Edmonton CPA | Understanding Financial Statements In Business
While many entrepreneurs review their financial statements with their Edmonton CPA at their year end review. However, business owners should get into the habit of reviewing their interim financial statements more often than that. In fact, they should be reviewing those financial statements prior to making any financial decision in their business no matter how big or small. By getting into the habit of doing this, can help entrepreneurs not only avoid making mistakes financially, but also being able to grow their business by knowing what to do and when.
One of the first things that entrepreneurs should understand, is what is being referred to when they hear the term financial statements. This actually is referring to a group of reports. The income statement, the balance sheet and the statement of retained earnings. Not only is it important to understand that there are three reports, and an entrepreneur must learn how to read each one.
The income statement is going to show an entrepreneur the revenue, the cost of goods sold and the expenses in their business during a specific period of time. In fact, Edmonton CPA says that entrepreneurs again to the habit of reviewing their income statement at a six-month comparative so that they can see the trends financially in their business. Not only will they be able to see if the revenue is going up on a whole or going down, but also this is going to enable entrepreneurs to see any anomalies. For example, if they had one month that was extremely profitable or not, they can see that much more easily by looking at a six-month comparative. Then, they can find the reason why, is is a mistake, was it because their business was in their off-season? By reviewing their income statement this way, entrepreneurs will be able to see what the revenue is doing in their business.
However, business owners should be advised that they should not look at their income statement first. And they should not be looking at their income statement without first having read and understood their balance sheet. The reason why says Edmonton CPA is because the balance sheet is going to inform the business owner what the overall financial health of their business is. This going to help an entrepreneur understand what that means overall for the business, and when they look at their income statement, is going to be able to show them a clear picture of their business finances.
Not only is it important for entrepreneurs to review their balance sheet first, so that their income statement is more meaningful, but also because errors can exist on the interim financial statements that can be very difficult to catch if an entrepreneur is only looking at the income statement. By looking at the balance sheet first, an entrepreneur can fix errors, so that the decisions they make will be more informed.
When entrepreneurs are able to understand their financial statements, they will then start making better financial decisions in their business. Whether this means they are simply avoiding making mistakes that can be very costly. Or if they are able to use that information to plan their growth, either way will help entrepreneurs stay in business longer and be successful.
Edmonton CPA | Understanding Financial Statements In Business
Business owners who learn how to read their financial statements make better financial decisions says Edmonton CPA. Therefore, it is important that business owners are looking at their interim financial statements prior to making any financial decisions. Intuit’s to the study of small business owners, in order to test them and their financial literacy in business. Those who were quiz were asked questions about what an accrual is, how to increase cash flow and what a balance sheet is. 82% of the people who responded or less than 70% on the test. This shows that a significant amount of entrepreneurs struggle with understanding their business finances. Helping entrepreneurs become more knowledgeable can have a huge impact on their ability to run successful businesses.
Entrepreneurs should understand that there are three main components to the financial statements of their business. These are the balance sheets, the income statement and the statement of retained earnings. It is also very important to note that when they receive these statements either from their Edmonton CPA, or their bookkeeper that each report should only be a single page long. The reason why, is that it can become much easier to read and understand each report. When the reports are easier to understand, it will become easier for entrepreneurs to use that information in their business.
Business owners should get the habit of reviewing their sheet first, because this shows the overarching financial health of their business. It shows a list of all of the assets in the business as well as all of the liabilities and the equity. An entrepreneur should be able to add the equity and liabilities up to equal the assets in the business. This is why it is called a balance sheet.
The income statement on the other hand shows the revenue in a business but only within a specific amount of time. While it is important for an entrepreneur to review the income statement preferably on a six-month comparative, they should also understand that what they are looking at for the income statement, does not necessarily reflect the overall financial health of the business. When they understand this, they can gain an understanding of why they should not simply look at this report in order to make financial decisions in their business.
More financially literate an entrepreneur is in their business says Edmonton CPA, the better their decisions will end up being. Since 50% of all entrepreneurs will fail by year five, the more entrepreneurs that can understands their business finances can actually help them beat those odds. Therefore, it should be considered a business owners first priority to learn and understand their financial statements in their business so that they can become successful.