Vancouver CPA | Tips on How to Read Income Statements
Even though it is very important for entrepreneurs to review their income statement says Vancouver CPA. They often do not, because they do not understand the information contained in this important report.
Therefore, when business owners learn how to organize the information in their income statement. They will be able to understand what is in this report. So that they will be able to read it, and utilize the information very quickly.
Therefore, when business owners talk to their Vancouver CPA boat not understanding their income statement. They often start with simply understanding the four components on this financial report. And where these components will be, so that they will be more likely to understand the information.
The very first component, which is at the top of the income statement. Is the revenue category. And refers to the gross amount of profit they are bringing into their business. Through typical invoicing of selling their products and services.
The next component is the cost of sales. These are all of the expenses that are directly related to producing their products and services that they sell. Typically the only expenses here will be the supplies and materials needed to produce the products. As well as the labour needed to produce them.
Whether an entrepreneur has staff, that is on a payroll that works for them to produce the products and services that they sell. Or whether an entrepreneur simply is hired an independent contractor. It does not matter, those expenses count toward the cost of sales.
The third component of an income statement is general expenses. Which are all of the other expenses in the business. And all of the bills that an entrepreneur will incur before they sell a single product or service at all.
This typically includes administrative staff, office rent, as well as things like utility bills, phone and Internet. But can also include things like office supplies, and equipment leases.
And finally, Vancouver CPA will say that the last component on a income statement is the other income and other expenses. These are legitimate corporate income and expenses. That are not necessarily related to the business.
Such as expenses or income from a rental property, investments, corporate income tax. And the business owners own salary. By keeping all of these expenses and income separate. They can be considered as part of the whole picture.
Without making the revenue of the business look larger than it should be. And without making the expenses of the business larger than those should be as well. Which will help an entrepreneur make better business decisions.
By understanding how the income statement is organized. Will allow an entrepreneur to be able to look, and see how much money they have in their business, and by subtracting the expenses, how much money they have to utilize. So that they can decide whether they can pay bills, run payroll.
It will allow them to use the information to realize that they do not have enough money. And how they are going to compensate for that. This is why so important for entrepreneurs to learn how to read their income statement.
If entrepreneurs are not reading their income statement regularly says Vancouver CPA. They may actually be making or financial decisions in their business without realizing it.
In fact, not only is the failure rate for entrepreneurs in Canada extremely high at 50%. But the second most common reason why entrepreneurs are not succeeding. Is because they run out of money in their business. And while there are several different reasons why business owners could run out of money.
If they are taking an informed financial decisions. Or spending money without looking at their income statement. To understand if they have the finances to spend that money. They could very well be causing their business to run out of money.
When that happens, they are often forced to close the doors to their business. Therefore, when Vancouver CPA teaches entrepreneurs how to read and organize their income statement. It will help entrepreneurs significantly be able to make more informed financial decisions.
One of the first things that entrepreneurs should keep in mind. Is that an income statement should never be longer than a single page. Because it will be very difficult to read and understand when it is more than one page.
However, in an effort to have as much information as possible. Vancouver CPA says many business owners try to over classify the expenses. And instead of having better information. All they have are very confusing categories, that make their income statement long and hard to read.
Instead, the recommendation is for business owners to keep their categories broad, such as putting all office supplies in one category, whether it is printer paper, toner, staplers or cleaning supplies. Instead of having many multiple categories such as printer paper, regular paper, ink, toner etc.
However, if an entrepreneur truly wants to analyse the types of expenses that they have. They can do that says Vancouver CPA. As long as they use subaccounts instead of categories. Because that will allow the income statement to be short and succinct.
While allowing them to reports that they want, whenever they want analyse the expenses that they have in a way that is meaningful for them. By keeping it to one page, business owners will be more able to read the income statement, understand the information. And use the information that is in the report.
When it is longer than a single page, business owners may have such a difficult time reading and understanding it. That they stop using this important document financial decisions. And can put their business at risk once again.
The sooner entrepreneurs can learn how to read their income statement. The sooner they are going to be able to practice while their business is small. Because when they only try to read and understand their income statement when they are aching a lot more money. It becomes more difficult.
By learning how to read this important document. Can help business owners make that are financial decisions, that can help them not only avoid problems. But also help them grow their business as well.