Vancouver CPA | What to Know About Income Statements
There are many things that entrepreneurs need to learn when they start their business of the first time says Vancouver CPA. And while there is a lot of information that is important to learn.
The recommendation is for business owners to start off by learning how to read their income statement. Because this alone can significantly help them learn how to run their business.
In fact, while studies have shown that 80% of small business owners in Canada. Have a large gap of knowledge when it comes to their basic business finances. Learning how to read their income statement.
Can make them more likely to make better financial decisions. Earlier on in their business. Which is why this is one of the first things that Vancouver CPA will talk to their business owners about.
The reason why, is because this will show them how much revenue they have generated in their business within a time frame. As well as how many expenses they have incurred.
And a quick glance at a well organized income statement. Can show entrepreneurs if they have generated enough revenue in their business. To cover all of their expenses.
And whether they need to minimize expenses, spend more time and effort increasing their sales and marketing. So that they can increase their revenue. Or they need to do a bit of both.
A common mistake that many small business owners in Canada make. Is thinking that they are going to be able to figure out how much money they have. Simply by looking at how much money they have in their bank account.
And while this sounds like it will work. But a bank balance will not show entrepreneurs. Is how much money they have once the payments that they have scheduled have come out of their bank account.
For example, business owners may have checks that they written, and put in the mail to their suppliers. But some of them have not cleared their bank account yet.
As well, they might have electronic fund transfers that are scheduled to clear their account. Or an entrepreneur may have arranged payroll. And if they spend any additional money in the bank account.
They could cause their checks to bounce, or they could cause a payroll through. And that might get them not only in hot water with their supplier, but their employees who want to be paid.
And they may no longer have a means to pay them. That is why entrepreneurs should avoid trying to run their business by looking at their bank account.
And instead, learn how to read their income statement. Because they will see exactly how much money they have in their business, and how many expenses they have says Vancouver CPA.
And not only can using this information help them avoid making decisions that could cause their business to run out of money. But also, it can help them be proactive in their business early on.
So that they can generate more income, to reach their revenue goals. As well as be able to do things like hire more staff, or purchase assets they need in their business.
There is a lot of information that small business owners need to learn very quickly says Vancouver CPA. But one of the first things that is recommended entrepreneurs should learn. Is how to read their income statements.
The reason why this is so important. Is because statistically, one of the most common reasons why Canadian entrepreneurs fail. According to a study done by industry Canada.
Is that business owners run out of money, and that causes their business to fail. Affecting 29% of all failed entrepreneurs in Canada. In fact, half of all small businesses in Canada fail within five years.
Therefore, the more entrepreneurs who learn how to read their income statement. May be able to impact the number of businesses that are failing. Because they are running out of money in their business.
The first thing that business owners need to do. In order to learn how to read their income statement. Is simply understand what information is contained in this important financial document.
There are four main components, starting with revenue at the very top of the page. Which will show an entrepreneur the gross amount of money that they have brought into their business.
Through selling their products and services. It is very important for entrepreneurs to realize that this is the regular way that they generate income for their business.
And if they have generated revenue in an unusual way. That belongs in a different category. The second category underneath revenue is cost of sales says Vancouver CPA.
And these are all of the expenses that an entrepreneur will incur. By producing the products and services that they have sold in their business. If they do not have any sales in that month, they will not have any cost of sales.
Below cost of sales are the general expenses. And Vancouver CPA says that these are all of the expenses that are not related to the products and services that they sell.
And even if they sell nothing at all, they will have these expenses. Often called the overhead expenses. These are the most significant expenses an entrepreneur will have in their business.
Some of the most typical overhead expenses include rent of their office space, the payments on any equipment leases that they have. Utility bills such as water, power and gas.
But also bills such as their Internet bill, there office phone and cell phone bills. As well as office supplies, such as pens, paper and staples.
And finally, the other income and other expense category. Will be for all of the income or expenses that are generated by the corporation. That are not necessarily related to the business directly.
Such as income or expenses from a rental property. Income from investments that the corporation owns. As well as things like corporate income tax, and the business owners salary.
By understanding all of the information on an income statement. Can make an entrepreneur far more likely to be able to read this document. And use the information in their business.