Vancouver CPA | How Entrepreneurs Should Read Income Statements
It is very important for entrepreneurs to learn how to read their income statement according to Vancouver CPA. Because that will help them make more informed financial decisions in their business.
In fact, so many entrepreneurs in Canada struggle with this. That running out of money in their business. Is the second most common reason why all Canadian entrepreneurs fail each and every year.
According to an industry Canada survey. Not only are 50% of all Canadian entrepreneurs failing in their business within five years. 29% of those failed entrepreneurs. Say that running out of money is the reason why.
In order to overcome those statistics. Vancouver CPA recommends entrepreneurs learn how to read their income statement. And use it on a regular basis.
In order to make informed financial decisions. So that they can avoid making mistakes. That would cause them to run out of money in their business. And force them to close their doors.
By looking at their income statement, there going to be able to see how much revenue they have generated in a month. And see how many expenses they have also incurred.
So that they can decide if they have the money to be able to do things like pay those bills, run payroll. Or even do things like pay themselves, and purchase and assets they need.
If an entrepreneur reviews their income statement. And realizes that they do not have the money to make those decisions. Not only have they avoided spending money that they cannot afford to spend in their business.
But they also can then use that information to be proactive. And decide that they need to generate more revenue in their business. By increasing their sales and marketing.
Which will allow them to be proactive, that can help them grow their business. And is one of the reasons why Vancouver CPA recommends all business owners learn.
How to read their income statements early on in their business. The sooner business owners can do this, the sooner they are going to be able to make more informed financial decisions.
And not only make decisions that will help them avoid problems. To help them learn how to be proactive early on in their business. So that they can generate more income and succeed more easily.
One of the most things that entrepreneurs need to remember. Is that in order to keep their income statement to a single page. They need to be very careful how they classify all of their different expenses.
When they are putting those expenses into their accounting software. Many business owners think that they are being extremely helpful when they are over classifying their expenses.
Because they think it is going to help them understand their finances better. However this is not the case. And all it does is end up making their income statements long and confusing to read.
Therefore, by keeping their expense categories very broad. Entrepreneurs can ensure that their income statement is easy to. Because it is a single page. Which will make them much more likely to review it as often as they need. To make informed financial decisions.
It is very important that business owners learn how to read their income statements early on says Vancouver CPA. Is because this is going to help them run their business better.
And according to into it, the company that makes accounting software QuickBooks. 80% of small business owners scored less than 70%. On their basic business financial literacy test.
Which means many small business owners in Canada. Are struggling with understanding their business finances. And rather than tell them that they need to learn everything very quickly.
Vancouver CPA simply recommends entrepreneurs start with understanding their income statement. Because that alone can be extremely beneficial in entrepreneurs making more informed financial decisions.
The first thing that business owners should learn. Is what for components are on their income statement to begin with. So that when they look at this document. They will know the information that is being communicated.
The first component, showing at the very top of the income statement is the revenue. And represents all of the gross revenue an entrepreneur has brought into their business. Through selling their products and services, or invoicing their clients.
Below their revenue is the cost of sales. All of the expenses that are directly related to generating those sales. Including material, and labour. Whether or not labour was staff on payroll, or independent contractors.
One of the most important things for entrepreneurs to keep in mind. Is that if they generated no sales in their business. They will have incurred no cost of sales for that same time period.
Underneath cost of sales will be general expenses, also known as overhead costs. Which are all of the other expenses that an entrepreneur will generate in their business. Outside of their expenses of producing their products and services.
Some of the most common overhead expenses include the rent of their office space, and any administrative staff salary that they are paying. As well as things like utility bills, office supplies, phone bills and Internet.
As well as things like if they are paying equipment leases. That would fall into the general expense category of the business says Vancouver CPA.
Below general expenses are other income and other expenses. Which are legitimate income and expenses generated by the corporation. But are not necessarily related to the actual business.
A great example of this would be a corporate income tax. Or investments that the corporation has. And any expenses or income related to that investment.
The sooner business owners can learn how to read their income statement. The more likely they are going to be at making more informed financial decisions in their business.
That not only can help them avoid making decisions that would cause them to run out of money. But also can help them be proactive in their business as well.