Vancouver CPA | Understanding Income Statements
One of the first things that Vancouver CPA recommends entrepreneurs learn. Is how to read and organize their income statements. Because these statements able help entrepreneurs make more informed financial decisions.
That not only can help them avoid running out of money in their business. But it can also help them be proactive, in learning how to use the information. To help them grow their business as well.
However, the first step in learning how to read the income statement. Is learning how the information is organized. And there are four main components of an income statement. And how those four components are organized is extremely important.
First is the revenue, appearing at the top of the income statement. And the revenue is the gross amount that an entrepreneur has made in their business. Through regular invoicing activities. What a business owner makes from selling their products and services, should be the information here.
If an entrepreneur has sold an asset, or has made money from investments. That does not belong in their revenue. Because while it is a legitimate corporate expense. It is not an expense of the business, and did not arise from regular business activities.
The next category below revenue is the cost of sales. Which is the expenses that they will incur. By producing the products and services that they sell. The expenses here should only be supplies and material. As well as the labour needed to produce those products and services.
Whether that labour was an independent contractor that they hired. Or staff wages, that they pay in order to produce those products and services. Important to note that administrative staff salaries do not go here.
Underneath the cost of sales are the general expenses, also known as overhead expenses. And all of the expenses that a business owner will have to pay. Before they sell a single product or service in their business.
The most common general expenses are office space rent, administrative staff, utility bills and office supplies. It is important that the general expenses get listed in numerically dissenting order.
So that an entrepreneur will be able to see what the most significant expenses are. Because they will appear at top of the page. Often, or will have this list in alphabetical order. And that should be avoided says Vancouver CPA, because it will not help them understand what their largest expenses are.
And finally, the last component on their income statement. Our the other income and other expenses. Char for placing the income and expenses that arise legitimately in the corporation. That do not have anything to do with the regular operation of their business.
For examples, the expenses or revenue from a rental property. Money made on investments, corporate tax. And even the owners salary should be included in this category advises Vancouver CPA.
Once an entrepreneur understands how the information on their income statement is organized. And makes it a lot easier for the business owner to be able to read and understand it. So that they will be able to make decisions based on the information within.
Since many business owners do not have previous business ownership experience says Vancouver CPA. They have to learn how to run a business, while they are running their own business. And they need to know what to learn quickly.
And since 80% of all small business owners scored less than 70% on a basic business financial literacy test. Which was put together by into it, the makers of QuickBooks. There are is a lot of knowledge gaps, that entrepreneurs have when it comes to their business finances.
This could be why 29% failed entrepreneurs say the reason why they failed. Was because they ran out of money in their business. And this is why understanding their income statement should be one of the first things they learn.
Because by understanding more business finances. They can often avoid this fate, of running out of money. Because they will be able to make better and more informed financial decisions.
In fact, it is very important that entrepreneurs get very good at reading the statement. Because the recommendation is for entrepreneurs to look at this statement. Before making any financial decisions in their business. From paying bills, and running payroll. To purchasing assets or hiring staff.
With how many financial decisions an entrepreneur needs to make in their business every week and every month. They need to become very well acquainted with this report. So that they will actually read this statement before any financial decision.
And when they do not understand it, or it is disorganized. They may avoid reading it, and make decisions without considering their finances. Which is what puts their business at risk. However, Vancouver CPA says entrepreneurs also need to know.
That they will be able to help their business grow, by making one informed financial decisions when they read and understand their income statement. Which is why it is very important to this at all times.
The first thing that they can do to ensure that their income statement is organized, easy-to-read. Is understanding that there statement should only be a single page. Because when it is more than one page, is a lot more difficult to read and understand.
And they can keep it to one page, by avoiding over classifying expenses. Often, business owners over classify their expenses in order to provide as much information as possible. But rather than give them a deeper understanding of their expenses.
What it does, is it makes the statement itself more difficult to read. And instead, Vancouver CPA recommends using broad categories for the income statement. Them organizing their expenses in using subaccounts. So that they can at any time, a report on their accounting software.
That will allow them to analyse that information in a way that makes sense to them. Without jeopardizing the usefulness of their income statement itself.
By understanding how to read their income statement. Business owners will be able to make more informed financial decisions. That will help them avoid making mistakes. But also help them being proactive in growing their business as well.