Edmonton CPA | Why Business Owners Should Read Income Statements
It is extremely important for all business owners to understand their business finances according to Edmonton CPA. In fact, very few business owners start out understanding their business finances when they open up their business.
Intuit’s, the company behind QuickBooks did a survey. In order to find out how many small business owners understood basic business financial literacy. What they discovered through this survey, was that 80% of small business owners. Scored less than 70% on this test. Meaning there are a vast majority of business owners who have extremely large knowledge gaps in their financial knowledge.
One of the first things that business owners should learn. Is how to read their income statement. The reason why this should be the first thing that business owners learn. Is because they should be able to use this financial report. In order to make financial decisions in their business.
Before the make any decisions such as if they can afford to run payroll. Or if they can pay bills, pay themselves or make purchases. They should consult their income statement. In order to find out if they have the money in their business to do so.
One mistake that many business owners often make according to Edmonton CPA. Is that they think that they can tell how much money they have in their business simply by looking at their bank balance. But this would be huge mistake.
Because the bank balance does not show how much money they have after payments have come out of their bank account. If they end up using their bank statement to make these financial decisions. They often can end up spending more money than they actually have.
The first thing that business owners need to know when learning how to read the income statement. Our the four main components of the income statement. The first is the revenue, which is all of the money that a business owner has brought into the business through selling products and services.
The second is cost of sales, which is all of the costs associated with producing the products or services that they sell. Only the materials, supplies and the labour is included in this section.
Following the cost of sales is the general expenses. Which are all of the remaining expenses in the business. And whether an entrepreneur sells anything in their business or not. These are the expenses that they will have to pay.
And finally, the fourth section on an income statement is for other income and other expenses. These are for keeping track of what the corporation has brought in. Or the expenses the corporation has incurred.
But are not specifically related to the business. For example, investments that the corporation owns could be included here. And the corporate income tax that they owe should also be included in the section.
By understanding all of the sections in an income statement. Can help an entrepreneur start to learn how to read this important document says Edmonton CPA. So that they can review it before they make any financial decisions in their business.
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Many business owners fail to understand how to make informed financial decisions says Edmonton CPA. At least when they first start out operating their business. The sooner business owners can learn. The sooner they will be able to make better and more informed decisions. That can help them not only run their business. But avoid making decisions that could be costly.
For example, 50% of all business owners in Canada and up failing. And the second most common reason why business owners fail in business. Is that they run out of money. By learning how to read and use their income statement. Many business owners can avoid this fate.
One of the first things that a business owner should learn. Is how to organize the income statement so that they can read it the easiest. Edmonton CPA recommends that business owners organize their income statement and numerically dissenting order.
What this order will do, is ensure that all of the biggest expenses are at the top of the income statement. While the least consequential expenses and up at the bottom.
Therefore, when an entrepreneur is looking at their income statement. They can see which expenses have the greatest impact on their bottom line. And no which expenses they should spend time minimizing. In order to improve their financial position in their business.
The next thing those business owners should ensure happens with their income statement. Is that it stays to be one page. Income statements that are longer than one page are more difficult to read. And often take significantly more time to understand.
Since Edmonton CPA suggests all business owners review their income statement prior to making any financial decision. The longer it is, the less likely business owners will do this. Because of the time it takes. As well as how much more difficult it will be.
However, business owners may not know how to keep it to one page. The best thing that entrepreneurs can do is ensure that they are not trying to over classify all of their expenses. Many entrepreneurs think that this is going to be very helpful.
However what over classifying categories does. Is makes it more confusing, more prone to errors. And it will make the income statement longer than a single page.
If business owners think that they would like to have several categories for their expenses. Instead of making several classifications. Edmonton CPA suggests using subaccounts. So that their income statement can remain on a single page. But they can still print out the breakdown of expenses if the wish.
By learning how to organize their income statement. Can help ensure that business owners not only can read their income statements better. But then use those statements to make more informed financial decisions in their business. That is going to help them succeed in business.