Understanding their business finances is extremely important says Edmonton bookkeeping, that when entrepreneurs can learn how to read to their balance sheet and their income statement, they can make more informed financial decisions that can help them not only be more profitable in their business, avoid making decisions that could negatively impact their business as well.
Learning how to read their income statement can help entrepreneurs understand where they are generating money in their business, and how much it is costing them to generate that income. It is not difficult to learn what is on they are income statements, and the impact it can have on their business is massive. There are three categories that entrepreneurs should understand to learn what is on their income statement. They have the revenue section, the cost of goods sold section and the expenses. The revenue shows entrepreneurs how they are earning money in their business, the cost of goods sold shows the cost associated with earning that money, and the expenses shown entrepreneur all of the additional expenses that they incur as a business owner, and the profit they make on the top half of their income statement needs to pay for the expenses on the bottom half.
When an entrepreneur is looking at the income accounts of their business, they should see that they have several accounts based on how many products or services they sell. Edmonton bookkeeping recommends that entrepreneurs keep this to about three so that it is not difficult to manage or maintain. Entrepreneurs sometimes only have one main product or service, and if it is possible, they should categorize these expenses so that they can gain an understanding of the different ways that they generate income in their business.
The second section is the cost of goods sold, and this directly relates to all of the different income accounts that a business has. If they have three income accounts, they should have three costs of goods sold accounts. The reason why they should be kept separate so that an entrepreneur can keep track of all of the various revenue streams in their business, and how much money it cost them to generate that revenue. Business owners should not be alarmed however if they see that they do not have any cost of goods sold account in their business. This is possible if an entrepreneur has a business that does not generate any additional cost of goods sold to provide their product or service. Businesses that might be affected are lawyers or accountants.
The third section is the expense account, and these are all of the expenses that are not related to generating revenue. Whether or not an entrepreneur sells anything in their business they will have these costs. Ten bookkeeping says examples of expenses are office supplies, rent, and utilities.
By understanding the different sections in their income statement, can help business owners learn what sections mean what and how to analyze the information in each one.
Learning how to organize an income statement can help entrepreneurs use that information to make great business decisions says Edmonton bookkeeping. For example, if entrepreneurs understand where their revenue is coming from and how much it costs to generate that revenue, they can minimize the cost necessary to create those products or services, understand they need to raise their prices to increase their revenue, and if they need to minimize the expenses in their business to increase the revenue as well. This is very important and can help entrepreneurs be proactive in becoming successful in their business.
Many entrepreneurs have the most questions about the expenses in their business. Business owners should consider anything that they pay in their business that is not directly related to generating income. These are the costs they would incur regardless of their sales. Examples of expenses in business are rent, administrative staff, utilities, office supplies, and advertising.
Edmonton bookkeeping says that entrepreneurs should keep track of each of these expenses in various expense accounts in their income statement. This can help them understand exactly where they are spending money so that they can keep track of its, and demise it if necessary. There is a payroll expense of the section, and while this is not used to help entrepreneurs minimize those expenses, because the expenses are set by Canada revenue agency, this can help an entrepreneur stay organized and understand how much tax they have taken off of their employee’s paychecks. This way, an entrepreneur can review their income statement, verify that they have taken off enough, and remind themselves how much they need to send off to the government. If entrepreneurs do not send the right amount of taxes to the Canada revenue agency, they may be hit with interest charges and penalties. Examples of what expenses are going to go into this category are all of the various payroll taxes including EI, income tax as well as the employer and employee contribution for CPP. A business owners will also be able to keep track of the amount that they have deducted off of their employee’s checks if they pay for health benefits.
They also have meals and entertainment sections, and Edmonton bookkeeping says that this is an often misused expense category. Entrepreneurs often believe that they can post any meal that they had in a restaurant to this account, but they should think of it more like an account for advertising purposes and they should be considering the reason why they are having a meal or are going out. This account is designed to help entrepreneurs keep track of entertaining existing or prospective clients, and whether they have taken them out for a meal, or taken them to a function or a sporting event, these are what should be put into the expense account. If an entrepreneur has worked overtime, or is traveling for work, they may be able to put those meals in this account, but entrepreneurs should consider what the purposes for eating that meal, and if it is for advertising, and it fits in this category.