Vancouver CPA | Understanding Income Statements
While it is very important for new business owners to understand all of their business finances says Vancouver CPA. Learning how to read their income statement is a good place to start.
Because the information on this financial documents. Can help entrepreneurs understand how much money they have made in a month. How many expenses they have generated in the same month.
And if they have made enough money to cover their expenses. And if not, they can see what expenses are the most significant. And that will help them minimize expenses if they needed.
As well, they will be able to see if they need to generate more revenue. And what they can do in their business to do that. Such as spending more time money on their sales and marketing activities.
In fact, a CPA will recommend that new entrepreneurs should get into the habit of reviewing their income statement. Before they make any financial decisions. That they can make best decision for their business.
And in fact, they should get out of the bad habits. Of looking at their bank balance in order to make those financial decisions. Because their bank balance will have less information than they realize.
One of the first things that entrepreneurs may think. Is that since their bank balance will show exactly how much money they have in their business. They can use this information to make financial decisions.
Such as whether they should pay bills, run payroll, or even purchase assets. However, Vancouver CPA cautions that while this will show them how much money they have in their bank account that exact moment.
What it will not show them, are what expenses they have to pay. As well as what payments are scheduled to come out of their bank account, such as checks that they have sent their suppliers.
That have not yet cleared their bank account. As well as electronic fund transfers they have organized. And even payroll that they have scheduled as well.
If they look at their bank balance, and see that they have ten thousand dollars you bank account. They may spend five thousand dollars says Vancouver CPA.
Without realizing that they have eight thousand dollars worth of checks waiting to clear. Which would cause them to spend more money than they actually have.
But also, if entrepreneurs know how much money they have in their bank account that is used. They still need spend that money, realizing what expenses they still have to pay. And might spend money, that should be used to pay bills.
The first thing that business owners can do, is know what information is on their income statement. Appearing at the top is revenue, followed by cost of sales, then general expenses. And finally other income and other expenses.
By understanding the four components. Can help an entrepreneur start to understand their expenses. And will eventually start looking at their revenue versus expenses. In order to make more informed financial decisions.
They can use this up getting to help them avoid spending more money than they have. And eventually, they can for CPA says they will be able to use the information. To be proactive in helping them grow their business as well.
Vancouver CPA | understanding income statements
It is very important for entrepreneurs to understand their income statement says Vancouver CPA. Because while 80% of small business owners lack a basic knowledge their business finances.
Learning how to read this one financial documents. Can help them significantly understand their finances. And make better business decisions.
Owners should understand what information is on the documents. So that they know what they are looking at they read this their income statement, and start to use the information properly.
At the top, they will see revenue. Which is the gross amount of money they are bringing into their business that month. Through selling their products and services. As well as invoicing their customers.
While the most important things to remember about revenue, is this should be revenue that they have generated through regular business activities. Anything additional belongs somewhere else.
Such as corporate income tax, or selling an asset. Belongs in a different spot their income statement says Vancouver CPA. And the top category is only for gross revenue alone.
Below revenue is the cost of sales. And these are all of the expenses that they will incur by producing their products and services. If an entrepreneur does not have any sales in their business that month.
They will not have any cost of sales in this category. The typical expenses here are supplies and material as well as labour. That labour is staff on payroll, or independent contractors that were hired.
Below cost of sales will be the general expenses. That are to all of the overhead costs of the business. Before an entrepreneur sells anything. And should be listed in numerically descending order.
Usual overhead expenses include rent, utility bills, phone and Internet, as well as office supplies. And include things like equipment lease payments, and administrative staff salary.
Below their general expenses, Vancouver CPA says we the other income and other expenses. And this is of the most misunderstood category of the income statement.
All of the information here, should be legitimate corporate income or expenses. That are not necessarily related to the operation of the business. Such as the owners salary, corporate income tax.
As well as any investments that an entrepreneur has. Such as rental property, that has expenses as well as income. All of these expenses go here, so that they are not completely overlooked.
But they also do not interfere with understanding the revenue or expenses of the business. That not nor needs to get good at looking at. In order to understand their business and make more informed decisions.
The sooner entrepreneurs can learn how to read their income statement. By understanding the information that is on the page, and how it is organized. The sooner rather going to be able to make better financial decisions.
Such as can they pay employees, or do they have to lay someone off. Can they afford to hire a new person, purchase an asset, or do they need to spend more time and energy on sales and marketing. By understanding this, can help entrepreneurs proactively run their business.