Edmonton CPA | Why Review The Balance Sheet First
Many entrepreneurs struggle with understanding their business finances says Edmonton CPA. In fact, into it, who is the company that makes the accounting software QuickBooks did a survey of entrepreneurs to see how financially literate they were in business. They discovered that 82% of all respondents scored less than 70% on the test. When entrepreneurs take that information, and added to the fact that half of all entrepreneurs will fail by year five, they can come to the conclusion that by coming more financially literate in their business can lead to a higher success rate as an entrepreneur.
Entrepreneurs should be receiving financial statements on a regular basis from their bookkeeper. They will be reviewing these financial statements at the year-end with their Edmonton CPA, but in the interim, they should also be making a point to receive their financial statements. The reason why is so that entrepreneurs can use that information to make financial decisions in their business. By understanding the overall financial health of their business can help them whether they decision is if they can run payroll, pay bills, or even pay themselves. Can help them understand if they in a good financial position to be able to start thinking of purchasing assets or real estate, and when that might be. Therefore, it is a huge priority for entrepreneurs to learn to read their financial statements.
One thing that business owners should understand, is that when they hear their Edmonton CPA refer to financial statements, what that specifically is referring to. Included in what might be referred to as financial statements are actually three different reports. These three reports are an income statement, a statement of retained earnings, and balance sheet. Not only is it very important for an entrepreneur to become familiar with these reports, but they must also review the reports together to get an overall picture of the financial health of their business. By looking at one report or the other does not give a clear enough picture.
In order to help entrepreneurs be able to use this information to make regular and routine financial decisions, is very important that they understand that all three of these reports need to be a single page long. This way, it can be very easy to look at, and understand. Edmonton CPA says that it is will also ensure that it will be easier to compare the statements to each other, so that they can come to a conclusion about the finances in their business. Once they learn how to do this, they will be able to start making informed financial decisions in their business that can help them not just avoid making mistakes, but start making great decisions that can help them grow and be successful. The sooner an entrepreneur can learn this information, the sooner they will be able to significantly impact their business. Since 15% of entrepreneurs fail by their first year, they need to ensure that they do not make any financial mistakes that could cause them to be one of the 15%.
Edmonton CPA | Why Review The Balance Sheet First
Business owners should ensure that they are not just reading the income statement of their financial statements says Edmonton CPA. Business owners should be reading the balance sheet as well, and writing it first before moving onto the income statement. By learning how to read to each of the financial statements, and then how to review them at the same time is important to help entrepreneurs understand the overall financial health of their business. When they understand this, the financial decisions that they make will be more informed, and therefore better.
In order to understand why entrepreneurs should read the balance sheet first, they should understand the information that is on a balance sheet as well as the income statement. Edmonton CPA says that the balance sheet show a list of all of the resources that a business has to work with. The top is going to list all of the assets of the business, and the order of how easy it is to make those assets liquid. Below that, will be all of the liabilities of the business, and below that the equity. Balance sheet will not only show entrepreneurs the overall financial health of the business, but it can be much easier to catch mistakes when reading the balance sheet first.
The income statement on the other hand is going to show how profitable of specific period of time the business was. It has a list of how much revenue was generated and what expenses were incurred. The revenue, minus the expenses shows the net income or net loss of that business within that specific period of time. Business owners should not make the assumption that a profitable period of time or an unprofitable. Time is representative of the business as a whole. That is why it is very important that entrepreneurs understand the overall financial health of the business, and then look at the profitability. Of time.
One mistake that entrepreneurs often make, is that they do not look at the balance sheet first, or even at all. Edmonton CPA says many entrepreneurs simply look at the income statement in order to make their financial decisions. Not only is that a mistake, because entrepreneurs cannot possibly know how the overall finances are in their business by looking at one period of time. But also, because mistakes that might exist on the balance sheet actually end up masking some really significant errors on the income statement. Which can end up making the income statement look extremely profitable when it might not have been.
When entrepreneurs are able to not only learn how to read each of their financial statement components. But learn how to read them in the right order, and use that information to make informed financial decisions, they will be able to run their business more successfully. By knowing when they can spend money or pay bills, and when they should minimize spending, or layoff staff can help entrepreneurs make financial decisions sooner, that can help them be successful in business.