Edmonton CPA | Understanding The Information In Financial Statements
Business owners should understand that financial decisions they make can be improved by learning to read their financial statements says Edmonton CPA. In fact, the sooner they learn how to read these important reports, the better. The reason why, is because industry Canada says that 50% of all entrepreneurs fail by year five. In addition to that, 29% of failed entrepreneurs say running out of money was the reason why. Therefore, the better financial decisions business owners can make the better.
One of the most important things that a notch been our can do to help them make more informed financial decisions is learning how to read their financial statements. The financial statements are referencing free reports that can help entrepreneurs gain an understanding of the finances of their business. Edmonton CPA says these reports are the income statement, the statement of retained earnings and the balance sheet. Only should an entrepreneur learn how to read these, but use them to make financial decisions prior to spending any money in their business.
Entrepreneurs are often only looking at the income statement when they do learn how to read financial statements. However, Edmonton CPA would recommend that entrepreneurs do not do this. The reason why, is because income statements do not show the overall finances of the business. All they do is show how profitable a certain period of time was. The balance sheet on the other hand shows an entrepreneur how profitable the entire business is. Therefore, business owners should be learning how to read the balance sheet first, and then using the income statement alongside the balance sheet to make decisions.
In fact, Edmonton CPA would say that if entrepreneurs are looking at the income statement without looking at the balance sheet, they will most likely be making mistakes that could not only negatively impact the business, but could cause them to make such shares that would force them to go out of business due to running out of money. The matter how big or small business decision is, looking at the reports of the business will ensure that any decision they make be a good one. Whether they are going to run payroll, pay bills, buy assets or do things like hire more staff or even lay them off.
Once an entrepreneur is knowledgeable about the balance sheet and the income statement Edmonton CPA says that they should ensure that they are getting interim financial statements on a regular basis, and then reviewing that information so that any financial decision they make will be a good one. Because of that, entrepreneurs should ensure that they are running current financial statements prior to any financial decision. At a bare minimum, this usually means that entrepreneurs are running payroll twice a month, so that is minimum how often they should be getting updated statements.
Ultimately, business owners have the most to gain of the most lose whether or not they are making informed financial decisions. Edmonton CPA recommends that entrepreneurs learn how to read the finances early on in their business, so that they can avoid the high failure rate, and learn how they can use the information to grow their business.
Edmonton CPA | understanding the information in financial statements
Business owners may not understand how important it is to read the financial statements of the business says Edmonton CPA. Industry Canada says that the failure rate for businesses in Canada is very high. 15% of businesses fail in their first year, 30% of all businesses fail by year two, and by the time five years comes around, only half the businesses that started out are still around. One of the reasons why there such a high failure rate, is because many business owners have never had a business ownership experience, therefore they are learning how to run a corporation at the same time that they are running a corporation. In fact, the makers of QuickBooks software, into it decided to do a survey of small business owners in order to determine how financially literate they were about their business finances. What they discovered, was that 80% of all the respondents scored 70% or less. This means that a significant portion of entrepreneurs do not have some of the most basic knowledge they need to successfully when their corporation.
In order for entrepreneurs to understand the information that they need to consider when making financial decisions, Edmonton CPA says they needs to learn to read their financial statements. The balance sheet should be the first thing that business owners understand because it gives an overview of the entire financial position of the business. However, just looking at the balance sheet alone only gives entrepreneur part of the picture. Once they understand the balance sheet, they should go on to learn about their income statement.
What the income statement is says Edmonton CPA is a report that shows how profitable a specific timeframe is. The range of time is typically a month, but the recommendation is for entrepreneurs to review this at a six-month comparative statements. This way, it is much easier for entrepreneurs to see trends and anomalies. Are they starting to make more money and the general trend is improving the finances? Or is there a downward trend? May be there is one month that was extremely high or extremely low compared to the other months. Edmonton CPA says it would be almost impossible to be able to see this trend looking at a six-month comparative statements. Being able to determine if that extremely high. Or extremely low. Was due to a mistake, or was it due to something else. Such as a natural slow. For the business.
Once an entrepreneur not only learns how to read each report, they will be able to start reading the reports together so that they can make more informed financial decisions in their business. Once they learn how to do that, not only can they avoid mistakes that they might have made before that could put a huge financial strain on their business. But they can learn to read the reports so that they can see if their advertising is working, if they should hire more staff or lay them off, and do things like prepare to purchase assets and pay their staff.