The skill on how to effectively read financial statements is extremely important in businesses, so when entrepreneurs receive balance sheets and income statements from their Edmonton bookkeeping company, they should ensure they know how to read them because the financial information they can gain, and help them run their business can be invaluable. Not only can reading these reports help entrepreneurs avoid cash flow problems, but they can help entrepreneurs be proactive in their business to ensure that their business is succeeding.
many entrepreneurs read their income statement first, or as the only thing that they look at when they receive those reports from their Edmonton bookkeeping company. One of the main reasons for this is because entrepreneurs can understand that report, and so they use their income statements to make financial decisions in their business. This is not the most effective way to review the statements. The biggest reason is, if they do not review for errors first, they may be making decisions based on the income statement that has several significant mistakes in it. Any time an entrepreneur gets an Edmonton bookkeeping report, they should look for errors. Errors have the potential to exist any time anyone other than an’s chartered professional accountant does the financial statements of the business.
It is difficult or impossible to find errors reviewing the income statement alone. Business owners need to look at the balance sheet, and review it, a six-month comparative statement which is called a horizontal so that the can easily see if any months look very different than others. By looking at these inconsistencies or anomalies, business owners can look at the months that they occurred, to see if they can explain why those inconsistencies happened. Perhaps due to the seasonality of their business, they had an extremely high payroll month. Or, perhaps an entrepreneur purchased a rather large asset in that month. Those could cause the finances of the business to look extremely different than other months. However, if this is not the case, entrepreneurs should consider that it was an inconsistency due to an error and look to fix that error and then check to see if that error exists on the income statement as well.
Once an entrepreneur has verified the accuracy of both interim financial statements, the balance sheet and the income statement from their Edmonton bookkeeping company, then the business owner can start reviewing the information to see the financial position of the business. On the balance sheet, the entrepreneur is going to be able to see the assets of the business compared to the liabilities of the business. They should be verifying that there are more assets than liabilities. If that is true, the business is doing well. How much higher the assets are, helps an entrepreneur see how successful they are doing. This shows the overall success of the business. Once they understand that, they can start looking at the income statement, which will show the current financial state of the business.
Many entrepreneurs lack basic business financial literacy, which causes them to not be able to understand how to read the financial statements given to them by their Edmonton bookkeeping company. By learning how to read the balance sheet and income statement, can help entrepreneurs make decisions in their business that will positively impact their business. Without understanding these reports, the financial decisions that an entrepreneur makes may cause financial problems in their business.
While the balance sheet will help entrepreneurs figure out if there are any errors on their income statement, and will show the overall financial position of the business, entrepreneurs should then move on to learning how to read the income statement and understanding what it says about their business as well. The income statement given to them by their Edmonton bookkeeping company will show an entrepreneur the revenue of the business, the cost of goods sold, as well as the expenses. This can give an entrepreneur an overview of what the financial position of the business in that month is.
An entrepreneur should understand that it is laid out very specifically. There Edmonton bookkeeping company will ensure that all of the information on their income sheet fits on a single page. The reason is to ensure that it is easy to read and understand. If for some reason it does not all fit on one page, that is usually due to the expenses being split into two many different categories. While entrepreneurs often do this to be extremely clear and detailed, it can make things far more difficult to understand. For example, if an entrepreneur split up their office supplies into several categories it can be difficult to understand. They might have an office printing section, a paper section, a filing section, a notetaking section, but ultimately all of these things can be grouped under office supplies because that is essentially what they are.
The next thing entrepreneurs are going to notice is that the expenses are going to be listed in numerically descending order so that the highest expenses end up at the top of the list. There Edmonton bookkeeping company will have done this on purpose, to make it very easy to read and understand. If an entrepreneur is interested in expense minimization, all they need to do is spend time at the top of the list and advising those expenses. They will typically find that the top of the expense list is things like rent and administrative salaries. The bottom of the list will be things like bank fees and phone bills. If an entrepreneur can find a way to save on rent, or save on administration salaries by having their admin staff work on revenue-generating activities part of the time, that can offset the cost and affect the bottom line a lot more significantly in figure out a way to cut their bank fees by 50%.