Vancouver CPA | Best Practices for Organizing Income Statements
When business owners are new in their business, Vancouver CPA says they may make financial decisions. By looking at their bank balance, to safe they have the money to spend.
Whether they are running payroll, purchasing assets. Or even paying bills. It is easier to look at their bank balance to make these decisions. Because they will have fewer expenses, and income.
However, this is not a good habit for business owners to get into says Vancouver CPA. Because the bank balance is not a good way to understand their business finances.
The reason why, is because while a bank balance will show an entrepreneur exactly how much money they have in their business at that moment in time. What it will not show a business owner.
Is how much money they have in their business, once the payments that they have scheduled have come out. Such as checks that not nor has written, and put in the mail to go to their supplier.
Or even electronic fund transfers, and organizing payroll. They all still be scheduled to come out of the bank account. And if an entrepreneur forgets about that, or assumes that those payments have already cleared their bank account.
They might make a decision that would cause them to bounce those payments, and run out of money. As well, Vancouver CPA says is not a good idea to use the bank account balance to make decisions.
Because it will not show an entrepreneur how many bills they have to pay. And if they can afford to make those payments. Or understand what expenses they should pay first.
This is why looking at their income statement is so important. Because it will show them all of their revenue, as well as all of the expenses that they have together in this document.
So that they will be able to understand if they have made enough revenue to cover all of their expenses. And if so, what expenses they should be paying first.
And if they have not generated enough revenue to cover all of their expenses. They can then be proactive. And make a plan on how they are going to increase their revenue, ideally through sales and marketing.
So that they can cover all of their expenses, and have money left over. For things like saving up for assets, or planning on hiring more staff.
And the only way that an entrepreneur is going to be able to look at their income statement. In order to understand all of this. They need to know what the four main components of an income statement are.
Revenue is the first component, and will appear at the top of the page. And below revenue, or all of the cost of sales. Such as the material and labour used to produce those products and provide the services.
The general expenses are the third component, and are all of the expenses related to the actual business. And even if an entrepreneur generates no sales at all. These are going to be the expenses that they have to pay.
Finally, there is the other income and other expenses. As for all of the things that are related to the corporation. But not necessarily the business.
By understanding the income statement better. Can help entrepreneurs use this statement. Instead of other methods to make more informed financial decisions in their business.
There are many things that entrepreneurs nor staff to learn been they first opened the doors to their business says Vancouver CPA. And one of the most important things that entrepreneurs should learn quickly. As how to read their income statement.
This will help them understand what is going on in their business. Such as if they have expenses that are not sustainable. Or if they need to increase their revenue. So that they can be proactive in their business.
But in addition to being proactive, learning how to read their income statement is going to help them. Ensure that they can make financial decisions, without causing them to run out of money in their business as well.
Not only should entrepreneurs know the categories of information on their income statement. But they also should know how that information should be organized.
The first thing that Vancouver CPA recommends, is having the income statement organized in numerically dissenting order. Because it can help keep business owners focused.
It when it is organized in numerically dissenting order. Small business owners are going to be able to fold or page in half, and see that all of the expenses that are above the fold, or the most significant expenses in their business.
And if they need to minimize some of their expenses. They should focus on the ones that are above the fold. Because they are going to have the largest impacts to an entrepreneurs bottom line.
If they are organized in alphabetical order for example. Business owners may not realize what expenses they should focus on. And may spend time and energy trying to minimize things like bank charges, or cell phone bills.
And even if they are successful, it is not going to the large impact on their bottom line overall. And all that time that they spent minimizing those expenses. Will be time that could have been better spent elsewhere in their business.
The next thing that Vancouver CPA recommends, is that they keep their income statement to a single page. So that it can be much easier to read, as well as understand.
When income statements are multiple pages, they become a lot more difficult to look at. And draw conclusions quickly about what is going on financially in their business.
Which is why it is very important for business owners to keep all of their expenses classified in broad categories. Rather than try to make grow classify them.
However, many business owners think that they are providing more information that can be helpful. Which is why they need to understand early on to not over classify their expenses.
Because it can help them see more clearly what is on their income statement. By understanding how their income statement is organized, and how to keep it to a single page.
Can help more business owners understand their business finances. So that they can make more informed decisions in their business.