It is extremely important that entrepreneurs learn how to read their interim financial statements including their balance sheet and their income statements says Edmonton bookkeeping. By understanding these reports, entrepreneurs can make more informed financial decisions in their business, not only avoid making poor financial decisions but so they can use the information to proactively grow their business and become successful. The failure rate of entrepreneurs in Canada is high, 50% after five years, so the more an entrepreneur can avoid the reasons why entrepreneurs typically fail, they can increase their chances of succeeding in their business.
The first thing that an entrepreneur should understand is that when they read their income statements, it should be after they read the balance sheet. The income statement can provide a lot of great information for entrepreneurs, but entrepreneurs need Edmonton Bookkeeping to be able to understand the information on their balance sheet first. Not only can they catch mistakes that might exist on the income statement by reading the balance sheet first, but they will be able to gain an overview of the overall finances of the business. This is going to help them consider the information in their income statements and how they can impact their business losing both reports. Before entrepreneurs start looking at their income statements to make decisions in their business, they should have first read and understood their balance sheet.
After an entrepreneur has read their balance sheet, then it is time for them to understand what their income statement is telling them. They should see three distinct categories on their income statement, the first one being the revenue of their business and is shown in separate income accounts, the second category is the cost of goods sold, and is where an entrepreneur keeps track of all of the expenses they made to be able to sell the product or service. The final category is the general expenses of their business, all of the bills that an entrepreneur incurred in their business that were not related to generating their product or service. By understanding these three categories, entrepreneurs can start to understand what they mean.
The first category is the revenue category and is all of the money that an entrepreneur has made in their business. Edmonton bookkeeping says that this should be broken up into all of the different products or services that they offer. If an entrepreneur has one main product, they can split it into different categories if that makes sense. The typical rule is for entrepreneurs to have no more than three income accounts, because having more than that might be difficult to manage, and categorize. All of the different ways that an entrepreneur makes money should be listed here.
By understanding all of the different categories in their income statement, entrepreneurs can gain a deep understanding of how they make their money and how they spend their money in their business. This can help them make important financial decisions, especially when used alongside their balance sheets.
The reason why entrepreneurs should understand their income statement is because together with their balance sheet, those two reports are very important to entrepreneurs says Edmonton bookkeeping. Before a business owner makes any business decision concerning money, they should look at their balance sheet and income statement to make an informed decision. Not only should entrepreneurs learn how to read their balance sheet, but it is equally as important that entrepreneurs can read and understand the income statement so that they can use that interim financial statements well.
The second category on their income statement after the revenue accounts is the cost of goods sold the account. The first thing that entrepreneurs should take note of, is if they are in the service industry, they may not have any cost of goods. If they have already set their business up, and they’re incurring no expenses to generate their income, they may not have anything in this category. Types of businesses that are likely to not have an additional cost of goods sold are accountants, lawyers, and Edmonton Bookkeeping.
If an entrepreneur is not in an industry that does not generate any expenses to produce their product or service, then they likely will have the cost of goods sold. Businesses like retail stores or merchants will have the cost of goods be all of the items that they purchase to resell to their customers. Whether it is clothing, books, furniture, all of the cost of goods would be these products. If a business is a manufacturer, all of the raw materials that they buy to create their products would be included here. Edmonton bookkeeping says that trades are also a great example of businesses that will have a cost of goods sold. Even though they are doing a lot of the work themselves, the labor of their employees that are doing the work counts as a cost of goods sold, and all of the things that they need to purchase to service their clients. For example, if it is a construction company they would be purchasing lumber, nails and screws and paint. If it is an electrician, they would be purchasing wiring and electrical outlets for example.
Business owners must be not only keeping track of the cost of goods sold but keeping it separated into all of the different areas that an entrepreneur earns their money. For every different revenue stream, they will have a different cost of goods account. This is so that entrepreneurs can keep good track of all of the different costs related to each of the different types of income streams they have.
When entrepreneurs can understand their cost of goods, then they are going to be much more prepared to minimize those costs, look for different suppliers, or even if they need to raise their prices so that they can increase their profit margins. This is very important to help entrepreneurs stay competitive and profitable.