Vancouver CPA | Reading and Understanding Income Statements
Often, when people go into business ownership says Vancouver CPA. They have no prior business ownership experience. And just because they are very good at the industry that they are working in.
Does not mean that they are very good at running a business yet. And in fact, according to Intuit’s, the company that makes accounting software QuickBooks. 80% of small business owners struggle with basic financial literacy.
They conducted a survey, asking small business owners to respond to a financial literacy test. Asking questions such as what is a balance sheet, as well as asking people if they understood how to increase their revenue.
And 80% of all respondents scored less than 70% on this test. Demonstrating that many business owners have a very large knowledge gap. When it comes to understanding their business finances.
However, it may be very difficult for many entrepreneurs to understand where they should start. In order to understand their business finances better.
However, Vancouver CPA recommends that new business owners start off. By understanding their income statement. The reason why it is so important to understand the income statement.
Is because it can help entrepreneurs understand how much revenue they have generated within a month. As well as how many expenses they have incurred compared to the revenue.
And looking at this financial statement. Can help entrepreneurs understand if they should be spending their finances. And if so, on what. Or if they need to increase the revenue in their business.
Because they are not covering their expenses at all. In fact, Vancouver CPA says many entrepreneurs realize that they simultaneously need to increase the revenue while minimizing expenses.
Because if they are not able to understand this. They may end up running out of money in their business. And having to close the doors to their business. Even though it is preventable, as long as they had this information from the start.
In fact, not only do 80% of small business owners lack a lot of business financial knowledge. According to industry Canada, running out of money is the second most common reason why Canadian small business owners fail.
Therefore, Vancouver CPA says when they teach entrepreneurs how to read their income statements. They help those entrepreneurs have the tools necessary. To not only avoid running out of money in their business.
But help them be proactive in their business as well. Since 15% of entrepreneurs fail in their first year of business ownership. As well as 30% fail in their second year. The sooner entrepreneurs learn how to read their income statements. The sooner they are going to be able to overcome these odds, and succeed.
However, it is not just understanding how to read the income statement. It is understanding how to keep that income statement short and distinctive. So that entrepreneurs can use the information easier.
By keeping it to one page, business owners are going to be able to read the information very quickly. In order to avoid running out of business because they are running out of money.
One of the most important things for new entrepreneurs to do says Vancouver CPA. Is learn how to read their income statement. Because this will show business owners how much money they are making in their business.
However, even though many business owners are told that they should read their income statement. They do not know exactly what they are looking at.
Which is why Vancouver CPA likes to tell entrepreneurs exactly what the four main components are on their income statement. So that they know what they are looking at.
And can start to use that information quickly in their business. The first thing that business owners should see when they look at their income statement is that the revenue is at the top of the page.
And should include all of the gross amount of money that they have generated in their business. Through selling their products and services, either by point-of-sale, or through invoice.
The next thing that entrepreneurs will see is there is cost of sales next. Which are all of the costs associated with generating those products and services that they have sold.
A good rule of thumb to remember. Is without any sales, or revenue generated in their business in that month. There should be no cost of sales at all.
The cost of sales that an entrepreneur will most likely have. Will be the material that they need to purchase in order to produce those products and services.
And the labour that they needed to pay for, in order to produce and deliver those products and services to their clients. The labour can be staff that some payroll. Or it can be independent contractors and it would still belong in this category.
Below cost of sales are the general expenses. And these are all of the expenses that an entrepreneur will incur. Before selling any products at all. Also known as overhead expenses.
An entrepreneur is most likely going to have rent of their office-based as well as administrative staff be to the largest overhead expenses in their business.
They will also have things like equipment lease payments, utility bills, phone and Internet. As well as things like office supplies that contribute to the general expenses of their business.
And finally, Vancouver CPA says underneath that will be other income and other expenses. These are things that are genuinely incurred by the corporation. That are not necessarily for the business directly.
Such as if the business owner has rental property. There might be expenses as well as income related to that. That belong in this category, instead of putting it in the revenue for expenses of the business.
That way, they and their accountant can keep track of the other income and other expenses. Without confusing the information in with the revenue and expenses of the business.
Sooner entrepreneurs are able to read and understand their income statements. The more likely they are at being able to make informed financial decisions in their business.