Edmonton CPA | Understanding And Organizing Income Statements
Business owners often make critical financial errors when they first open their business says Edmonton CPA. And while some of those errors are able to be overcome. Some errors are not. It is why 15% of Canadian small business owners and up failing in their first year of business.
Many business owners believe that they should be able to look at their bank balance in order to make financial decisions. And while they will be able to see exactly how much money they have in their business at that moment. That does not necessarily represent all of the money that they have available to be used.
For example, a business owner might have electronic fund transfers scheduled for later on in the month. Or have written checks that have not yet cleared. But looking at the bank balance. Will not tell an entrepreneur how much money they have once those expenses have cleared.
If business owners make financial decisions such as hiring staff, running payroll for making asset purchases. By looking at their bank statement alone. They can end up running out of money. Causing checks or even payroll to bounce, when the expenses come out of their accountant.
This is why learning how to read and income statement is crucial according to Edmonton CPA. Is because it will show entrepreneurs how much revenue they have in their business, and what expenses and cost of sales they have. So that they know exactly how much money they have to work with.
The first step in understanding the income statement is understanding the four main components. The first is revenue, which appears at the top of the statement. And his all of the money that an entrepreneur has brought into their business through selling their products and services.
Underneath revenue is cost of sales. And these are expenses that are directly related to generating those sales. Typically, material, supplies and labour will be the expenses here. Whether the labour is staff that is on payroll, or independent contractors. Or even a mix of the two.
Below cost of sales are the general expenses. And these are all of the expenses that an entrepreneur will incur. Whether they have sold products and services or not. They will be fairly static from month-to-month, and generally make up a large portion of an entrepreneurs expenses.
Typical general expenses include things like rent of a business owner’s office space, amortization of equipment, utility bills and even office supplies to name a few.
Finally, the last category on the income statement are the other income and other expenses. These are for anything that the corporation has brought in, or an expense of the corporation. But are not specifically related to the business itself.
A good example of an expense of the corporation would be corporate income tax. And a great example of income from the corporation be income from an investment that the corporation owns says Edmonton CPA.
By understanding how the income statement is organized. And what information is on it. Can help entrepreneurs read through this one-page statement. So that they can be better equipped to make financial decisions. That will allow them to not only avoid making mistakes financially. Help them grow their business as well.
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Many entrepreneurs struggle with understanding basic business finances according to Edmonton CPA. Because they have not had previous business ownership experience. And they are learning what they need to know, as they run their business.
Edmonton CPA suggests learning how to read and organize their income statement. Can help them understand their business finances significantly. And also help them prevent making bad financial choices.
Knowing how to organize and income statement is extremely important. Because a disorganized income statement will not be easy-to-read. Starting with the expenses. These should be listed in numerically descending order. That can be very easy for an entrepreneur to see what the largest expenses in the business are.
If an entrepreneur needs to minimize expenses. They were simply able to look at the top half of the expenses in order to figure out what is going to be worth their time and energy in minimizing. For example, business owners might think that they can save money on their phone bill, or their bank charges.
However those will typically appear at the bottom of their expenses. And are not typically worth an entrepreneur spending significant amount of time minimizing. Even if an entrepreneur can eliminate their bank charges and cell phone bill. That is not likely going to affect their bottom line that much.
However, if an entrepreneur can save their administrative staff salary, or their rent. That can make a huge difference to the profitability of a business according to Edmonton CPA.
It is also extremely important for entrepreneurs to understand how to keep their income statement to a single page and why. If the income statement is longer than one page. Not only is it more difficult to read and understand. It will also take a longer time. Which can be very difficult. Especially with how often an entrepreneur should be reviewing their income statement.
How they can keep it to one page is by avoiding over classifying their expenses. By keeping broad classifications. Can help an entrepreneur have a one page income statement. And business owners should understand that over classifying the accounts. Will not make it easier to understand what is going on in their business financially.
Something else business owners to keep in mind, is where they put their own salary is extremely important. Because some business owners think it belongs on the cost of sale section. While others think it should go in the general expenses.
Neither is true. It should go in other income and other expenses. The reason why, is because an entrepreneurs of salary is not a cost of sale or general expense. Because it is a tax decision, based on the entrepreneurs lifestyle. And belongs in the other income and other expenses.
By keeping it in the other income and other expenses section. Can ensure that they will be able to understand the revenue of their business. Without clouding that number with what they draw out of the corporation as salary.
This will also help entrepreneurs qualify for financing and loans should they need one. Which is why it is extremely important that business owners keep their salary out of the expenses of the business.