Edmonton CPA | what to know about financial statements
It is very important for entrepreneurs to learn early on in their business how to read financial statements says Edmonton CPA. Many entrepreneurs lack the skills that they need when they first started in business to make informed financial decisions. In fact, into it, or the makers of QuickBooks surveyed small business owners in order to test their basic business financial literacy they discovered that 82% of all of the respondents scored less than 70% on this test. This shows that a significant amount of entrepreneurs have large holes in their knowledge about business finances. The sooner an entrepreneur is able to understand the information contained in their financial statements, they greater chance they have at making better financial decisions.
The first thing that entrepreneurs should understand when they hear about financial statements from their Edmonton CPA is that this refers to three different reports. These reports are the statement obtained earnings, the income statement as well as the balance sheet. One thing to keep in mind about these reports is that they should all be one page. This is done on purpose, so that not only is it easier for business owners to look at and read and understand, but so that they can be used together to make informed financial decisions. If an entrepreneur feels that there is not enough financial information on them, they can always ensure ask their accountant or bookkeeper for more reports.
The first report that entrepreneurs should look at and understand is the balance sheet. The balance sheet will show an entrepreneur list of all of the assets and liabilities that exist in the business. This gives entrepreneur an overall picture of the finances of the business. By subtracting the liabilities when assets, and looking at how liquid those assets are, and entrepreneur can gain an understanding about how much money they have in the business that they can use.
When an entrepreneur looks at their balance sheet, Edmonton CPA says that it should be organized in a very specifically. Assets should be listed at the top of the report, and in order of how easy it would be to make these assets liquid starting with cash. Then the Accounts Receivable will follow, and then inventory, and property including vehicles, machines, equipment and buildings or real estate. Just because an entrepreneur has a lot of assets in their business, does it necessarily mean that they have a lot of money to spend. This report will help them understand that.
By learning how to understand their financial statements, entrepreneurs will be able to be more informed about their overall finances. They can use this information not only to understand when and how to spend their money, but also, as they get used to it how to make more informed decisions that can help them grow their business. The sooner a business owner can learn this, greater impact can have on their business says Edmonton CPA.
Edmonton CPA | what to know about financial statements
One big challenge that entrepreneurs have as they learn how to run their corporations is Edmonton CPA is that they have to learn quickly, so they do not fail as they learn. Another thing to keep in mind, is the majority of entrepreneurs have never owned business before, and so there is a lot of information they need to learn. Because of this, the failure rate for businesses is very high. 15% of all entrepreneurs fail within their first year, 30% have failed by year two, and 50% of close their doors by their fifth year in business. The sooner an entrepreneur learns how to read and use their financial statements to make decisions, they can affect this failure rate for themselves.
The financial statements of the business include the income statement, statement of retained earnings and the balance sheet. Edmonton CPA says once an entrepreneur has learned how to read and utilize their balance sheet, that is when they can start learning about the income statement. The information that is on the income statement is the revenue, the direct cost of sales, the general expenses and the net income or net loss. By subtracting the cost of sales in the general expenses from the revenue, and entrepreneur will get an idea of how profitable their business was during the time period of that income statement.
The reason why an entrepreneur should not be using an income statement to gain an understanding of how much equity they have in the business, is because an income statement only deals with a certain range of time. Typically one month. Edmonton CPA says business owners should understand that looking at the profitability of one specific month does not necessarily help entrepreneurs understand the overall financial health of the entire business as a whole. Also, because the income statement is typically a one-month snapshot of the business, entrepreneurs should get into the habit of looking at six months at a time. That way, they will be able to see the trends of the business as well as if there is any anomalies or mistakes.
Once an entrepreneur has learn how to read their income statement, they should use the income statement together with their balance sheet in order to help them make financial decisions. At no point should an entrepreneur use the income statement alone, because even if one income statement shows extreme profit, that does not necessarily mean that is translated into assets on the balance sheet. For example, Edmonton CPA says that extremely profitable income statement may have gone to pay down the liabilities of the business because the last seven months or extremely unprofitable.
By understanding how to read the income statements and use information to make decisions entrepreneurs can gain huge insight into the finances of their business. By learning how to make these decisions early on, entrepreneurs can become very good at it by the time the business is growing, so that their prepared to help their business grow into the future.