Vancouver CPA | Income Statements
Business owners may be very says Vancouver CPA. Trying to figure out what information they need to learn first. In order to help them run their business successfully.
And while 80% of small business owners scored less than 70%. On a basic business financial literacy test. That was given to them by into it, who are the makers of QuickBooks.
This shows that many entrepreneurs are lacking a lot of knowledge about their business finances. And while there is a lot of information to learn. Vancouver CPA recommends starting with their income statement.
The reason why business owners need to do this, is because so much information on their income statement. That will help them understand the revenue, their expenses.
And help business owners learn how to make more informed financial decisions in their business. Very quickly, as soon as they learn how to read this one document.
The first thing that business owners should do. In order to learn how to read their income statement effectively. Is simply knowing what the four main components are.
The first section of their income statement is revenue, which will be at the top of the income statement. And should show all of the gross income that they have by selling their products and services, and invoicing clients.
However, it is very important for entrepreneurs to ensure that other revenue. Such as legitimate corporate revenue does not get listed here. This section is only for business revenue.
Below the revenue section, is the cost of sales. Which are all of the expenses that are directly belated. To producing products and services that they sell.
The most important that Vancouver CPA says business owners need to mind about this section. Is that if they do not have any sales in a month, there income statement should not show any cost of sales.
Typically, the most common cost of sales include material as well as labour. Whether labour is staff payroll, or independent contractors that they have hired tenderly, or even long term.
The third section is general expenses. Also called overhead expenses. And are all of the other expenses that entrepreneur generates in their business. All of the expenses that they incur just to open their doors.
The most likely overhead expenses include rent, administrative staff salary. As well as things like utility bills, Internet, and as well as office supplies. And even paying equipment leases belong here.
And finally, the other income and other expenses is the fourth and final category income statement. And should be for all legitimate expenses and income. That are not actually related to the business directly.
For example, corporate contacts and owners salary belong here. As well as if the corporation’s investments, the income belongs here. And the corporation owns rental property.
All of the expenses and income from that rental property belong here. As well as things like selling assets, that may be in the business. But are not the regular way the business generates income should go in this category as well.
By understanding what information specifically on the statement. Can help entrepreneurs learn how to read this document effectively.
it is very important for entrepreneurs to learn how to make informed financial decisions in their business says Vancouver CPA. And if they plan that their business for any length of time. Without learning how to make informed financial decisions.
Many small business owners in Canada may put their business at risk. And in fact, according to a study done by industry Canada. Half of all of the entrepreneurs that start businesses in Canada fail within five years.
And the second most common reason why entrepreneurs are not succeeding. Is because they are running out of money. Which is why 29% of failed entrepreneurs say they are not successful in business.
However, it is going to be very difficult for entrepreneurs to learn how to read their income statement. If it is disorganized, or too long to read effectively.
A great example of this, is that an income statement should only be a single page long. And if it is longer, not only is it difficult to read. It is even harder to understand.
And that could get business owners into the habit. Of not reading their income statement as often as they should. Or even avoid reading it altogether. Which will cause them to make poor financial decisions.
However, business owners may not know how to keep their income statement short. And that is why it is very important they understand when they are putting their expenses into their accounting software.
That they do not try to my grow classified as expenses. And they may be doing it to help them understand their numbers better. When all it is accomplishing, is making their income statement longer, and harder to read and understand.
By keeping their expense categories it very broad. Can help ensure that their income statement is only a single page. However, they can always ask their Vancouver CPA how to create subaccounts.
So that they can still go into detail with their expenses if they feel it is necessary. That will allow them to print out a report, that will help them analyse the numbers the way they want.
The next thing that is important about their income statement. Is that it should be organized in numerically dissenting order. So that the information that they do see can be a lot more meaningful.
For example, when the expenses are in numerically dissenting order. They will be able to see what expenses have the greatest impact on their bottom line. By looking at the top half of the list.
And this becomes extremely important if entrepreneurs find that their revenue is not covering their expenses. And they need to work on cutting those expenses.
By cutting the expenses that are at the top of the list, will be the most impactful to their bottom line. Then trying to cut expenses that have the least impact to their bottom line.
When they do this, Vancouver CPA says they are going to be able to make better and more informed decisions in their business.