Vancouver CPA | Learning to Read Income Statements
Even though many entrepreneurs are told by their Vancouver CPA to read to their income statement. If it is not organized, and business owners do not know what information is on it. Can be very overwhelming to try to understand.
Therefore, the first thing that business owners should learn. Is what the main components that are on an income statement, and where they will appear on the page. So that they can understand the information easier.
The first thing that business owners need to know, is that revenue will pay her at the top of the page. And is the gross amount of money that business owners have brought into their business.
Through selling their products and services, and invoicing customers. This should be amount that they brought in through regular business activities, and nothing to do with their corporation.
Below happening, the for the cost of sales. And these are all of the expenses that are directly related to producing the products and services that they sell in their business. An important thing to remember.
Is that if entrepreneurs have not had any sales in their business. They should not have any cost of sales in this category. And that the expenses that they should see relate only to the material used to produce those products and services.
As well as all of the labour that they needed to produce those products and deliver those services. Whether it is staff that is on their payroll. Or independent contractors that they have hired themselves.
Underneath the cost of sales says Vancouver CPA are all of the general expenses. Also called overhead expenses of the business. That are all of the expenses that an entrepreneur will incur.
Whether they have sold any products or services in their business or not. Typical overhead expenses include rent of their office space, as well as things such as utility bills, phone and Internet.
As well as things such as payments on their equipment lease, office supplies and even the salary of their administrative staff. These expenses should be listed in numerically descending order.
With the most significant expenses appearing at the top list, and the least significant expenses appearing below. So that entrepreneurs will be able to see very quickly what expenses.
Our making the largest impact to their bottom line. So that if they ever have to minimize these expenses. They will know which ones they needs to focus on. Which ones are least important.
The next thing that Vancouver CPA will share with their business owners. Is that the other income and other expenses is at the bottom of the income statement. And while it may be very difficult for entrepreneurs to understand.
Other income and expenses should be for income and expenses that are valid for their corporation. But are not necessarily related to the operation of their business.
For example, if entrepreneurs have rental property, the expenses and the income generated by that property would belong in this category. As well as the owners salary, corporate income taxes, and even assets that an entrepreneur has sold in their business belongs here.
By understanding what information is listed on the income statement. Can help entrepreneurs ensure that they at least know they are looking at when they read this document.
When entrepreneurs are learning how to read their income statement, Vancouver CPA says it is important. That they know how to have the information organized to make it easy to reuse.
If it is not easy-to-read, or if it is on more than one page. This decreases the chances of an entrepreneur using this information. In order to make financial decisions.
Which will increase their chances of making poor financial decisions. That not only can put their business at risk. But it can actually cause business owners to get out of money in their business, and be forced close their doors.
In fact, according to an industry Canada survey. Not only are of all Canadian small businesses failing within five years. But the second most common reason why Canadian small businesses are failing.
Is because they are running out of money in their business. And by not making the most informed financial decisions. Is one of the ways that they are putting their business at risk.
In fact, Vancouver CPA says one problem is that many business owners think that they can make financial decisions. By looking at their bank account balance. However this is not a good way of making decisions.
Because while the business owner can see exactly how much money they have in their bank account that exact moment. It will not show them how much of that money is already spoken for.
Such as if an entrepreneur has sent out checks in the mail to suppliers. That have not cleared their bank account yet. Or any payments that they have scheduled. Such as electronic fund transfers, or payroll.
But also, Vancouver CPA says that looking at their bank account. Will not show them all of the expenses that they have to pay. And even if they have enough money in their bank account, even taking into consideration.
All of the payments that they have coming out of their bank account. If they spend money, without paying for all of their expenses. They may spend more money than they have, and get behind in paying bills.
Therefore, learning how to read and organize their income statement is vital. And the first thing that business owners should do. Is ensure that their income statement is listed in numerically descending order.
So that they can see what their most significant expenses are. And if they have generated enough revenue to cover those expenses. If they need to increase the revenue, minimize their expenses.
Or if they need to do both, so that they can viable in business. If they look at their expenses in numerically dissenting order. Also know what the most important expenses to pay are.
And that can help them figure out how much more and revenue they need to generate, to not be behind in their expenses any longer.
Learning how to read and organize their income statements are an extremely important activity says Vancouver CPA. And the sooner business owners do this, the sooner they will be able to make better financial decisions.