When entrepreneurs hire an Edmonton bookkeeping company to look after their interim financial statements and the most important things that a business owner can do is learn how to read the balance sheet and income statement in order to help them make more informed financial decisions in their business. Industry Canada says that 50% of all entrepreneurs fail in business within the first five years, and those entrepreneurs were asked what reason their business failed was. 29% of them said that the reason why their business failed was that they ran out of money in their business. Business owners can not only improve their financial decisions, but actually, be proactive and how they operate their business in order to avoid running out of money and increasing the profits in their business.
The first thing that entrepreneurs need to understand, is that when their Edmonton bookkeeping company sends them the interim financial statements, they will be receiving a balance sheet and income statement. It is most important for an entrepreneur to review the balance sheet first. It is not because it is the more important document, but because it can help entrepreneurs gain an overview of the overall financial health of their business. Also, when reviewed in a six-month comparative statement, it will allow entrepreneurs to more easily see any inconsistencies or anomalies that happen in one month over another. If entrepreneurs are not able to explain the inconsistencies, then they should look for the error. If they discover it is an error, they should also review the income statement to ensure that the error has not been carried over. Examples of some inconsistencies that might show up in a six-month comparative statement are if the business owner made a large asset purchase, or if they had a large payroll in a certain month due to the seasonality of their business.
Another way that looking at the balance sheet first can help entrepreneurs is because the balance sheet will help an entrepreneur see if they are about to have a cash flow problem. By using this tool sent to them by their Edmonton bookkeeping company, entrepreneurs can be proactive in their business instead of discovering too late that they do not have enough money to pay their staff or their vendors. How they would do this, is by looking at their balance sheet and seeing that the cash in their Accounts Receivable is both low. That usually indicates that a business owner is going to have a cash flow problem. Since they will not have a lot of money being paid to them in the future because Accounts Receivable being low, the business owner needs to be proactive to avoid running out of money. This means that an entrepreneur can engage in some of revenue-generating activities, they may seek out financing from a financial institution, or they may decide to contribute personal finances to the business to avoid this issue.
By learning how to read the interim financial statements and first the balance sheet, can help entrepreneurs gain insights as to the financial health of their business, and help them make proactive decisions that can help them grow their business as well as avoid problems.
Entrepreneurs should learn how to read and understand the financial statements sent to them by their Edmonton bookkeeping company. They will be receiving a balance sheet and income statement at least every month that can help them make financial decisions in their business, but only if they learn how to read them. Entrepreneurs should get into the habit of reviewing their balance sheet first, but they should also understand what their income statement is so that they can use that information positively in their business.
When an entrepreneur looks at their income statement, they should understand that there is going to be revenue, cost of goods sold, and the expenses in their business. There Edmonton bookkeeping company will have organized this report to fit on one page so that it can be easily read and easily understood. If for some reason an entrepreneur refines that this report does not fit on one page it may be due to the expenses being split into two many subcategories. Although entrepreneurs often try to be extremely detailed in what expenses they have, this is one report that entrepreneurs should be more general to understand the expenses more easily.
After an entrepreneur has verified that all of the expenses fit on one page, the next thing that they should notice is that there Edmonton bookkeeping company will have organized the expenses in numerically dissenting order. The most expensive items will be at the top of the list. The reason for this is so that entrepreneurs can easily tell at a glance what the highest expenses are in the business. By reviewing this information, entrepreneurs can gain insight as to what items they would need to minimize to have the greatest effect on their business’s bottom line. The items that they will most commonly see at the top of this list include the rent of their office space and administrative staff. Items that will be at the bottom of the list include bank fees and phone bills. Many entrepreneurs are very tempted to try and minimize expenses by looking at their bank fees and phone bills first because it is the easiest to try to minimize expenses in. However, even if a business owner can get their bank fees down to zero, it is not going to impact their bottom line in a very significant way.
When entrepreneurs learn how to review their interim financial statements and understand them in a meaningful way, they will be able to use that information to help them make financial decisions in their business that can help them not only avoid financial problems in their business but even engage in activities that can increase their profits and grow their business as well.