Vancouver CPA | Tips to Organize Income Statements
One of the main problems that they Vancouver CPA sees. When they meet with new business owners, is that they do not understand their business finances. And this can have a significant negative effect on the ability for an entrepreneur to run their business.
In fact, the company that makes the accounting software QuickBooks, Intuit did a survey. In order to find out how financially literate business owners were about basic business financial literacy. The results of this survey, shows that 80% of small business owners, scored less than 70% on this test.
Which means there is a significant amount of business owners. Have large knowledge gaps, when it comes to their business finances. Which is potentially, one of the reasons why entrepreneurs in Canada fail very often In business. Because they run out of money in their business.
This is why when small businesses meet with Vancouver CPA, one thing that they will help them do. Is not only understand what their income statement is. To help them organize it, so that they can more easily read it, understand it. And use it to make informed and guided financial decisions.
Starting with the four main components of an income statement. The first, and the one that is at the top of the income statement is their revenue. It refers to the gross amount of money that the business has earned, through invoicing clients. And at this point, no bills are removed from this total.
Below the revenue, is the cost of sales. These are the costs that are directly related to producing the products and services that they sale. Typically, this includes material and labour. Administrative staff wages, will not be included here.
The third component says Vancouver CPA are the general expenses. Which are all of the costs that a business owner will incur. Before they sell a single product. And typically refers to the rent of their office space, utilities, bills. And even office supplies, and administrative staff wages here.
And finally, the last component of the income statement is the other income or other expenses. The things that belong in this category, would be valid corporate expenses. That are not necessarily related to invoicing in their business. Such as selling an asset in their business.
Or expenses or revenue from a rental property that they own. Other things that can be included here are investments, corporate income tax, and business owners own salary.
Once entrepreneurs understand how their income statement is organized. They are going to be able to start understanding the information that is contained in the statement. To help them make informed financial decisions.
Which is why their income statement should always be organized in numerically descending order. Because that means the most significant expenses will fall to the top of the statement, and they expenses that impact the business the least will be on the bottom.
This will continue to help entrepreneurs understand the information on their income statement. So that when they read this important financial document. They will know what it is saying, and can act accordingly.
Often, when business owners are new in business says Vancouver CPA. Not only are they not reading their financial statements. But they also do not understand them, and so they make a lot of financial decisions without looking at their actual numbers.
And with 29% of all entrepreneurs failing in business. Because they ran out of money in their business, learning how to organize and read their income statements. Can be very significant in helping in minimizing the number of business owners who fail because of this.
One problem that many business owners have, is that their income statement is longer than a single page. Which makes it very confusing to look at, and understand the information that is presented in this statement.
Often, it is more than one page. Because entrepreneurs are over classifying a lot of their expenses. Because they think that having a lot of information is going to help them. But all it is going to do, is because the income statement to be more confusing.
Therefore, business owners need to get very good at putting their expenses into broader categories, for example. If business owners have an office supplies category, they can put many things into that from vendor paper, toner, pens and pencils for example.
However, if they try to break that out into different categories. Such as have paper category, toner category, etc. They end up having questions about where certain things go. Such as does this taper this stapler go into general office expenses, or into administrative expenses for example.
If business owners do want to have a lot of information, so that they can analyse the expenses themselves later. In a way that makes sense to them. They can use subaccounts instead. Because this will allow their income statement to be short and concise.
But it will allow an entrepreneur to pull a report later on says Vancouver CPA. That will allow them to analyse those numbers. Without affecting the ability to read and understand the income statement itself.
And in fact, many business owners have multiple revenue accounts. And this can also get confusing according to their Vancouver CPA. Because while most businesses have hundreds of different kinds of products and services that they sell.
The types of products and services that they sell are typically very small. A great example of this, is a restaurant. Who will have a lot of different food and drink items that they sell. Including alcoholic beverages, appetizers, main courses and desserts.
But all of these should it into one category, under food. But if the restaurant also has a food truck. As well as sells merchandise out the front of their store, those can be three different revenue categories. Because they have very different price points, and margins.
The more entrepreneur is able to understand how their income statement is organized. The better they are going to be able to use that information, to help them make more informed financial decisions in their business. So that they can help their business grow and be proactive about their finances.