Vancouver CPA | Learning How to Read Income Statements
Even though business owners are often experts in the industry that you are businesses and says Vancouver CPA. Being an expert in their industry, does not make them an expert in running a business. Which is why 80% of small business owners scored less than 70% on a business financial literacy test.
They often do not know how to do things such as read their income statement, which is an extremely important tool. That they can use to help them make more informed financial decisions in their business.
In fact, the first thing that Vancouver CPA recommends entrepreneurs do. In order to gain a deeper understanding of their business finances. Is learn how to read their financial statement, because that can give them a significant amount of information.
The first step in learning how to read and income statement. Is simply understanding what information is contained in this report. And how it is organized, so that when an entrepreneur reads this, they will know what information they are looking at.
The first component is revenue, and appears at the top of the income statement. And represents all of the gross revenue that they have brought into their business. Through regular sales and invoicing their customers for the products and services that they have sold.
The second category is cost of sales. And all of the direct costs related to producing the products and services. Including material and labour belong here. If an entrepreneur does not have any sales in a month, they will not have any cost of sales on their income statement.
Below cost of sales are the general expenses. And these are all of the other expenses and bills that an entrepreneur must pay. Before they sell a single product. And typically include things like office rent, administrative staff salary. As well as things like office supplies, phone and Internet bills.
It is important to note here says Vancouver CPA. That the general expenses should be listed in numerically descending order. The reason why, is because it makes it much more easy. For a business owner to know what their significant expenses in business are.
And if they need to minimize expenses, what they should put their time and energy towards. Instead of things that may seem easy to minimize. But is not going to have a big impact on their bottom line, such as their cell phone bill, or bank charges.
Underneath general expenses will be the category for other income and other expenses. And this is the category that confuses a lot of business owners. Because this is all of the income or expenses that was generated by their corporation. That are not necessarily related to their business.
Such as selling an asset, entrepreneurs might think that that belongs in revenue. But they do not earn most of their revenue through selling assets. So belongs in other income. Also, the entrepreneurs own salary should never be considered an expense of the business.
Therefore, it belongs than other expenses. So that it can still be tracked. Without making the business look less profitable.
It is very important brought owners to learn how to read to their income statement according to Vancouver CPA. Because it will help them make informed financial decisions in their business.
In fact, many entrepreneurs are not able to make great business decisions. And because of this, they go out of business because they ran out of money. And is actually the second most common reason why Canadian entrepreneurs fail.
And while many business owners think that they are making the best business decisions. Because they look at their bank account before they spend any money. This is actually a very dangerous business practice says Vancouver CPA. And will cause an entrepreneur to run out of money. And there are many reasons why.
The first thing that business owners need to realize. Is that although their bank account shows exactly how much money they have. It shows how much money they have in that moment. And not how much money they will have. Once the payments that they have arranged, come out.
Such as the checks they have written their suppliers. And put in the mail. Or electronic fund transfers that they have arranged, and even payroll that is waiting to come out. Therefore, when business owners look at their bank account balance.
They are not really understanding how much money they have to use. And if they spend the money that is in there, they could cause payments to bounce. Which would have larger and negative ramifications. Especially if the payments that balance our payroll to their staff.
In addition to not showing an entrepreneur how much money they have to utilize. If business owners are looking at their bank account Allen’s. In order to make financial decisions. Will happen says Vancouver CPA. Is they might end up spending money that should go towards bills.
And when they spend that money, they are not going to be able to pay their bills at the end of the month. Which can not only have a negative effect on their business. But if that happens too often, it can be very difficult for to dig themselves out of.
This is why all entrepreneurs should ask their Vancouver CPA how to read their income statement. So that they can make the most informed financial decision.
In addition to knowing what information is on the income statement, such as revenue, cost of sales and general expenses. Entrepreneurs also need to know that they need to have their income statement fit on a single page. To make it easy-to-read and understand.
And this is significantly important. Because an entrepreneur should be looking at their income statement prior to making any financial decision. And if it is hard to read or understand. Entrepreneurs simply will not do this, and want to make the most informed decision they could.
If entrepreneurs want to ensure that they are making the best decisions possible. When it comes to the finances of their business. They should learn how to organize, and read their income statement. And to do so when they are new in business. So that as they grow, it does not become a problem.