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Often, the only time that an entrepreneur looks at their financial statements is when there with their accountant says Edmonton CPA. However, it is very important that business owners learn how to read these financial reports so that they can make informed financial decisions more often than they see their accountant. The sooner a business owner can learn how to read their financial statements and use them to guide their financial decisions, the more likely they will be able to grow their business.
The very important that entrepreneurs understand that the term financial statements covers of variety of reports. Three main parts to a financial statement include the balance sheet, the income statement and the statement of retained earnings. Business owners need to learn how to read each of these three reports, because they need to look at all of them in order to make their financial decisions. If they are looking at only one report, they may miss valuable information, or make mistakes but their decisions.
The first report that entrepreneurs get to the habit of reading says Edmonton CPA is the balance sheet. There are several reasons why. Not only is the balance sheet and easy place for entrepreneurs to catch mistakes that might exist. But also, because a balance sheet is the most important, that shows an entrepreneur a list of all of the resources that their business currently has to work with. Business owners should review their balance sheet, fix any mistakes, and then look at their income statement alongside their balance sheet in order to make their decisions.
A business owner should understand the information that is on the balance sheet. Even though has a list of all of the resources they have to work with, Edmonton CPA says it is very important to understand how it is organized. The balance sheet have a list of all of the assets, all of the liabilities, and all of the equity in their business. The assets will be listed in order of how easy it will be to make those assets liquid. By totaling up the liabilities and the equity in the corporation, it will equal the assets.
The income statement on the other hand covers a specific period of time, typically a month, or quarter, and it will show how much money was generated in that specific time period Says Edmonton CPA. It will also have a list of all of the expenses that were incurred, so that an entrepreneur can subtract the expenses from the revenue that was generated in order to determine the net profit or the net loss that they had in that specific time period. While an income statement will show how profitable that specific time period was or was not, the balance sheet will show the financial position overall of the corporation.
By learning how to read their financial statements, entrepreneurs are putting themselves in a great position to be able to make informed financial decisions independently of meeting with their accountant. This will empower them to be able to not only avoid making financial decisions that would be an error, but they can also use that information positively, to help them grow their business and become successful.
Many entrepreneurs may understand that the financial statements of their business is important says Edmonton CPA. However, they do not know the best way to read them, or they end up looking at only one of the reports. If entrepreneurs do not know the best way to read their financial statements, and how they can use that information to make financial decisions in their business, they may end up making errors. Not only is it important to learn that information is on each financial statement, also how to read them, and in what order so that they have greater understanding of their financial position.
One of the biggest errors that entrepreneurs often make says Edmonton CPA is that they read to their income statement as a stand-alone document in order to make decisions in their business. Some financial decisions that entrepreneurs might have to make include should they purchase assets, should they hire more staff or lay staff off. They look at the income statement and see that during a specific period of time a lot of revenue is generated, or maybe they lost a lot of money. If there only looking at this specific period of time, without looking at the entire bigger picture of how much assets and equity they have in their business, they cause them to make the wrong decision.
The recommendation from Edmonton CPA would be for entrepreneurs to learn how to read their balance sheet, and then use their balance sheets alongside their income statement. The last component part of their financial statement is the statement of retained earnings. This is going to show accumulative balance of the income or the prophets left in the corporation. Since an entrepreneur takes dividends out of the retained earnings, this is a document that is going to show a running total of all of the earnings that have stayed in the corporation.
One thing that business owners should keep in mind when they are reading the statements, is that they should all be a single page long. The reason why, is so that they can be easily read and understood. Any time an entrepreneur needs to make financial decision, which might be daily, the ease of reading these statements is going to be very important.
By learning how to read their financial statements early on in their business, entrepreneurs can gain a lot of confidence in knowing that the financial decisions that they are making our good ones, informed by facts. The matter how big or small the financial decision is, whether they can run payroll, pay bills, or even do big things in their business like purchase real estate or a building can be reinforced by reading their financial statements first prior to making any decisions. By doing this, entrepreneurs will be able to be more profitable in their business.
