The failure rate for entrepreneurs in Canada is extremely high says Edmonton bookkeeping, with half of all entrepreneurs failing in business within five years. When surveyed about the reasons why their business failed, 29% of those entrepreneurs said that the reason why they failed was that their business ran out of cash. One way that entrepreneurs can change that statistic, and succeed in business more often, is by understanding the interim financial statements, and how they can use those to make informed financial decisions in their business. The income statement of a business is one-half of the financial statements. When entrepreneurs can understand the information in their income statement, they will be able to use that in conjunction with their balance sheet to make informed financial decisions in their business, and increase the ability to succeed because they are not running out of business.
To completely understand their income statement, Edmonton bookkeeping says that entrepreneurs need to understand there is the revenue, cost of goods sold as well as expenses. The revenue will be indicated in their income statements as various income accounts. Edmonton bookkeeping says the word various is used because the different services and products that an entrepreneur offers in their business will have its account. However, many entrepreneurs typically only have one main product or service that they sell, but they can break it down into up to three categories for clarity of information. The reason why entrepreneurs should keep it to three categories is to keep it easy to organize and be consistent in without needing a lot of time to organize it.
After the income accounts, entrepreneurs should have the cost of goods sold an account. They should have a separate account for each of the income accounts on the income statement. The reason for this says Edmonton bookkeeping, is that entrepreneurs can understand what cost of goods is associated with each stream of income. An example of this would be a gas station that sells gas, lottery tickets, and food. The cost of goods associated with the gas, the lottery tickets, and the food are going to be very different and should be accounted for separately.
The next thing that entrepreneurs are going to have on their income statement are their expenses. Many entrepreneurs do not understand the difference between the cost of goods and expenses. Simply put, expenses are everything that an entrepreneur incurs in their business that will exist whether they sell products or not.
Helping entrepreneurs understand each of the sections of their income statement can help them categories the information, and then use that information to make informed financial decisions. Once they understand their income statement, they can use it together with their balance sheet, before they make any financial decisions in their business to ensure it is the most impactful decision they can make that does not put their business at risk.
The reason why it is so important for entrepreneurs to understand their income statement is so that they can use it to help make informed financial decisions and says Edmonton bookkeeping. Since they’re such a high failure rate of entrepreneurs in Canada, in such a high rate of entrepreneurs who do not understand business finances, be able to easily help entrepreneurs understand their income statement can go a long way to impacting the success of their business.
Once an entrepreneur understands the revenue and income accounts on their income statement, and how those cost of goods sold relating to those income accounts, entrepreneurs should keep in mind how the expenses need to be indicated in their income statement. While these are all of the costs that business owners incur by way of doing business but are not related to the manufacture or sale of their products or services, all of the expenses need to be categorized to help an entrepreneur understand if anything needs to be minimized, or where they are spending their money in their business.
One of the first categories of expenses that is most often misunderstood says Edmonton bookkeeping is the meals and entertainment. While this account should mostly be used for entertaining clients and potential clients, there can be some exceptions to this rule, but it is not an account for entrepreneurs to put receipts every time they eat a meal away from home. Some exceptions to this rule would be a traveling salesperson, who needs to eat in the restaurant because they are not able to go home to eat that meal. When an entrepreneur factors into the reason why they are claiming that meal in their expenses, that reason usually indicates if it should be in excess or not.
Payroll expenses are another section of their income statement that is important. Several different payroll expenses need to be organized, and especially since an entrepreneur is going to be sending these source deductions off to the Canada revenue agency, entrepreneurs must keep track of them separately as well. In addition to income tax, there is a high, and the employer contribution of CPP and the employee contribution to CPP. In addition to the payroll expenses that are taxes, if an entrepreneur has any health benefits that are being deducted directly from their employee’s checks, this one counts here as well.
The next expense category that business owners often have questions about says Edmonton bookkeeping is the professional fees. These fees are what an entrepreneur incurs if they have a professional designation, and to continue practicing in their field, they need to pay the professional fee. Examples of this are doctors, lawyers, accountants, and engineers.
When business owners can understand their income statements easily, it will help them use the information alongside the balance sheets to make informed financial decisions that can help them not only avoid financial difficulties but will help them proactively grow their business as well.