Vancouver CPA | Income Statement Organization
One of the most important things that Vancouver CPA recommends their clients do. In order to help them understand their business finances better. Is to organize their income statements to be easier to read.
Income statements are extremely important to be able to read quickly, and clearly. So that business owners will be more able to read them prior to making any financial decision in their business.
Since business owners are making many different financial decisions throughout the month. Such as paying bills, running payroll. And even paying themselves, or purchasing things for the business.
It is very important that they not only get into the habit of reading their income statement. Prior to making any of those decisions. That if the income statement is easier to read. They will be more likely to read it.
Because it will be easier to read, and understand. And the first thing that Vancouver CPA recommends learning. Our what the four main components that are on an income statement.
The first component is revenue, and will appear at the top of the income statement. And this is all of the money that they have brought into the business through selling their products and services, and invoicing customers.
The next component of an income statement is the cost of sales. Which will be located below the revenue. And all of the expenses that are listed here. Should only be the expenses directly related to producing their products and services.
Therefore, materials, supplies and labour. It should be the only things listed here. Whether the labour is staff on payroll, or independent contractors that they have hired. Is not important at all.
A good rule of thumb to remember. Is that if a business owner does not have any sales in that month. They will not have any cost of sales either. And below that, will be general expenses.
General expenses refer to all the other expenses in the business. All of the things that a business owner must pay, before they make any sales at all.
Some of the most common overhead expenses include rent, administrative staff salary, and utility bills. As well as costs such as phone, Internet, office supplies and even things like equipment leases.
Finally, the last component is other income and other expenses. And will be all of the income and expenses that are not necessarily related to the business. Although they are valid corporate income or expenses.
Things such as corporate income tax, the owners salary, or expenses and income from rental properties. Our legitimate corporate expenses and income. But does not belong in the revenue of the business.
A great example of something else that can fit into this category. Is if an entrepreneur sells an asset in their business. While they might think that should go into revenue says Vancouver CPA.
Since it is not a regular way that they generate income for their business. It belongs in other income and other expenses.
Understanding how to organize a businesses income statement. Will make entrepreneurs more likely to understand this valuable document. And use it on a consistent basis to make more informed financial decisions.
It is very important for business owners to make informed financial decisions in their business according to Vancouver CPA. Especially since running out of money is the second most common reason why entrepreneurs in Canada fail.
However, many business owners are lacking a lot of basic business financial literacy. Which can make it very difficult to make informed business and financial decisions.
That is why understanding what to learn first about their business finances. Can help entrepreneurs make better decisions, and help them not only avoid making decisions that can cause them to run out of money in their business.
But the sooner they learned this information, the sooner they are going to be able to be proactive. And make business decisions that can help them grow their business as well.
Once an entrepreneur learns the four components that should be on the income statement. Starting with the revenue, and then cost of sales, general expenses and finally on their income and other expenses.
The next thing that Vancouver CPA recommends, is organizing the income statement in numerically descending order. The reason why, is because it helps entrepreneurs understand what the largest expenses in the business are.
That way, when entrepreneurs look at their income statement, they will typically know. That all of the expenses that fall to the top of the page. Are the most significant expenses to their bottom line.
When an entrepreneur goes to minimize their expenses, they can focus on the expenses that are off the top of the list. By spending a bit of time minimizing those expenses. They can make a large impact to their bottom line.
If an entrepreneur does not keep their income statement in numerically descending order. But can happen, is that they will try minimizing the expenses that will not have a large impact on their bottom line.
Such as trying to minimize their phone bill, or their bank expenses. And even though they are likely to be successful in reducing those expenses slightly. That is not going to have a large impact on their bottom line overall.
Therefore, knowing what are the biggest expenses in the business. Can help entrepreneurs be more efficient with their time. If they have to minimize expenses.
However, while many business owners think that minimizing expenses is going to help them be more profitable. It will also be able to use their income statement to make the decision.
On if they need to increase their revenue instead of minimizing expenses. Because once they look at their income statement, and compare revenue to expenses. They may realize that they simply need to sell more products and services.
The sooner business owners learn how to read and understand their income statement says Vancouver CPA. The sooner they are going to be able to understand the revenue, and expenses in their business much more thoroughly.
And that will help them be proactive when it comes time to increase revenue, cut expenses or do both.