Vancouver CPA | How Income Statements Are Beneficial
Often, when entrepreneurs first open their business, Vancouver CPA says that they will need to learn how to understand their business finances quickly. Or else they can end up making decisions that could be very negative in their business.
And even cause them to be forced to close the doors to their business. And in fact, not only do 50% of all entrepreneurs in Canada fail. But the second most common reason why these small business owners are closing their doors. Is because they run out of money in their business.
And while many business owners think that they are making the right decisions. When they look at their bank account balance. In order to make financial decisions, this is actually very dangerous. And can end up costing a business owner significantly.
While the bank account shows exactly how much money they have in their bank at that exact moment in time. What it will not show says Vancouver CPA. Is what their expenses are, as well as what payments have already made, that simply have not cleared their bank account yet.
For example, an entrepreneur who looks at their bank account balance. In order to decide if they have money to purchase and assets. They see that they have ten thousand dollars in the bank account. And will spend five thousand dollars on the asset. Without considering that they do not actually have much money.
The reason why they do not have that much money says Vancouver CPA. Is because they have written three checks, and arranged payroll, which will come out in a few days. And when all of that clears their bank account. They will only have a few hundred dollars left.
So when they purchase that asset, they will cause their checks and their payroll to bounce. Which can have significant impact their business in a negative way. Therefore, business owners should avoid trying to make informed financial decisions. Based on how much money is in their bank account alone.
As well, reason why business owners should avoid doing this. Is because while it does show how much money they have at that moment. It also does not show them their expenses. And if they spend money, without realizing that they do not have enough money to pay their expenses.
Could cause them to get behind in their bill payments. Which could be very difficult to overcome, once an entrepreneur is not able to pay their bills at the end of every month. This is why Vancouver CPA says entrepreneurs should get into the habit of learning how to read their income statement.
Because not only will it show them what their revenue is, so that they know how much money they have made. They will also know their cost of sales and expenses. And be able to understand if they have made enough money to cover their expenses. And if not, what they need to do to overcome that.
The sooner entrepreneurs can learn this skill of reading their income statement. Will be able to make better and more informed financial decisions in their business.
When business owners start their business, they often lack a understanding of basic business financial literacy says Vancouver CPA. Which can cause them to make poor decisions early on in their business.
Therefore, the sooner entrepreneurs are going to be able to learn how to read their income statement. The more informed they are going to be about their business finances. And be able to use that information to make more informed financial decisions in their business.
The first step to understanding their income statement, is understanding what components are on it, and what order. So that they will be able to know what they are looking at, when they review this statement.
The first category is revenue, and it will appear at the very top of the page. And will be the gross amount that they have invoiced. Through regular invoicing of their products and services to their customers.
The second category according to Vancouver CPA is the cost of sales. And these are all of the direct costs, related to producing their products and services. And if they do not have any sales, they should not have any cost of sales in this category.
Typically, the supplies and material as well as labour will be included here. Whether the labour is salaried staff, or an independent contractor that was hired on a one-off basis.
The third category or the general expenses. And these are all of the other expenses in the business. That entrepreneur will incur, whether they sell a product or not.
And the most common overhead costs are rent, as well as administrative staff. And can include things like utility bills, phone and Internet. As well as office supplies, and equipment leases for example.
Finally, at the very bottom of the income statement. Knowledge manure will find other income and other expense category. While it may be very confusing what information should be in this category. This is where entrepreneurs can put income and expenses in the corporation.
That while they may be legitimate corporate income and expenses. It is not necessarily related to the regular operation of their business. Such as corporate investment, and corporate income tax. As well as expenses or income from a rental property, or the sale of an asset.
Once an entrepreneurs familiar with all of the components and where they are on the income statement. The next step says Vancouver CPA is understanding that their expenses should be listed in numerically descending order. The reason why, is because it will help them understand what their largest expenses are.
When entrepreneurs have their expenses listed in alphabetical order for example. They might be able to keep track of their suppliers. That is not going to help them understand their expenses. Or what they need to do to minimize their overhead when necessary.
By understanding their income statement. Business owners will be more likely to be able to understand their business finances. And when they get into the habit of reviewing this before they make any financial decisions.
They will be able to make better and more informed decisions. That can help them not only avoid problems in their business, but help them grow their business as well.