Vancouver CPA | What an Income Statement Is
When entrepreneurs are starting their business, Vancouver CPA says learning how to read their income statement is important. And should be one of the first things that they learn in their business.
The reason why, is because while 80% of small business owners struggle with understanding their basic business finances. And there are many things that they can learn, that will help them gain this understanding.
There income statement will show all of their expenses, compared to their revenue on a monthly basis. And that can help them significantly first understand if they are generating enough revenue to cover their expenses.
And if they are not, do they need to increase their revenue, or they need to minimize expenses. Or if they need to do both, so that they can avoid running out of money in their business.
Since 29% of all Canadian small businesses that have failed. Say that running out of money was the reason why they were not successful in business says Vancouver CPA.
Which makes learning how to read their income statement. Extremely important exercise. Because it can help them overcome this obstacle. However, in order to learn how to read this document.
Business owners need to know what the four components are on this important financial document. Starting with revenue at the very top, it shows an entrepreneur how much money they have brought into their business.
Important thing with this, is that it needs to be income that they have generated by selling their products and services, and through invoicing their customers says Vancouver CPA.
They might have different revenue, such as selling an asset, or from investments in the corporation. They do not belong in revenue. They should be able to understand everything that the business generated.
Through regular operations, and selling the products and services in the business only. Also, this is the gross amount of money that they brought into their business. With nothing being removed from this amount at this point.
Below that is the cost of sales. Which are all of the costs that are directly related to producing their products and services. If an entrepreneur has no sales in a month, they will have no cost of sales.
The most typical expenses that entrepreneurs will find here. Will be labour, as well as materials and supplies. Whether the labour is staff that is on payroll, or an independent contractor that was hired.
Underneath cost of sales will be general expenses. Also called overhead costs. These are all of the expenses that an entrepreneur will have, before they sell any products or services in their business.
And disposed food things such as office space rent, administrative staff salary. As well as things like office supplies, equipment leases, and utility bills just to name a few.
And finally, there will be other income and other expenses. Which are income and expenses that are legitimate corporate income and expenses. But not necessarily related to the business in any way.
Such as corporate income tax, business owners salary, or things like income or expenses from rental property for example.
By understanding how their income statement is organized. Can be the first step to understanding how to read this important document. That can help entrepreneurs be more proactive in their business.
Even though many business owners may know how important it is to read their income statements says Vancouver CPA. They still might not be doing this in their business. Because they are very confused with the information and how it is organized.
This is why Vancouver CPA teaches all of its new business owners. How to organize their income statement. So that it is easy-to-read. And therefore, business owners will be much more likely to use.
The first thing that they recommend, is to ensure that the income statement is organized in numerically descending order. With the largest expenses appearing at the top page.
That way, business owners will be able to see very quickly. What the most significant expenses are. Just by looking at the top of the page. If they look at their revenue, and see that they have not made enough revenue to cover expenses.
They made want to minimize some of their expenses. Particularly if they have unsustainable overhead. And by having it organized in numerically descending order. Make it very easy for entrepreneurs to know what to spend their time minimizing.
The next thing that Vancouver CPA will teach their business owners. Is that their income statement should be only a single page, and no longer. Because it will be difficult to read and understand when it is longer than that.
Business owners need to be able to read and understand their income statement. Before making any financial decision. And the number of times there going to have to review this document.
Which means that if they cannot quickly read it and understand it. They may not use it at all. And then make poor or ill-informed decisions in their business. Because they are not using this important document.
How business owners can keep their income statements to a single page. Is to ensure that they keep their expense classification to a minimum. So that they do not have too many different accounts.
Business owners often think that micro-classifying expenses can help them understand their expenses better. When all it does is make their income statement longer, and more difficult to read.
They should work to ensure that their expense classifications are very broad. However, they can ask their Vancouver CPA how to use subaccounts. That will allow them to pull their expenses from their accounting software.
So that they can keep the categories broad, and have a short income statement. But then look at their expenses through different report, that can help them understand their expenses in a way that is meaningful to them.
By learning these few things early on in their business. Will make entrepreneurs much more likely to be able to understand their income statement. And then use that information to help them make more informed decisions in their business.