Vancouver CPA | Are Income Statements Helpful
Entrepreneurs often lack a lot of understanding of their business finances says Vancouver CPA. That if they do not overcome quickly, can cause them to make poor financial decisions in their business.
In fact, according to the company into it, who makes the accounting software QuickBooks. 80% of small business owners. Scored lower than 70% on a basic business financial literacy test. Which shows many entrepreneurs have large knowledge gaps in business finances.
Because of that, they end up making poor financial decisions. And causing them to lose money, spend more money than they have. And that can end up costing them their business. With 29% of all failed entrepreneurs, saying that running out of money was the reason their business failed.
However, one misunderstanding that business owners often have. Is that they are going to be able to make informed financial decisions. Looking at the bank statement, or their current bank balance online says Vancouver CPA.
The reason why this is a very bad idea. Is because while their bank account they show exactly how much money they have in their business at that exact moment in time. At the bank account does not show, is how much money they owe others. And how much money is coming out of their bank account in the form of payments.
Therefore, if a business owner looks at their bank account balance, and sees that they have ten thousand dollars in their account. They may decide to spend five thousand dollars. But not realize that they have many expenses do, and payments that are coming out.
Therefore, they will spend the money, and because all of the payments to bounce. Such as payroll, checks that they have sent their suppliers. And electronic fund transfers that they have scheduled. Which can cause a lot of problems in their business.
But also, if they spend money that should go towards bills. They may run into a problem of not being able to pay their bills. Which can compound their other financial problems. Which is why Vancouver CPA says entrepreneurs should never look at their bank account balance. In order to make financial decisions.
Instead, they should start learning very early on when they are still small. How to read and understand their income statements. Because this will show them what their revenue is, and what expenses they incurred in that month.
That way, they can decide if they have the money to be able to spend on bills, running payroll, or purchasing assets. They will also be able to look at the fact that they might need to increase the revenue, and to increase their sales and marketing efforts.
Or they will see that they needed to minimize expenses. By looking at their income statement, they will be able to understand each expenses to cut. Have the biggest effect on their bottom line.
This is very important for all small business owners in Canada to do. Which is why when they are new in business, they should start learning how to read and use their income statement. So that when they grow, it becomes a lot easier to understand.
Vancouver CPA | are income statements helpful
There is a lot of information that entrepreneurs need to learn when they start first business according to Vancouver CPA. And while they want to learn is much as they can about their business finances. They often do not know the best or first place to start.
This is why the recommendation is for entrepreneurs to start with their income statement. Not only will it allow them to understand business finances such as their revenue, cost of sales and expenses. When they learn how to read their income statement. They will also learn important information.
Such as if they have the money to be able to pay bills, run payroll. Or purchase assets. Or if they need to increase their revenue to be able to do those things. Or if they have unmanageable overhead, and they need to work on minimizing that. And then what overhead they need to minimize first.
This is a great first place to start, and entrepreneurs can start learning how to read their income statement. By understanding what the four components of an income statement are in the first place. The first component is revenue, which will be at the very top of this statement says Vancouver CPA.
And refers to the gross amount of money they are bringing into their business. They should ensure that only income that comes from regular invoicing activities should be included in this category. Because while they might legitimately make money in their corporation, such as through investments or selling assets.
That is not regular invoicing activities. And will belong in a different category elsewhere on the income statement. The second category below revenue is the cost of sales. And these are all of the direct expenses, related to producing their products and services. And if they do not have any sales, they will not have any cost of sales.
This typically includes the supplies and material, as well as labour. Whether the labour is an independent contractor. Or staff that are on the businesses payroll. Business owners should be mindful that administrative staff salaries do not end up here advises Vancouver CPA.
Below the cost of sales will be the general expenses. And the general expenses are for all of the other expenses in the business. That are not related to producing the products and services. And will be all of the costs that an entrepreneur has to pay. Simply by opening the doors to their business.
The most common general expenses include administrative staff and rent, bills, office supplies and equipment leases. And the last category are for all the other income and expenses that are legitimate corporate expenses and income. But are not specifically related to the business.
Such as corporate income tax, owners salary, income or expenses from a rental property. Or investment income. By understanding what all of the components are an income statement. Make it much more likely for an entrepreneur to read and understand this important document. When they are new in business, which will help them make decisions.