It is extremely important that entrepreneurs become very well acquainted with how to read and understand their income statement says Edmonton bookkeeping. The reason for that is because the income statement is one-half of the interim financial statements that entrepreneurs need to be reviewing for any time they make a financial decision in their business. Decisions such as can they afford to run payroll, and if not what are they have to do to generate more honey in their business to afford payroll? Do they have money in their business to purchase and assets? If they do not, they can come up with a plan on how to save the money in their business to make that asset purchase. If entrepreneurs are not reviewing their interim financial statements to make those financial decisions, they could end up making a decision that could negatively impact their business, or potentially cause their business to run out of money. For example, if they think they have enough money to buy an asset, and then they do not have money to pay staff or rent. 50% of all entrepreneurs fail in business within five years, and 29% of those failed entrepreneurs say that the reason why their business failed was that they ran out of cash in their business. Because this is a significant problem for so many entrepreneurs, business owners should do everything in their power to avoid making that error.
When entrepreneurs are learning how to read their income statement, they should first understand all of the various parts and why they exist on that report. Edmonton bookkeeping says that entrepreneurs should understand that there is a revenue section which is indicated in the income statement as various income accounts. Entrepreneurs often wonder how many income accounts they should have on their income statement, and while there is no correct answer, bookkeepers tend to recommend that entrepreneurs have no more than three. Even if an entrepreneur only has one product or service, they can breakdown that product into a couple of or a few different categories to increase the ability to understand how they earn their money in their business.
The next section that a business owner should know about in their income statement is the cost of Edmonton Bookkeeping and goods sold the account. They should have an account for the cost of goods for each of the end income accounts that a business will have on their income statement. Entrepreneurs should also understand that not every business is going to have a cost of goods sold, because not every business generates expenses in creating that product or service. Examples of businesses that do not typically generate expenses while reducing their product or service are lawyers, bookkeepers, and accountants. That is knowledge and service-based, and once they have their business set up, it does not cost them anything extra to deliver their product or service.
It is very important that entrepreneurs learn how to read and understand the income statements of their business says Edmonton bookkeeping. Small business owners can use this information to make informed financial decisions in their business. A problem that many small business owners have is not having basic business financial literacy, which can cause them to make poor financial decisions in their business. By understanding their income statement, and how they can use that together with their balance sheet, entrepreneurs can end up making better financial decisions for their business.
The three different areas on their income statements that business owners need to be aware of are the revenue sections, the cost of goods sold sections and the expenses of the business. One of the biggest questions that entrepreneurs tend to have when they are getting familiar with their income statement, is learning what the difference is between the cost of goods sold and an expense. Edmonton bookkeeping says that business owners should keep in mind that the cost of goods sold is all of the expenses that are associated with creating the product or service that they sell. For retail businesses, this might be whatever product they sell whether it is clothing, food or gifts. Or if it is things like labor and materials used to create those products.
Something that entrepreneurs should keep in mind, is that all businesses do not necessarily have a cost of goods sold the account. Accountants, bookkeepers, and lawyers are examples of businesses that do not incur costs to create their product or service. Something else for entrepreneurs to keep in mind when it comes to the cost of goods sold is that each cost of good needs to correlate to the specific income account that was generated from that cost of goods. This can help entrepreneurs keep track of which materials went into what products that were sold, so entrepreneurs can make financial decisions based on minimizing expenses or increasing their profit margins.
Entrepreneurs are entering the expenses on their income statement, they should understand that the expenses are everything that they pay to run their business. Whether or not they sell products or services, business owners will incur these costs. Examples of expenses are rent, administrative staff salary, and utilities.
By categorizing all of the different expenses into various expense accounts, can help entrepreneurs understand where they are spending their money. Examples of various expense accounts include meals and entertainment, were entrepreneurs can include all the expenses that they incurred wining and dining their clients, potential clients. In addition to meals and entertainment, business owners can expect to see payroll expenses, professional fees as well as other expenses on their income statement. By categorizing all of the different expenses properly, entrepreneurs can ensure that they are going to be able to review this information and see if there are anyways that they need to minimize those Edmonton Bookkeeping expenses.