Vancouver CPA | Are Income Statements Useful
Entrepreneurs should avoid making financial decisions based money in their bank account says Vancouver CPA. Because while entrepreneurs often start out doing this in their business. It is very dangerous business practice for many reasons.
The reason why is because their bank account is going to show them exactly how much money is in their bank account at that exact moment in time. Without taking into consideration. How much money is coming into their business in expected payments. As well as what is coming out as expenses.
For example, an entrepreneur may have organized payroll, that they have put in the mail their suppliers. As well as arrange a couple of electronic fund transfers. Which means even though their bank account may show that they have ten thousand dollars.
They should not make the assumption that all of the money in their bank account is money that they can use. Because if they then spend five thousand dollars to purchase and assets. They could cause anyone of their payments including payroll to bounce. Which would have very bad occurrences for their business.
Therefore, taking into consideration the actual amount of money that they have. Taking all of their expenses into account. So that they can avoid spending more money than they have. Which can cause them to run out of money in their business, and cause them to close their business.
However, Vancouver CPA says being able to read and understand their income statements. Also help an entrepreneurs be very proactive in growing their business. For example, when they see that they do not have enough money to make financial decision.
They can make the decision to put more money or efforts towards their sales and marketing. So that they can increase the revenue, and generate enough money. Be able to do the things that they want. Such as purchase and assets, hire a staff member. Or simply be able to pay all of their bills.
And the sooner an entrepreneur can learn how to read their income statement. The sooner they are going to be able to make these decisions, and help their business significantly. The first place to start, is understanding what information is in their income statement to begin with.
There are four main components of their income statement starting with revenue at the top. With all of the revenue that they are bringing into their business through regular invoicing activities.
Below that is the cost of sales, which are all of the expenses they will incur. By producing their products and services. Including materials and labour. Whether that labour is their staff, or contractors that they hired says Vancouver CPA.
The third component of the income statement are the general expenses. Also called overhead expenses. That a business owner will incur whether they sell any products or not. And typically include office rent, administrative staff, utility bills, and office supplies just to name a few.
And finally, other income and expenses are at the very bottom. And are for legitimate corporate expenses and income. That do not necessarily relate to the actual business. Such as corporate income tax, or expenses and income from rental property.
By understanding how to read their income statement. Entrepreneurs will be closer to being able to use this information. To help make informed financial decisions that will help them succeed.
Often, business owners end up making financial decisions based on money in their bank account says Vancouver CPA. But that is a very dangerous business practice. Because they can end up spending more money than they actually have.
Which is why business owners should get into the habit of reviewing their income statement. Before making any financial decision. Because they will see all of their actual revenue, and expenses in the same place. That will show them whether they are making money, or not.
And then with that information, they can make decisions. Whether they have the money to pay bills or run payroll for example. Or if they need to cut expenses, because their overhead is unmanageable. They will also be able to understand if they need to simply sell more products and services as well.
And while many business owners may understand exactly all of the components on the income statement. Revenue, cost of sales, general expenses and other income and expenses. It may not be organized in a very easy to read way.
The first thing that Vancouver CPA recommends, is organizing their income statement in numerically dissenting order. The reason why, is because it will help entrepreneurs understand what their largest expenses are. And what expenses are not impacting their bottom line very much.
By organizing their income statement this way, they will be able to look at the top half of the income statement. In order to see the largest expenses to their bottom line. And if they have to minimize expenses. They can focus on these ones.
Typically, entrepreneurs will have administrative staff and rent as their largest expenses. And it is worth their time and effort to demise expenses here. Rather than the ones that are at the bottom of the list.
Such as lowering their phone bill, or their bank charges. Because while they might be able to save a few dollars every month. That is not going to help them be profitable in business. The way that lowering their administrative salaries could be beneficial.
And while many business owners are very hesitant to minimize administrative staff salaries says Vancouver CPA. It is actually more ethical to minimize administrative staff salaries. Either by cutting hours, or laying off one person. Because if an entrepreneur continues to have unmanageable overhead.
A puts the entire business in jeopardy, and if an entrepreneur goes out of business. Not only will they not have an income and their livelihood. But all of the people that will stay employed with the business will be out of a job as well.
Therefore, by reducing salaries, or letting one person go. They can protect the entire organization. As well as the likelihood of the people working for them as well. Therefore, learning how to read and understand their income statement can be extremely beneficial to their entire company.