One of the reasons why entrepreneurs should learn how to read and understand their financial statements prepared by their Edmonton bookkeeping company is because most entrepreneurs struggle with understanding basic business financial literacy. Into it, who is the company that makes QuickBooks products did a survey of small business owners to find out how financially literate they were about their business? They were asked questions such as what are the roles of a balance sheet and income statement, how can they improve cash flow in their business and what our accruals. Out of all of the respondents, 82% scored less than 70% on the test. This shows that many entrepreneurs struggle with understanding business finances. Helping entrepreneurs increase their understanding can help business owners succeed.
The first thing that entrepreneurs need to understand is when they receive interim financial statements from their Edmonton bookkeeping company, it is that those reports should be balance sheets and income statements. They may also get additional reports such as an aging Accounts Receivable summary, for an aging accounts payable summary which can help entrepreneurs keep track of all of the businesses that of the money, as well as all of the vendors they owe money to. However, the most important reports are the balance sheet and income statement.
The next thing that entrepreneurs should always keep in mind when they receive these reports, is that they should verify the accuracy of the reports. This is important every single time because the potential for errors to exist is always present. If an entrepreneur wants to ensure that their financial decisions are the best possible, they should ensure the accuracy of these reports. Therefore, any six-month comparative statements. The reason for this is so that entrepreneurs are more able to see any inconsistencies month over month. If they find any inconsistencies, they need to consider if there is a reason for those inconsistencies. Inconsistencies can be things like they had an extremely high payroll month because they had three payrolls in that month. Part, an entrepreneur about a large piece of equipment and that impacted the cash flow. By taking into consideration these potential reasons for the inconsistencies, business owners can verify the accuracy of the information. However, if they cannot explain why those inconsistencies are there, they should then review the information to look for errors. If they discover that there are errors, they can fix their balance sheet and then review the income statement to see if those errors exist on the income statement as well. Doing this every single time they review their interim financial statements can help entrepreneurs ensure that those statements are correct and that they can make the best financial decision on them.
Once an entrepreneur has verified the accuracy of the information, they can look at their balance sheet to determine the overall financial health of their business. The balance sheet from their Edmonton bookkeeping company will show them their assets in order of liquidity, all of their liabilities and the equity in their business. When looking at the assets, one thing that an entrepreneur is going to want to verify is that if they do not have a lot of cash in their business, that their Accounts Receivable is high. While entrepreneurs should not have a high Accounts Receivable report for a long time, if they do not have very much of an Accounts Receivable section, it could indicate that an entrepreneur may have a future cash flow problem. This might mean that an entrepreneur will need to increase the revenue by revenue-generating activities such as increased marketing efforts, or an entrepreneur may want to seek out financing or make plans to personally contribute money to the business denies the cash flow issue. By being proactive, entrepreneurs can work to overcome a cash flow problem, rather than being caught off guard and potentially causing their business to close.
One of the most significant activities that an entrepreneur can learn to do very well to have a great financial impact on their business, is to learn how to effectively and efficiently review the interim financial statements given to them by their Edmonton bookkeeping company. The failure rate for businesses is extremely high in Canada, and the business financial literacy is quite low. Industry Canada says that 15% of entrepreneurs will fail in their first year, and 50% of entrepreneurs will be out of business by their fifth year. Into it, the makers of QuickBooks also surveyed entrepreneurs to test them on their basic business financial literacy. 82% of all of the respondents that were quizzed on their knowledge of basic business finances, scored less than 70% on the test. Helping entrepreneurs increase their financial knowledge in their business can impact how successful they are.
Once an entrepreneur has reviewed the balance sheet to minimize errors, and have reviewed the information to gauge the overall financial health of their business, the next thing that they should do is review their income statement. The information on their income statement prepared by their Edmonton bookkeeping company is the revenue, cost of goods sold and expenses. Their income statement should all fit on a single page. This is done on purpose to be easy to read and easy to understand. This might mean that the expense categories are generalized so that they can all fit on a single page. Business owners often try to be very specific when classifying their expenses to provide as much information as possible, but especially on the income statement, the general is better. Not only is it easier to remember where to classify expenses, but it can also help entrepreneurs gain a deeper understanding of the expenses of their business.
The next thing that entrepreneurs will notice about their income statement, is that there Edmonton bookkeeping company will have organized expenses in numerically descending order so that the highest expenses are at the top of the list. The reason it is done this way is so that entrepreneurs are easily able to see that the expenses at the top of the list have the greatest effect on the business’s bottom line. If an entrepreneur wants to minimize expenses in their business, they should spend their time minimizing the top half of the list. Rent and administration staff salaries can be to the things that are at the top of the list. If an entrepreneur can minimize those expenses, they can greatly impact their bottom line. The bottom of the list will include things like bank fees, and while it might be tempting for entrepreneurs to spend time minimizing those expenses, it is not going to greatly impact the business.