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

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Other Income & Expenses | Edmonton Bookkeeping

Hi and welcome to another edition of ask us burl CPA. Today we’re talking about other income and expenses. I am here with coal coal, our Resin Calgary flames fan in the Edmonton Accounting Office, greeting a pretty wide, Calgary’s clinch a playoff spot. I understand that first team in the west to do so. I don’t know what to think about that. Um, we’ll move on I guess from that there’s nothing else to do but move on. So the, you know, the quote that we have to deal with here in other income and expenses, he’s there if the regular income, your expenses, these are other income and expenses. It’s a Michael Gerber quote, you know, author of our favorite, the e myth, you know, with no clear picture of how you wish your life to be, how on earth are you going to live it? What is your primary aim? Where’s the script to make your dreams come true?

What is the first step and how are you going to measure it? How far have you gone and how close are you to getting your goals? So goal, it’s a little bit, we’re going a little bit deep on the accounting show here today, but that’s okay. We’ll tie it back in its other income and expenses. So, and we remember that the statistic here into it, the makers of quickbooks, they did a survey, a small business owners and they found that 82% of small business owners would get a score of less than 70% on basic business financial literacy items. So less than 70%, um, you know, less than 70% of the time they know what’s going on. Stay proactive with your business’s finances with Edmonton Bookkeeping. So, uh, or 30% or more of the time, they don’t know what was going on when it comes to the financials, which is a problem, it’ll be the story here that we have is the business owners, they’re looking to increase the size and profitability of their business, but they don’t have a clear picture of what’s going on on that income statement because they have what we call other income or other expenses.

You know, they’re mixed in with the real drivers of their business and they’re completely skewing the income statement. So they don’t really understand how their core business is doing. So quote one of the questions that these business owners need to ask, what is the other income and expense section of the income statement? Yeah. So let’s start at the top of what should be on your income state. And you have your revenue items, you have your direct cost of sale items, then you move down to your gross margin. What happens after the direct costs? We pay those contractors who pay those supplies and dealt with that job directly. I’ve ever gross margin. Make sure you stay ahead with our Edmonton Bookkeeping. Now we have all our overhead expenses, you know, the administrative wages, the rent, the office supplies, the interest and bank charges. And we’re going to get to a number called income from operations, income from operations, cause all of those general and overhead expenses.

You know, they didn’t deal directly with the job and getting the job all the door, but they’re part of your core business. We’ve got to have a space to operate. It’s the, but we start getting into the other, uh, income and expenses. Now these are the items that don’t deal with the core business. Um, so we’re talking about, you know, things like taxes. Um, we’re talking about the profits and loss from investments. These are items that they don’t deal with the core business. You know, the, the salary that the business owners are taking. Um, they need to be separated from what’s happening in the core business so we can get a good idea. You know, what’s the profit or loss from the core business? Where does other income and expenses fit in on an income statement? So it’s below. So you get to that really powerful number, revenue, cost of sales, other, uh, you get to the general and overhead expenses.

And then you have your net income from operations. That’s that powerful number, that net income from operations. How much are you making your core business? Now we have the other expenses or income. They’re legitimate and expenses, but they don’t deal with your core business and the rate below that income from operations. So you get that total, that income from operations. How does this help calculate income from operations? So it really, if you had these items mixed in, so let’s say you have, you know, the, you run, uh, uh, of your plumbing contractor, you’re a dentist and you have the Condo fees for your rental property and it’s a rental property owned by your corporation, but it’s not part of your core core business. The, you know, that residential rental property does not help you deliver plumbing services or see your patients if it has nothing to do with it.

Um, but it’s, it’s, it’s legitimately owned by your corporation. If we have those condo fees mixed in with your other overhead expenses, that income from operations and under, it’s not really reliable anymore. You know what the same thing, you could have a big gain or loss because you sold a bunch of stocks. Um, that doesn’t have anything to do with your core business. I mean, even moving out some of the capital assets of your business, you could have done really well on a moving out a piece of equipment that deals with your business or you know, not so well, but that’s a, it’s a onetime event really. It’s, it’s not something that deals with your core business. Don’t get behind, find a great Edmonton Bookkeeping today. So, um, you know, having those other income and expenses stripped out of the, the, you know, the primary, the core revenue and the core expenses and gets that income from operations number are real, you know, clean item that uh, are clean total that deals with their core business in general.

Is it better to focus on net income or income from operations? So a lot of people, business owners, they get the financial statements and they start looking at net income. Let’s just look at net income. But often the net income is there. There’s some things that, there’s one time events that can happen, you know, big sale of the equipment or an asset. You know, we have a bunch of investment income, but one of the big thing is what the owner’s pay themselves as a salary. So which often is it? Is it tax decision? We’re trying to minimize tax with the payment that, that salary or provide for enough, uh, provide for the funds that they drew out of the business. They have nothing to do with the underlying a performance of that business. So focusing on the income from operations, that’s going to help you focus on the core activities of your business.

Often if you want to increase that income, it’s just take less money out of your business. That can be, you know, one item or it just can be the decision that the accountant made on what’s the cheapest way to pay you. They paid you in the form of dividends and instead of salary, in which case your net income can look much better. But nothing’s really changed about the business. It’s just the mechanism we use to, to pay, you know, to minimize tax is different. Why should your investment income to be separated into other income and expenses? Yeah, those, one of the great examples, so we have investment income. Edmonton Bookkeeping services will help you stay on top of the game. Um, you know, we can have, you know, dividends that we’re getting on stocks. We can have the interest that we’re getting on bonds. We can have the fee that the investment manager is charging us. All of these things do not deal with the core business.

