Edmonton CPA | The Importance Of Reading Income Statements
The reason why it is so important for entrepreneurs to learn how to read their income statements early on in their business according to Edmonton CPA. Is so that they can make more informed financial decisions. And make those decisions much earlier on in their business.
In fact, many entrepreneurs in Canada fail every year. And according to Industry Canada, many within the first year of owning their business. 15% of entrepreneurs fail in their first year of business ownership. While 30% fail in year two, and half fail by their fifth year in business.
The second most common reason why entrepreneurs are failing in their business. Is because they ran out of money. Which is a reason why 29% of all failed entrepreneurs say they were not successful in their business.
Therefore, by learning how to read and organize their income statement. Can help entrepreneurs understand their business finances better. So that they can avoid making decisions in their business that are harmful.
Edmonton CPA says the first step to understanding their income statement is learning what the four main components of their income statement are. The first will be at the top of the income statement and is revenue. This is all of the money that they have brought into their business by selling their products and services.
Underneath revenue is cost of sales, which are all of the costs directly related to selling those products and services. Labour is going to be included here. Whether it is how much money and not nor has paid an independent contractor.
Or if this is staff that an entrepreneur has hired to help create those products and services. If an entrepreneur does not have any sales in that month. They will not have any cost of sales either.
The third category is general expenses. And will include all of the rest of the expenses that an entrepreneur has incurred in their business. Since this is not related to cost of sales. These are all of the expenses that an entrepreneur will have. Whether they sell products or not.
Typical general expenses include things like rent of the office space, amortization of equipment, administrative staff. But can also include a lot smaller things such as utility bills, Internet and phone as well as office supplies.
Finally, the fourth category on their income statement is other income and other expenses. This is the category that is for expenses or income that the corporation has generated. That are not specifically related to running the business.
For example, if a corporation owns rental property. The expenses for the rental property will be in this category. And all of the income that is brought in for that rental property will be in this category as well. They are legitimate expenses for the corporation. But not related to the business.
A business owner should also put their own salary into this section says Edmonton CPA. Because their salary is neither a general expense nor cost of sale. And is often based on tax decisions, and lifestyle choices.
And it is going to be very important for them as well as any financial institutions that look at their income statement. To know how the business is doing. Without the owners salary clouding the amount of revenue that they are generating.
By understanding how to organize their income statement and the information on it. Can help an entrepreneur learn how to understand their business finances. So that they can make better financial decisions.
Edmonton CPA | the importance of reading income statements
Business owners should understand how important it is to learn basic business financial literacy according to Edmonton CPA. So that they can make better decisions in their business. And make those decisions early on as possible.
One of the first things that entrepreneurs should do is learn how to read their income statement. Because this is a document that they should understand. Before making any financial decision in their business.
Instead, many entrepreneurs think that they are being prudent by looking at their bank balance before making the same decisions says Edmonton CPA. There is several reasons why they should not look at their bank balance to understand how much money they have in their business.
An entrepreneur might have scheduled several electronic fund transfers. And they may be coming out on a certain day. Or at business owner might have written several business checks. And while they have sent them out in the mail. Some might not have been cashed yet.
If an entrepreneur is looking at their bank statement in order to make financial decisions. They might see that they have enough money to make purchases, run payroll or even pay bills. But they are not taking into consideration. All of the payments that are scheduled to come out.
Therefore, when they use their bank balance to make financial decisions. They might end up spending more money than they actually have to use. Which could cause them to run out of money in their business. Or cause them to bounced checks, or not have enough money to pay their staff.
This is why it is extremely important for entrepreneurs to learn how to use their income statement instead. Because this will show them how much money they have in their business to use. While taking into consideration all of the payments that they have waiting to come out of their bank account.
One of the first things that business owners should understand is that when it comes to their income statement. It should be listed in numerically descending order. Edmonton CPA says many entrepreneurs try to list their expenses in alphabetical order. But this is not helpful in helping them understand what expenses are impacting their bottom line the most.
When they list their income statement in numerically descending order. They will be able to see very easily the expenses that are largest. By looking at the top of their income statement. If they need to minimize expenses at any time. They should focus on the expenses that are at the top of the page.
Because the largest expenses are going to impact their bottom line most. And the smallest expenses are going to impact their online the least. And while they might be able to get their bank charges cut in half. Taking an hour or more of their time to save ten dollars a month by not be the best use of an entrepreneur’s time.
Therefore, learning how to organize their income statement. Can help entrepreneurs not only read this statement easier. But use that information to impact their business finances. So that they can make better choices in their business sooner.