Vancouver CPA | Organized Income Statements Are Easy to Read
Even though many business owners may be told they need to learn how to read their income statement says Vancouver CPA. They still might not be reading their income statements. Because they are not organized, and are therefore difficult to read and understand.
The first thing that business owners should learn. Is what information is on their income statement. And where that information appears on the page.
The first component that business owners need to know about. Is the revenue, which will appear at the top of their income statement. And refers to all of the income that they brought into their business.
Through selling their products and services, as well as invoicing clients. Through their regular ends of generating business. And not through other means, such as selling assets. Or through corporate investments.
Below the revenue, a business owner will find the cost of sales. And these are all of the expenses that are directly related to producing the products and services that they sell.
And if an entrepreneur has no sales in a month. They should not have any cost of sales either. And typically, the expenses that are listed here will be the material and supplies, as well as labour.
And it does not matter if the labour is staff, who are on the company’s payroll. Or if they are independent contractors. That were hired to do a specific job.
Underneath cost of sales, or all of the general expenses. Also known as overhead expenses says Vancouver CPA. And these are all of the remaining expenses that a business owner has.
That are not related to producing their products and services. If a business owner has no sales at all. They will still have their general expenses. And typically include things like the rent of their office space.
As well as administrative staff salary, as well as things like utility bills, Internet and telephone, office supplies. And even things like equipment leases be included in general expenses.
And finally, the last category on their income statement is for other income and other expenses. And are all of the income and expenses that are for the corporation, but not necessarily the business.
For example, if the corporation has investments, that income should be included here. As well as income and expenses for rental property owned by the corporation.
As well as things like selling assets in the business. Because while business owners may think that this belongs in the revenue. It actually does not belong in revenue, because that is not how they typically generate money for their business.
Other things that can be included in the other income and other expense category. Are corporate income tax as well as business owners salary says Vancouver CPA.
By keeping all of these expenses separate. Will help an entrepreneur understand what their corporation is generating and bringing in. That is outside their business. So that they can understand the revenue and expenses out of their business alone.
While many business owners understand that they need to understand their business finances says Vancouver CPA. They do not know what they need to learn, or they know what they need to learn, but are having a difficult time with it.
And though many business owners have been told that they need to learn how to read their income statement. If they do not know the information on this important document.
Or, if they do not know how to keep this information organized. Can be very confusing and difficult to read. And then they will not use this document to make more informed financial decisions in their business.
And since running out of money is the second most common reason why entrepreneurs in Canada are failing. Learning how to organize the information on their income statement.
Can help keep this statement easier to read. So that business owners will be more likely to use this to make more informed financial decisions in their business.
One of the first things that Vancouver CPA recommends, is organizing their income statement in numeric lead to sending order. That way, the information is easy to understand.
With the most significant expenses appearing at the top of the page. And the least significant expenses appearing at the bottom. So that if an entrepreneur needs to minimize their expenses.
The going to be able to look at the top half of the statement, and understand what expenses. Going to be worth their time minimizing, because they will have the greatest impact on their bottom line.
The next thing that entrepreneurs need to do. Is ensure that they keep their income statement to a single page. By ensuring that there expense categories are not over classified.
One mistake that many business owners make. Is by trying to put as much information into their income statement as possible. By over classifying all of their expenses into micro categories.
However, rather than make this easier to understand. Entrepreneurs are inadvertently making it more difficult to understand. And making their income statement longer, and the process.
Instead, Vancouver CPA recommends keeping the expense categories as broad as possible. So that their income statement can remain on a single page. And therefore, be easy-to-read.
However if entrepreneurs are wanting to include as much detail what their expenses as possible. They should use subaccounts instead. So that they can go into their accounting software and pull on expense reports.
And decipher the information in a way that makes sense to them. While ensuring that their income statement remains as short and so things as possible. So that it is easier to read and understand.
These are the first things that business owners should learn. When they are considering their income statement. So that they can keep it short, and easy-to-read.
Because if they are trying to get into the habit of reviewing this document prior to making any financial decisions. The shorter and easier it is to read. The more likely there going to be at using it regularly.
When they use their income statement regularly to make more informed financial decisions. Not only can they avoid running out of money in their business. It can also use the information proactively to help them grow their business as well.