Edmonton CPA | Why Should Entrepreneurs Organize Income Statements
If entrepreneurs have disorganized and long income statements, Edmonton CPA says that prevents them from understanding their business finances. When they do not understand their business finances, they make bad financial decisions. Or end up not being able to do things like pay their bills or employees.
This is why it is very important for business owners to learn early on how to read their income statements. So that they can not only avoid making poor financial decisions. But use the information proactively to help them grow their business as well.
The first step to understanding their income statement according to Edmonton CPA. Is learning what are the four components that are on this financial statement. The first is revenue, which will appear at the top of the income statement.
And will be all of the money that an entrepreneur has brought into their business. Either through invoicing customers that will pay at a later date. Or selling products directly to customers in their business.
The second section is the cost of sales. These are all of the costs directly related to making the products and services that they have sold. Edmonton CPA says if they do not have any sales in their business that month, they will not have any cost of sales on their income statement.
Typically cost of sales include the material that an entrepreneur has purchased to produce those products and services. As well as the labour they paid for to produce them. Whether that labour is staff that is on payroll. Or if they pay independent contractors as needed.
The third section of the income statement are general expenses. And these are all of the costs that an entrepreneur will have. Whether they have generated sales or not.
Typical general expenses will include things like amortization of equipment, administrative staff salary and rent of the office space. But can also include things like utility bills, Internet and phone as well as bank charges and even office supplies.
The final category is other income and other expenses. And this is for all of the income or expenses that the corporation has generated. But are not specifically related to the business.
For example, if the corporation owns rental property, the income, as well as expenses for that rental property, should be listed here. Because while it is a legitimate corporate expense and income. It is not related to their business.
Edmonton CPA says that business owners should get used to putting their own salary into other income and other expenses. First, so that they can see the revenue in their business with the costs subtracted from them. Without having their own salary appear to minimize the revenue in the entrepreneurs business.
Not only is this beneficial for an entrepreneur to be able to see themselves. But also, if there ever applying for financing with a bank or financial institution. They are going to want to see the revenue of their business without what the business owner is drawing for salary.
So by keeping it in other income and other expenses. Can make it crystal clear to the bank how much money is being generated in the business.
By understanding the income statement. Can help entrepreneurs be more knowledgeable. When they go to make financial decisions in their business.
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Many entrepreneurs struggle with understanding basic business finances according to Edmonton CPA. That will keep them from making the most informed financial decisions.
In fact, the company Intuit who makes QuickBooks did a survey of small business owners. In order to find out how much they understood about basic business finances. 80% of all the small entrepreneurs who responded to their survey. And of scoring less than 70% on this test. Showing how much knowledge gap there is an entrepreneurs with basic business finances.
Therefore, Edmonton CPA suggests that business owners learn how to read and organize their income statement. Because this is a financial report that they should be looking at before making any financial decisions in their business. So that they know if they have the money in their business to make those decisions.
For example, business owners often think that they can look at their bank balance. In order to understand how much money they have to use. But this would be very bad idea. Because while the bank balance shows exactly how much money is in their bank account at that exact moment.
What the bank balance does not show an entrepreneur. His how much money they actually have to use of that money. Once all scheduled payments and checks clear. For example, a business owner might have two thousand dollars waiting to come out in electronic fund transfers. And another five thousand dollars in checks that are waiting to be cashed.
If an entrepreneur has ten thousand dollars in their bank, they might think that they can spend all of it. When they cannot. Because they will have seven thousand dollars coming out any day.
This is why the income statement is so important. Because it shows all of the revenue of the business that an entrepreneur can use. Minus all of the cost of sales and general expenses in that month.
However, if their income statement is not organized. Edmonton CPA says business owners will not be able to read it very easily. So learning how to organize it will help ensure that business owners will know exactly what their income statement is saying.
The best way to organize their income statement is to list their expenses in numerically descending order. So that all of the largest expenses will for to the top of the income statement. While the least impactful will be at the bottom.
By looking at the top half of their income statement. Business owners will be able to see which expenses they should spend their time minimizing. And what expenses are not going to impact their bottom line very much at all.
Then, they can spend time minimizing expenses if they need. Without spending hours minimizing expenses that are not going to be very impactful at all.
Understanding why business owners should look at their income statement at all. Can help them organize and read to their income statement. So that they can make more informed financial decisions in their business.