Edmonton CPA | Why Organized Income Statements Are Important
Not only is it very important for business owner to learn how to read their income statements early on in their business according to Edmonton CPA. But what is going to help them learn how to read that income statement. Is ensuring that it is kept organized.
Many people have their first meeting with their Edmonton CPA. Only to find that they have disorganized and long the income statements. That are not helping them make more informed financial decisions.
The first thing that business owners can do to help ensure that they are able to organize their income statement. Is understanding the four main components that are within this report.
The first section will be at the top of the income statement and is called revenue. It is where an entrepreneur will see all of the gross revenue they brought into their business. Through selling their products and services.
Below revenue will be the cost of sales, which are all of the costs that are directly related to producing these products and services. is important to note that if there are no sales, there will be no cost of sales. And these costs typically will include materials and supplies as well as labour. Whether the labour is staff or independent contractors that are hired per job.
Underneath cost of sales are the general expenses. And while cost of sales do not occur if there are no sales. General expenses will occur whether there are sales or not. These will be fairly static from month-to-month.
And can include things such as the rent of the office space, the salary of the administrative staff. As well as smaller things such as utility bills, phone and Internet bills and even bank charges and office supplies.
Finally, Edmonton CPA says there will be other income and other expenses. Which are income and expenses that the corporation generates. But are not specifically related to the operation of the business.
For example, if the corporation owns a rental property. They will have income from that rental property. But also expenses related to the rental property. The was both belong in this category.
One of the most important things that entrepreneurs should take into consideration. Is that they are salary belongs in this category. Because not only is it not a cost of sale or general expense. It is actually a tax strategy. That is driven by an entrepreneurs lifestyle.
If business owners ever going to apply for financing from a bank or financial institution. They will need to have their salary removed from the income statement anyway. So by having that done proactively. Can help ensure that no matter when a business owner needs a loan. They will not put getting one in jeopardy because it looks like they do not have very good revenue.
By understanding all of the component parts to the income statement. Can help ensure that business owners know the information on their income statement. So that they can start learning the information within it. That will help them make more informed financial decisions.
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Many entrepreneurs struggle with understanding basic business financial literacy according to Edmonton CPA. It actually puts their business in jeopardy significantly. The reason why, is because according to industry Canada. Half of all entrepreneurs in Canada fail. And the second most common reason why is because they ran out of money.
It is not just important that an entrepreneur understands what information is on their income statement. But they understand how to read it. So that they can make more informed financial decisions.
How an entrepreneur will make more informed financial decisions. Is by understanding how much money they have in their business to use. By subtracting all of the expenses that they have from their revenue.
Many business owners think that they are going to be able to look at their bank balance for that information according to Edmonton CPA. But this is not true. While their bank balance shows exactly how much money they have in their business at that moment in time.
The bank balance does not take into consideration electronic fund transfers or checks that are waiting to clear the account. And might end up painting a very different picture of how much an entrepreneur has to work with financially.
This is why a business owner must be able to read their income statement. So that they can make decisions like can they afford to hire new staff, run payroll, or purchase assets.
How their income statement is organized is important to being able to use the information. Edmonton CPA suggests organizing the income statement in numerically descending order. So that the largest expenses can come to the top of the statement.
When they know what expenses are making the biggest impact of their bottom line. They will be able to make decisions such as how to minimize those expenses if necessary. Many business owners may spend a lot of time minimizing expenses that do not impact their bottom line. So to organize this way, can help business owners from wasting time that they do not have.
It is also very important that entrepreneurs understand that their income statement should not ever be longer than a single page. Because when the income statement is longer than one page. Not only is it hard to read and understand. But it will also take a long time to read as well.
Since a business owner needs to be able to read this document every time they are going to make a financial decision. And this can happen several times in a month. The shorter it is, and easier to read, the better. As well as the more likely a business owner will be at reading it in order to make those decisions.
How they can keep it down to a single page. Is by minimizing the amount of categories that they have their expenses in. Edmonton CPA says that they often end up trying to classify their expenses into very specific categories. An effort to better understand their finances.
Not only does this not work. But it does not help their income statement. And Edmonton CPA encourages business owners who want to understand their finances this way. To use subaccounts instead. So that their income statement can be clear. But they can pull their expense report and look at their various categories much more closely.