Edmonton CPA | Why Organize An Income Statement
By the time an entrepreneur has their first meeting with Edmonton CPA, they often already have a disorganized income statement. Not only is it disorganized, but it is typically longer than one page. And does not help an entrepreneur in making better financial decisions.
As a result, entrepreneurs will already have made several bad choices that are very difficult to recover from. This is often why 15% of entrepreneurs fail in their first year of business. And why 29% of failed entrepreneurs say that the reason why they failed is because they ran out of money.
If business owners can learn how to organize and then read their income statement. Edmonton CPA says they will be better prepared to use that information to make more informed financial decisions. That can help them not only avoid making decisions that would cause them to run out of money.
But this income statement can help them be more proactive in their business. Which will allow them to ensure that they are not spending money they do not have. It also know when the need to generate more money in their business. So that they can make those financial decisions.
One of the first things that Edmonton CPA recommends entrepreneurs do. Is understand the four main components of their income statement. The top of their income statement will have the first section called revenue. Which is all of the money that an entrepreneur has brought into their business through invoicing or selling their products and services.
Below revenue is the cost of sales. Which are all of the expenses that are directly related to generating those sales in their business. If they have no sales that month, they will not have any cost of sales on the income statement.
Generally, these cost of sales will include the materials and supplies needed to produce the products and services that they sell. As well as the labour needed to produce them. Whether that labour is staff that is on payroll, or independent contractors that are paid as needed.
Below cost of sales is the general expenses. And these are all of the other expenses that an entrepreneur will have in their business. These will be fairly static from month-to-month. And will be all of the costs that an entrepreneur incurs. Whether they sell any products in their business or not.
Business owners will see that their general expenses are typically things like rent or mortgage of their office space, administrative staff, amortization of equipment. As well as things like utility bills, phone and Internet bills, as well as office supplies.
And finally, there will be the other income and other expenses. Which are legitimate income and expense of the corporation. But are not necessarily specifically related to the business itself. For example, corporate income tax can be included in this section. As well as income made off of investments owned by the corporation.
Business owners should also put their own salary in this section. So that they as well as any financial institution will be able to see. What the finances of the business are like independent of their own salary.
By understanding how an income statement is organize. Can help an entrepreneur learn how to read it much easier. So that they can use this information to make better business decisions.
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One of the biggest challenges that entrepreneurs face according to Edmonton CPA. Is that they do not understand business finances. Especially when they first start out operating their business.
In fact, into it, who is the company that makes QuickBooks did a survey in order to find out how much financial knowledge small business owners had. What they discovered through the survey, is that 80% of these small businesses scored less than 70%. On their knowledge of basic business financial literacy.
This is a significantly large percentage of business owners that have extremely large knowledge gaps in business finances. That is contributing to their inability to make the best business decisions in their organization.
This is why Edmonton CPA recommends entrepreneurs learning not only what is on their income statement. But how it should be organized. So that they will be better able to read this important financial document. And use it to make more informed financial decisions.
The first thing that business owner should do, is ensure that their income statement is organized in numerically descending order. What this does, is ensures that the largest expenses are at the top of their income statement. While there least impactful expenses will be at the bottom.
If the fold their income statement in half, all of the most significant expenses will typically fall above that line. And these of the expenses that an entrepreneur should focus on minimizing if they need to bring their expenses under control.
Edmonton CPA says many entrepreneurs will spend a lot of time trying to minimize costs such as bank charges, cell phone bills, or office supply expenses. Which is not going to make a huge impact to their bottom line. Even if they were able to significantly reduce those amounts.
However, if a business owner put the same amount of time or energy into minimizing the largest expenses. Such as rent, administrative staff or equipment leases. They could make a huge impact to their bottom line. Giving them a very good return on their investment of time.
However it is not just important for entrepreneurs to list their income statement in numerically descending order. They also need to ensure that they are keeping it to a single page. Since entrepreneurs should be reviewing this statement before making any financial decision.
This means an entrepreneur should be reviewing their income statement several times. And if it is more than one page, it may be difficult to do. Or take a long time. Resulting in many business owners wanting to skip this step.
If the income statement is one page. Then business owners will be able to read it easier. And understand what it is saying very quickly. So that they will be more likely to review this statement before every single financial decision.
Business owners can do this by avoiding trying to my grow classify all of their expenses. And instead using more broad categories. The first thing that business owners need to understand is that micro-categories will not help them make better financial decisions. And it will force their income statement to be longer than a single page. Which will be very difficult to read.
When entrepreneurs can understand how to organize their income statement and why. They will be better prepared to ensure that they are doing things that will help them make their income statement more readable. So that they can make more informed financial decisions in their business.