Vancouver CPA | Reading Income Statements
Even though it is very important for business owners to be able to read their income statements, Vancouver CPA says many business owners cannot. Or do not read this important financial statement.
And try to make financial decisions in their business without it. However, in doing so, they may end up making poor decisions. That not only can put them into financial difficulties.
Business owners can also run out of money doing this. And cause them to close their business. Even though that is completely avoidable, if they would only learn how to read their income statement.
The reason why many business owners do not make financial decisions by looking at their income statement. Is because they often think they can look at their bank statement, and make the same decisions.
However, Vancouver CPA says this is not a good idea. Because although a bank statement will show an entrepreneur exactly how much money they have in their business at that exact moment.
What a bank statement will not show an entrepreneur. Is the payments that are scheduled to come out of their bank account. Such as checks that they have written, and put in the mail to their suppliers.
Electronic fund transfers that they have scheduled, and even payroll that is waiting to come out of their bank account. And if an entrepreneur spends the money that is in their bank account.
Without realizing that there are any payments that are waiting to come out. They may cause those payments to bounce, and they could run out of money very easily.
Therefore, Vancouver CPA recommends entrepreneurs learn how to read their income statement instead. Because it will show a business owner but they have in revenue.
And what they have in expenses, so that they will be able to see if they have generated a profit that month. And if they are able to spend that money.
Or if they have not generated a profit. And then come up with a plan on what they are going to do to grow their revenue. So that they can make those financial decisions.
Therefore, with how important understanding financial statement is. The first step for entrepreneurs who want to learn how to read it. Is knowing the information on this document.
There are four main components on an income statement. Starting with revenue, at the top of the page. Which will show all of the money that a notch been our has brought into their business.
Through selling their products and services, and invoicing customers. Through regular way that they generate business. Anything that they have generated their business that is not directly related to their products and services should not be here.
Below that is the cost of sales, which are the expenses directly related to producing the products and services. And typically only include interior and the labour needed to produce those products and services.
Below that is the section for general expenses. Also known as overhead costs. That a business owner generates just by operating their business. And will have these expenses whether they sell products or not.
And finally, the last category is for other income and other expenses. Legitimate income and expenses of the corporation. That are not necessarily related to their business specifically.
By understanding these components. Entrepreneurs will be more likely to be able to read as well as understand their income statement. And make more informed financial decisions.
While it is very important for entrepreneurs to be able to read their income statement says Vancouver CPA. According to into it, the company that makes accounting software QuickBooks. 80% of small business owners scored less than 70% on a basic financial literacy test in their business.
With so many entrepreneurs are struggling to understand their business finances. Learning how to read their income statement can be extremely beneficial.
Because it can help entrepreneurs take significantly more informed financial decisions very quickly. As soon as they learn how to read and use their income statement says Vancouver CPA.
The first things that business owners should ensure they do. Is have their income statement listed in numerically dissenting order. And the reason why, is because it can help small business owners.
Understand what the most significant expenses are, just by looking at the top of the page. Therefore, if they know they need to minimize expenses. They can focus on the ones that are at the top of the page first.
These are likely things such as office space rent. As well as administrative salary. And by spending their time minimizing the most significant expenses. They can make the largest impact to their bottom line.
Instead of trying to spend a lot of time minimizing their phone bill, or bank charges. Because even if they are successful in doing this. They are not going to make a very large impact on their expenses in total.
The next thing that Vancouver CPA recommends. Is ensuring their income statement is just a single page. Because it is going to be much more easy to read and understand when it is shorter.
One of the reasons why income statements tend to be longer than a page. Is because the classifications of accounts becomes very complex. When business owners try to micro classify all of their expenses.
So that they can have a greater understanding of those expenses. However, rather than making it easier to understand their expenses. There actually making it more difficult, due to they many different expense categories.
The recommendation instead, is to keep those classifications very broad. So that their income statement can stay just a single page. But if they do want to categorize all of their different expenses.
They should use subaccounts, so that they can go into great detail about their expenses. And pull a report from their accounting software if they want to look at those expenses were carefully.
But by keeping their classifications more broad. Allow them to have a more this things income statement. That will allow them to read it and understand it very easy.
Once business owners learn the information that is on their income statement. And how it is organized. It will be able to read this document before making any financial decisions. That they can make good decisions, that will allow them to grow their business.