Edmonton CPA | Understanding How To Organize Income Statements
Many entrepreneurs struggle with understanding their business finances according to Edmonton CPA. And as results, run out of money in their business. And and up having to close their doors.
Industry Canada did a survey and found out that 15% of Canadian entrepreneurs fail within the first year of business ownership. 30% of entrepreneurs failed by year two. And an overwhelming 50% of Canadian entrepreneurs failed in business by their fifth year.
The second most common reason failed entrepreneurs gave as the reason why they were not successful. Is the fact that they ran out of money in their business.
Learning how to make more informed and better financial decisions. Can significantly help many entrepreneurs not only avoid spending money they do not have in their business. But also help entrepreneurs how to be proactive, to make better financial decisions in their business.
For example, if an entrepreneur looks at their income statement. And sees that they do not have money to run payroll, or pay bills. They can be proactive in calling customers that owe them money. To bring that revenue into their business sooner. Or they can even engage in revenue-generating activities. To increase their financial position.
This is why it is incredibly important for entrepreneurs to be able to read and understand their income statement. So that they can make these types of decisions in their business says Edmonton CPA.
The first thing that they should understand, is the four main components that are in their income statement. Starting with revenue, which will be at the top of this statement. Is for all of the money that the entrepreneur has brought into their business either through invoicing customers, or making sales.
Below that are the cost of sales. Which are all of the costs directly related to producing those products and services. If an entrepreneur does not have any sales, they will not have any cost of sales on the income statement.
Cost of sales typically include things like the materials and supplies that an entrepreneur needed to purchase to produce those products and services. As well as the labour used to generate them. It does not make a difference if the labour is independent contractors. Or if labour is staff that the entrepreneur pays through payroll.
The third component of an income statement are the general expenses. And these are all of the other costs that an entrepreneur will incur. Even if they make no sales in their business. And are typically the largest expenses that they will have.
Edmonton CPA says typical expenses will include things like rent, administrative staff salary, as well as things like utility bills, phone and Internet and even office supplies. These should be listed in numerically descending order. So that an entrepreneur will be able to see what the largest expenses they have are.
And finally, other income and other expenses will be the fourth component. And will be for legitimate expenses and income that the corporation has. But are not specifically related to the business. Such as corporate income tax, or investments that are earning the corporation income.
By understanding the information on an income statement. Can help a business owner understand how to read it. And be more likely to be able to use this statement. In making financial decisions in their business.
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Many entrepreneurs struggle with understanding their business finances says Edmonton CPA. And in fact, into it, the company behind QuickBooks did a survey that proves this.
Out of all of the small business owners that responded to this survey. 80% of them scored less than 70% on basic business financial literacy. This means that many entrepreneurs have large knowledge gaps when it comes to the finances of their business.
This is why it is incredibly important for business owners to be able to read their income statement. So that they can learn how to make more informed financial decisions. And do that earlier on in their business.
One of the first things that is going to be important to help an entrepreneur ensure that they have an income statement that is readable. Is by learning how to make it fit on a single page.
When the income statement fits on a single page. An entrepreneur will be able to read it much quicker. And be able to understand it. So that they can make their financial decisions a lot easier.
Edmonton CPA says that if the income statement is more than a single page. It may be a lot more difficult and time-intensive to read. Causing business owners to either not understand the information.
Or simply not use it to make their financial decisions. Because it is too difficult or to time-consuming to read. Therefore, keeping their income statement to a single page is extremely important in helping them use this document.
The first thing that business owners need to do is ensure that they are not trying to over classify, or micro classify their expenses. Many business owners do this because they think it is going to help them analyse their numbers.
When all it does is makes their income statement more complicated and lengthier. Also, when business owners try to over classify their expenses. It takes them more time to put information into their income statement. And will increase the chances that there will be errors on the statement as well.
Edmonton CPA suggests entrepreneurs use subaccounts instead. If they want to go into greater detail of their expenses. So by keeping their classifications broad, but putting the detail into their subaccounts. Ensures that their income statement stays as a single page. While they can get a much more detailed breakdown if they choose.
And finally, Edmonton CPA suggests business owners learn where to put their own salary in their income statement. Many business owners put it in cost of sales. Because they work on generating their products and services themselves. And some put it into general expenses, since they do administrative work of their business.
However, this is not the place that it should go. Business owners should put their own salary into other income and other expenses. Because it is not an expense of the business. It is a tax decision. That is often based on the lifestyle that the entrepreneur has.
Also, by keeping it out of cost of sales or general expenses. They, and any financial institution that looks their income statement. Will be able to understand how well the business is doing. Without the owners salary minimizing the revenue that they are generating.
When business owners learn how to organize and read their income statement. They will be more prepared to make more informed and better financial decisions. That will help them significantly in their business.