For entrepreneurs to be armed with accurate financial information in their business to make informed financial decisions, Edmonton bookkeeping says that entrepreneurs need to understand not only what information is on their income statement, but how to categorize information on it, so they can understand the information and how to use it to make important financial decisions. 50% of all entrepreneurs fail in business within the first five years, and out of those failed entrepreneurs, 29% of them said the reason why they failed is that they ran out of cash.
To properly categorize information in their income statement, business owners should understand the information on it. The top will show the revenue of the business, the middle section will include the cost of goods sold, and the bottom section will include all of the expenses in the business. In addition to understanding the difference between the cost of goods and expenses, entrepreneurs should also understand that no matter how well they can understand this report, you need to be reviewing it alongside their balance sheet after they have first read and understood their balance sheet.
The difference between the cost of goods sold and the expenses of the business is that the cost of goods sold is the cost of selling their product or service. Edmonton bookkeeping says one of the most important things to understand is that not all businesses are going to have a cost of goods sold account on their income statement. Service-based businesses like lawyers or bookkeepers will not have a section here because they will not incur any costs to deliver their service. Examples of businesses that typically will have a cost of goods sold account are manufacturing businesses like factories or sign jobs, retail stores that sell products like clothing, food or gifts and also trades such as electricians, plumbers or contractors.
Another thing that entrepreneurs should keep in mind when keeping track of their cost of goods sold, is that it should relate to their various income accounts in their business. Edmonton bookkeeping says that this means for every type of product that an entrepreneur sells should have its own separate cost of goods account. This way an entrepreneur will be able to keep track of what materials went into which products that were sold. Since most businesses typically have one type of product that they sell, they may choose to break that down into separate categories. Those various categories will have their own cost of goods account.
My understanding of all of the various aspects of their income statement can help entrepreneurs ensure their entering the correct information into the right places. This also helps entrepreneurs be able to read this information and understand it so that they can use that information to make good and proactive business decisions. Doing this, entrepreneurs cannot only avoid making poor decisions, but they can proactively grow their business in a meaningful way.
entrepreneurs should be understanding what to enter into their income statement says Edmonton bookkeeping. The reason is that the income statement is one-half of extremely important interim financial statements that entrepreneurs should be reviewed before they make any financial decisions in their business. By understanding the information on it, how to enter it and how to read it can help an entrepreneur gain valuable insight into the document so that they can make the most informed financial decision possible.
Once an entrepreneur has understood the revenue and cost of goods sold section on their income statement, the next thing they should understand is the expenses. Many entrepreneurs do not understand the difference between expenses and cost of goods sold. While the cost of goods sold relates directly to the’s products or services that the business owner sells, the expenses, on the other hand, are all of the costs that a business owner incurs directly from operating their business. They should consider these expenses anything that they have incurred simply by being in business. If they have sold no products or services, these expenses would still exist. These can include anything like rent, administrative labor, utilities, advertising, and office supplies to name a few. Edmonton bookkeeping says that not only is it important to keep track of what the expenses are, but how to keep track of them and their income statement is important.
There will be various sections of expenses that need to be categorized. Entrepreneurs not only need to understand that they should keep their expenses separately but how to categorize those expenses. For example, Edmonton bookkeeping says that meals and entertainment is a particularly confusing category. Many entrepreneurs tend to believe that any time they eat a meal they can claim it as part of their meals and entertainment expenses. However, entrepreneurs need to be asking themselves why they eating that meal. If they are a traveling salesperson, and they are away from home to do their job, they are going to be able to claim every meal that they eat, because they do not have the option of eating at home. A business owner that goes home every night, however, will not be able to claim every single meal that they eat in a restaurant. That being said, an entrepreneur may be able to claim and overtime meal a couple of times a week. The biggest thing to remember for this expense category is that it is mainly for advertising purposes, and should be for wining and dining their existing clients and impressing prospective clients. It should be business and client-related and not just because of entrepreneurs hungry.
By understanding what the various expenses are, and how to categorize them can help entrepreneurs stay extremely organized when it comes to understanding their income statement. This is extremely important and can help entrepreneurs minimize the expenses in their business, as well as keep the costs of their materials down so that they can increase their profit margin. Understanding this can help entrepreneurs be proactive in running efficient and effective businesses.