Business owners should understand how to read the financial statements given to them rather Edmonton bookkeeping company because entrepreneurs who understand the financial statements can go on to make better and more informed business and financial decisions. Not only does this help entrepreneurs grow their business, but it can also help them avoid a lot of the financial problems that affect many other small businesses in Canada. Industry Canada says that 15% of entrepreneurs in Canada close their business within their first year. 30% of entrepreneurs will close their business by their second year, by the time five years is reached, half of all entrepreneurs will no longer be in business. When asked why these businesses close their doors, these failed entrepreneurs said the reason why their business failed was that they ran out of money in their business. Helping entrepreneurs increase their ability to make better and informed financial decisions can help them overcome these odds.
There are two reports that they should receive as part of their financial statements from their Edmonton bookkeeping company. These are the balance sheets and the income statements. While many entrepreneurs can be the income statement, they look at that only, and think that they can make informed financial decisions in their business. However, entrepreneurs read and understand their balance sheet first, they can gain better insight to the finances of their business that cannot only help them increase the ability to make better financial decisions but also review the financial statements for errors and fix them before they make those decisions so that they can make the best decisions they possibly can.
The way an entrepreneur would go about reading their balance sheet to catch errors is by asking their Edmonton bookkeeping company to give them their balance sheet in a six-month comparative statement often called a horizontal. The reason why this is important is because looking at several months at a time can help entrepreneurs see if there are any inconsistencies or anomalies in certain months that are not in others. If the financial information looks extremely different in a certain month, business owners should look at that month and see if they can explain it. Explanations can include having a high payroll. Because they had three payrolls in that month, which if entrepreneurs are paying their staff every two weeks that is going to happen twice a year. Or, they may have made a large asset purchase and that one month that cause the finances to look strange. Or perhaps due to the seasonality of their business they had an extremely low period. If there can be no explanation for those inconsistencies, entrepreneurs should work with their Edmonton bookkeeping company to see if there are any mistakes that can be fixed that would explain those inconsistencies. If there are, entrepreneurs should ensure that those errors do not exist on the income statement. Once an entrepreneur has verified the accuracy of the information, they can be better prepared to use the reports to make great financial decisions.
By learning how to review the financial statements given to them by their Edmonton bookkeeping company once a month, can help entrepreneurs make better informed financial decisions in their business. Intuit’s, who are the makers of the accounting software QuickBooks did a survey of entrepreneurs to find out what their basic business financial literacy is. They were asked questions about what the role of the balance sheet is, what is and income statements, and how they can improve cash flow. A whopping 82% of the respondents scored less than 70% on the test, indicating that many entrepreneurs struggle with understanding business finances. Helping entrepreneurs understand these reports, can help them make better financial decisions in their business and become even more successful.
The first thing entrepreneur should do when they receive their balance sheet and income statement from their Edmonton bookkeeping company, is to look at the balance sheet to minimize errors. Once they have done that, then they should look at the balance sheet and get an overall sense of the financial position of the business. The balance sheet is going to show entrepreneurs overall what the financial health of their business is. The report is going to contain a list of their assets, their liabilities as well as the equity in their business. Entrepreneurs should be specifically looking at the assets of their business and compare it to the liabilities. They are going to want to see is that the assets are larger than the liabilities and that it is on an upward trend that way. If entrepreneurs notice that it is not, they may want to increase their marketing efforts or engage in some revenue-generating activities.
If they notice when they look at their assets, that the cash is low as well as their Accounts Receivable, that could even indicate that an entrepreneur is facing a future cash flow problem. By being proactive immediately, and working on their marketing efforts and revenue-generating activities to help minimize that cash flow problem, or by seeking out alternative financing for being prepared to personally contribute finances to the business to minimize cash flow problem and help business owners be proactive in keeping their cash flow up in their business instead of being surprised by it and potentially forcing them out of business.
Their income statement is going to show entrepreneurs what the financial position of their business is in that given month. Their income statement will show the revenue, cost of goods sold and expenses. The Edmonton bookkeeping company will ensure that all of this information fits on a single page to make it easy to read and understand. The expenses will also be listed in numerically descending order so that the highest expenses will be at the top of the list so can help entrepreneurs if they want to minimize their expenses where they should spend their time minimizing costs. Rent and administrative salaries are just some of the examples of the highest expenses of the business and by working to minimize the highest expenses first, entrepreneurs can have the greatest effect on their bottom line.