ensure that these expenses are listed in numerically descending order. Instead of alphabetical or chronological. So that they will be a lot easier to see what expenses are impacting the bottom line the most.
Edmonton CPA says that when the expenses are in numerically descending order. They will be able to show the entrepreneur by looking at the top half of their income statement. What the expenses that are most worthwhile in minimizing will be.
Expenses that are most likely going to be at the top the list include rent, administrative salaries and amortization of equipment. Meanwhile, what will be at the bottom of the list will include things like phone bill, bank charges and office supplies.
Even if an entrepreneur can minimize some of the smallest expenses by a significant amount. It is not going to impact their bottom line very much at all. Which will not be worth spending a lot of their time or energy on.
When business owners understand how to organize their income statement better. Not only will they increase their understanding of the information on the statement. They will also be able to use that statement in order to make more informed financial decisions in their business. That is going to help them stay in business longer.