They’re generally, uh, and in ciliary investment option. And there are good thing. I mean it gives us some diversification of risk. Not everything is in the business. We have some liquid funds, um, and they’re a great thing, but they don’t deal with the core business. So we don’t want them to commingled with those core business revenue items or core business expense items. Why should rental income and expenses be separated into other government expenses? Same thing can be really significant and Revenue Inc and can often be especially problematic because it has expenses that, you know, if we’re looking, if an external bankers looking at and if they’re not separated, they won’t know the difference on the expenses that deal with the core business and the expenses that deal, uh, you know, with the, the passive investments of the business, if you will. So we really want to isolate those days so we get to that nice net income from operations of the core business that I’ll almost the words that should be added as the income from operations of the core business.

And then we get the other income or expenses that are important. We need to understand them. They’re, they’re legitimate income or expenses of the business, but of the corporation but not on the core business and rental income are, you know, really significant new condo fees are, you know, a big gain or loss when we sell the property and it can completely overshadow what’s happening in the core business. So we want to be able to, you’ll make sure that report is still usable to, uh, to run the core business and make decisions on it. Why should the gain or loss on asset disposals be put in the other income section? Yeah, so I mean, some people can say these, these can be gain and losses on passive assets, but they can also be gains or losses on active assets. Um, and either way I would put them in the other income or expenses because business, they aren’t buying and selling equipment on a regular basis. It can be very onetime in nature. They’re selling a significant piece of equipment and a big gain or loss once every five years, once every 10 years or one time and never again. Um, so you really want to take those kind of one time events out of your income from operations of your core business and put them in the other income section. You know, it’s important to know and understand what the effect of that was. But again, we don’t want that number clouding the core business because they’re normally one time in nature.

Should this salary paid to the owners be grouped with the salary paid to arm’s length staff? Yeah, that is probably like my number one pet peeve. Um, you know, when ever I see small business financial statements, these are notice three to financial statements or which effectively means we can, we can, uh, you know, assemble the financial statements how we see fit that’s going to be, um, you know, beneficial to the users and putting the owners wages comingling it with the wages paid to arm’s length employees. I mean, it’s just the first thing you do when you’re analyzing the business is back out the, the, the income, the sort of the, the wages paid to the owners to figure out what does the business make before the owners get paid. Because what the owners get paid could be, you know, a lot less than what they deserve or it could be a lot more than what they deserve.

You know, we could replace them for cheaper, but they’re just taking it out because he can and the business can support it. So yeah, they should always be other income section. Uh, you know, wages paid to a non arm’s like parties or wages paid to owners. A separate line item in the other income section, not commingled with the wages in the general overhead expense or the wages in the direct cost of Labor had all, how does separating owner salaries health the financing. Yeah. Sometimes a business can look like it can’t support the financing because the banker picks this thing up and says, okay, this business has $800,000 in revenue in a year, but it has, you know, $600,000 in wages. Well, little do they know if they just have one wage item that might, that $600,000 in wages might include 200,000 to 300,000 to the business owner and the business owner doesn’t need to take that salary.

So you know, so we go from this business is only making, you know, 200,000 and it can support this loan. Or you know, we have $600,000 in revenue and I’m sorry, 100,000 in revenue and $600,000 in expenses. And let’s say the business owner is half of that salary. Well not all of a sudden this business has 500,000 just support a loan. Um, so separating that can give you a lot more clarity and getting alone. And we’ve got to remember when you, when you apply for a loan, you can explain this all you all you want to the banker, you know your representative. But this is going to go to an underwriter and possibly their supervisor. You will never have an opportunity to discuss it with them. So you wanna make it as clear as possible what we pay the arm’s length employees and what we pay the owners.

Um, so they know exactly what’s going on in the business. How does separate or salaries help make businesses more sellable? Yeah, the, it’s, you know, we’re more looking at the value of the business for generally looking at what’s the normalized income of the business. And the first, one of the first things we do is we’re going to back out the salary paid to the owners because the owners salary is completely, it’s not tied to the fair market value of what they should be paid. And nine out of 10 times it’s, it’s either higher or lower than the fair market value. They’re rarely pain of self at fair market value. They’re paying themselves what’s the most beneficial for tax purposes or they should be if they’re not. Um, and you know, what you want to do is you want to back out that owner salary. So we see what does a normalized income here of this business, uh, because that’s what generally someone who’s going to buy a business for, you know, three to five times the normalize income of most small businesses. Don’t wait to find a great Edmonton Bookkeeping service.

Um, and they can’t get to that normalized income number if it’s not separated. And if you had the historical records where you’ve been separating the, the amounts paid to the owners, you know, the, the buyer is going to have more comfort with this document. They actually know, okay, this is what it’s gonna cost me to pay the employees who are, we’re still gonna be here when I buy this business and this guy comes, the owner comes off the books and this is how much it will cost to replace the owner. I’m going to do the work of the owner. Um, and they have a good idea of what they’re getting into. Um, and it’s, you know, a lot more reliable. There’s a lot more chance of a transaction’s going to occur if we can separate out. So I think that’s the, the all the time we have here today for other income and expenses. Thanks again for tuning in. Please hit the like and subscribe buttons so we can continue to deliver you tips on how to beat the odds at business. And if you have any questions, please put them in the comments below. We’ll do our best to address them and potentially, you know, do a future video on any questions you put below. Thanks very much. Thanks guys.