Vancouver CPA | The Importance of Income Statements
The reason why Vancouver CPA recommends all new entrepreneurs learn to read and income statement. Is because it is an extremely important financial documents. That can help them make more informed financial decisions.
The reason why, is because this document will show them how much revenue they have generated in their business. As well as how many expenses they have to pay. And at the most basic level.
Entrepreneurs are going to be the see if they have made enough revenue to cover all of their expenses. By looking at revenue compared to expenses on their income statements.
If they have not, Vancouver CPA says entrepreneurs need to make the decision. Of whether they are going to minimize expenses, increase revenue. Or both.
Often, business owners may not realize that they are not generating enough revenue. Which is why learning how to read this important financial document early on is so important.
So that business owners will be able to know that to be proactive in their business. And generate more sales, so that they can avoid running out of money in their business.
Which is actually one of the second most common reason why entrepreneurs are not succeeding. Which causes 29% of all failed entrepreneurs to close the doors to their business. According to an industry Canada survey.
As well, many business owners do not take into consideration early on. How to minimize their expenses. Or even understand that they may have unsustainable overhead.
Therefore, learning how to read this important document. Can help them make more informed financial decisions. Even if they still have a difficult time understanding the rest of their business finances.
In fact, it is considered best practices. For an entrepreneur to review their income statement. Before making any financial decision. Whether it is paying a bill, running payroll.
Or even paying themselves, or purchasing an asset. And while many business owners make this decision by looking at their bank account. This is a very dangerous habit to get into.
Because while it can be easy to do when their business is brand-new. And they can remember all of their expenses, as well as all of their income sources.
As they grow, the bank statement will show them exactly how much money they have in their business at that moment. Without taking into consideration how many payments are scheduled to come out of their bank account.
If they make a decision based on their bank balance alone. Vancouver CPA says they can very easily overspend. And end up running out of money in their business very quick Lee.
As well, looking at their bank balance alone. Will not show them how much they have in bill payments to make. And by spending money, without considering what payments they need to make first.
Can also have an entrepreneur running out of money in their business. This is why it is so important for entrepreneurs to learn how to read their income statement is one of the first things they do in their business. Make more informed financial decisions early on.
It is extremely important for entrepreneurs to learn how to read their income statements according to Vancouver CPA. Because this can help them make more informed financial decisions.
However, if they do not know what information is on their income statement, or if it is not organized. They may struggle to understand the information, and stop using this important document.
The first thing that Vancouver CPA recommends, is understanding the four main components on their income statement. So that they can start to understand what the income statement is communicating.
The first thing that business owners should remember, is that revenue will appear at the top of their income statement. And should include all of the gross revenue that they brought into their business.
Through selling their products and services as well as invoicing their customers. If they have any revenue that they brought into their business.
Through means that are not traditionally what they do in their business. Such as selling an asset, at belongs in a different category says Vancouver CPA.
The second category underneath revenue is a cost of sales. And these are all of the expenses that are directly related to the sales that they have generated that month.
And typical cost of sales include material and labour. Whether the labour is independent contracts, or staff on payroll. Most important thing for business owners to remember.
Is that if there are no sales in the business that month. There will be no cost of sales either. Which will make it very easy for entrepreneurs to understand this component.
Below the cost of sales will be the general expenses. And here are all of the other expenses in the business. That are not directly related to the production of the products and services they sell.
These are all of the expenses that an entrepreneur will incur in their business before they make any sales. And will include things such as the rent of their office space, the salary of their administrative staff.
As well as bills such as utility bills, Internet, phone and even office supplies. As well as things such as equipment leases can be included in general expenses.
And finally, the last category will be for other income and other expenses. For legitimate expenses and income that have generated by the corporation.
Or other income and expenses that were incurred through means that are not traditionally held business generates income. A great example of an expense that belongs here includes corporate income tax.
By understanding all of the different component parts of their income statement. Can help entrepreneurs build to understand the information faster.
Then use that information to make more informed financial decisions in their business. By learning how to read the statement prior to making any financial decisions. Can help entrepreneurs understand if they have the finances to make those decisions. So that they can avoid running out of money in their business.