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E-Myth – “Why most small businesses don’t work & what to do about it”

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Edmonton CPA | Why You Should Read The Income Statement First

Even if entrepreneurs know how important it is to review their financial statements says Edmonton CPA, if they do not know how they could still be making mistakes. Therefore, it is very important that business owners learn that not only should they be reviewing their financial statements on a regular basis and before they make any financial decisions in their business. But also, business owners need to understand how to review them, and in what order.

One mistake that business owners often make, is that because there able to understand their income statement better, they look at that report alone to make financial decisions. An entrepreneur should first understand what information is being communicated in the income statement. The first thing that should be taken into consideration, is that it only deals with a certain period of time in the business. And while Edmonton CPA recommends that entrepreneurs are reviewing six-month comparative statement, it still is only dealing with specific time.

The income statement is going to show how much revenue has been generated in that period of time, and what expenses were incurred. This way, at the bottom of the statement, business owners should be able to see how much revenue was generated in total. They will be able to tell if they had a profitable period of time, or not. However, entrepreneurs need to keep in mind that no matter what was going on during this specific period of time, it does not reflect the overall finances of the business. This is why business owners should not get to the habit of reviewing the income statement alone.

A more effective strategy to help entrepreneurs truly understand the finances of their business, is to get them to review their balance sheet first. The balance sheet is going to show an overall picture of the entire financial health of the business. Listing all of the assets in the business, all of the liabilities and the equity. A business owner should be able to add up the liability and equity in order to equal the assets of the business. The reason why this is important to review first says Edmonton CPA, is because this is going to give an entrepreneur an idea of the financial health of their business.

The last reports that entrepreneurs should look at is the statement of retained earnings. This is going to shown entrepreneur accumulative balance of the prophets that have been left in the corporation. This is going to give them a running total since the corporation was started. This can help entrepreneurs understand the earnings that they have, as well as the earnings that they have taken out of their business. Before entrepreneur decides to pay themselves dividends, this report should be reviewed and considered.

Ultimately, entrepreneur can learn how to make more informed financial decisions in their business once they learn not only how to read their financial statements, how to make decisions based on them. Therefore, when entrepreneurs get the habit of reviewing these financial statements prior to any financial decisions, they can improve the quality of that decision, making them more successful at running their business.

Edmonton CPA | Why You Should Read The Income Statement First

Even though business owners often have a good idea of why it is important to read and understand their financial statements says Edmonton CPA they may not know how. In fact, into it who is the company behind the accounting software QuickBooks surveyed small business owners in order to gauge how financially literate they were in business finances. Out of all of the respondents, 80% scored less than 70% on this test. Even though 70% sounds like high number, to score that low financial literacy test, needs that there are some big mistakes that many people could be making when running their business.

Therefore, it is very important that entrepreneurs learn how to read and review their financial statements, and then do so on a regular basis. Most important thing to take into consideration is that when an entrepreneur here is the term financial statements from their Edmonton CPA, this refers to a group of financial reports. This refers to three different statements including the statement of retained earnings, the balance sheet and income statement.

An entrepreneur needs to understand that a balance sheet is going to show the assets and liabilities for will a snapshot in time. This is going to show entrepreneurs the overall financial health of their business. Since all of the assets in all of the liabilities will be listed, it will be easy for an entrepreneur to be able to understand how much money they have in their business or not.

The income statement on the other hand is going to show how profitable the business was within a certain timeframe. While Edmonton CPA recommends that entrepreneurs are reviewing their income statement a six-month comparative basis, this still is only going to show entrepreneurs the profitability of that timeframe. Therefore, if entrepreneurs are making financial decisions based on this information alone, might not have the full picture. If it is an extremely profitable timeframe, but their business overall those have a lot of money, if an entrepreneur decides to spend a bunch of money, it might put their business at risk. On the other hand, if an entrepreneur shows that they have a unprofitable timeframe, and yet the overall financials of their business is very positive, it may cause entrepreneur to avoid purchasing an important asset or laying people off when that can actually be more detrimental.

By gaining a deeper understanding not only of what financial statements are, but how to read them can help entrepreneurs run their business says Edmonton CPA. The sooner an entrepreneur can learn how to do this, the sooner they are going to be able to make informed decisions in their business that can not only help them avoid making mistakes in their business, but help them learn what they need to do to grow and become successful as well.