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The reason why it is important for entrepreneurs to look at their financial statements says Edmonton CPA is because it can give them great insight to their business. In fact, if entrepreneurs do not use these important financial documentation to use in making business decisions, they could end up making stakes that could cost them their business. In fact, the company behind accounting software QuickBooks did a survey of small business owners in order to determine how financially literate many entrepreneurs are in business finances. 82% of the respondents scored less than 70% on this test. This shows that many entrepreneurs were out there lack basic skills that are needed to run a corporation.
If entrepreneurs are not using financial statements in order to make decisions, they may be making grave mistakes. For example, Edmonton CPA says some entrepreneurs believe they can use their bank balance in order to understand how much money they have to use in their business. The reason why this does not work is because even though it shows exactly how much money is in the bank at that given moment that does not tell the entire story. For example, if an entrepreneur has regular payments that come out of the bank account automatically, or if they have checks that are waiting to be cashed, it is not going to show an entrepreneur how much money they have to actually use. If they look at their bank balance and then spend some of that money, it often ends in bounced checks. Ultimately, running a businesses way ends up with entrepreneurs spending money simply do not have.
Therefore, entrepreneurs should become very well acquainted with all of their financial statements not only how to read them, but how to use them to guide their financial decision-making. When entrepreneurs hears their Edmonton CPA say financial statements, they should understand that it means three different reports including the income statement, the balance sheet and the statement of retained earnings.
The first and most important financial statement for entrepreneurs to learn is the balance sheet. The reason why is because this report will solve overall the business finances. It should be organized on a single page in a very specific order with assets at the top in order of how easy it is to make them liquid. Liabilities follow and equity at the bottom. It is also important to note that if an entrepreneur takes the liabilities and equity and advent together, they will equal the assets that they have the business. This is a reason why it is called a balance sheet.
When entrepreneurs are able to use the balance sheet to make financial decisions in their business, they quality of those decisions will go up. Not only will it help them avoid making decisions that could end up with them spending money they do not have, running out of business. Therefore, learning how to read their financial statements is very important to helping entrepreneurs succeed
If entrepreneurs are not using financial statements to make decisions in their business, they could be making big mistakes without knowing says ten CPA. Ultimately, it is very important for entrepreneurs to be looking at all of the financial documentation of the business in order to make financial decisions. If entrepreneurs are making decisions without doing that, they are putting their business at risk. Since 50% of all entrepreneurs end up failing within five years, teaching entrepreneurs how to read financial statements can put an end to that statistic.
Once an entrepreneur learns how to read the balance sheets of their business, Edmonton CPA says they should focus on their income statement. The income statement shows the profitability of a specific timeframe in the business which is typically a month. Since it is only a month of time, when entrepreneurs are reviewing this report, Edmonton CPA recommends that they review a six-month comparative statement. This is going to make it much easier for entrepreneurs to see the trends that are happening in the business, or if there is any anomalies. Anomalies could be direct result of mistakes, or if something unusual happening in the business.
When entrepreneurs are looking at their income statement, it should be organized on one page and very specifically. Revenue should be at the top, followed by all of the direct cost of sales. Edmonton CPA says these direct cost of sales should be only the expenses that are incurred by providing a product or service. This typically means subcontractors and materials for example. Underneath that will show the gross profit which is the direct cost of sales subtracted from the revenue. Moving down on the list, is the general expenses of the business which are typically the highest expenses that an entrepreneur will face. These are all of the expenses that exist whether or not an entrepreneur has sold something or not. These expenses include things like administrative staff, office supplies, utilities and rent or mortgage. At the end of this list, it will show the net income or the net lost of the entire business and that time period.
When an entrepreneur is able to understand the income statement, they can start to use that alongside their balance sheets in order to make more informed financial decisions such as understanding if they need to increase their marketing, or what to do about a downward trend for example.
When entrepreneurs learn how to understand and read their financial statements, it can increase the quality of financial decisions they make in their business. Not only can this help them avoid mistakes financially. But can also help entrepreneurs be proactive in planning the growth of their business. Business owners should not wait until they reach a certain point of success before they implement this. By learning how to do this early on, business owners can avoid the 15% failure rate in the first year of business that many entrepreneurs face.
