Helping entrepreneurs understand their business finances is important says Edmonton bookkeeping. Not only can this help entrepreneurs avoid making poor financial decisions in their business, but it can also help them understand what they can do proactively to help them increase their profits as well as grow their business. There are many challenges that entrepreneurs face in business, 15% of all Canadian entrepreneurs fail within the first year. In order for entrepreneurs to become more successful, anyhow to read their interim financial statements including balance sheets and income statements can help that.
Even though an entrepreneur should be reading their balance sheet first, understanding their income statement it and how to use that in conjunction with the balance sheet can help business owners significantly. In order to successfully read and understand their income statement, entrepreneurs need to know what information is on that income statement. Going from the top and moving down the page, business owners should see that there is the revenue section represented by different income accounts, the cost of goods sold section is next, with the expenses of the business at the bottom.
One of the most commonly asked questions says Edmonton bookkeeping is what is the difference between the cost of goods sold and expenses of the business. The cost of goods sold is the costs that entrepreneurs will have from producing the product or service that they sell. The more products or services that they sell, and the higher their cost of goods sold will be. This section should also explain the income in the business, and can help entrepreneurs keep track of all the various materials that went into the products that they sold. Examples of these types of costs are materials purchased to make those products and labor. Expenses, on the other hand, are all of the costs that a business owner generates in their business that are not related to their products and will exist matter how many products an entrepreneur sells or not. Examples of these expenses are rent, utilities, office supplies, and advertising.
Some businesses may find that they do not have any cost of goods sold account on their income statement. It is important that they note that this is not wrong says Edmonton bookkeeping. Depending on what the service they provide is, if they are not generating any costs associated with that product or service, then they will not have a cost of goods sold the account. Businesses that are likely not going to have a cost of goods sold account section on their income statement are accountants, lawyers, and bookkeepers.
When entrepreneurs are able to read and understand their income statement, they have a better chance of understanding their business finances which can help them make great informed financial decisions in their business to help them not only avoid problems but be successful in their business as well. When entrepreneurs do this, they will be able to beat the odds of many entrepreneurs before them who fail within the first year of their business.
The income statement that an entrepreneur receives from their Edmonton bookkeeping company once a month will be accompanied by the balance sheet. These two statements together make up the interim financial statements of the business, those business owners should be using before they make any financial decisions in their business. Learning how to read their income statements can help increase the likelihood of making a great business decision when looking at their balance sheet.
the first thing that an entrepreneur will see when looking at their income statement is that will have a revenue section at the top. We will have a few different income accounts based on how many products or services their business sells. Edmonton bookkeeping says that even entrepreneurs that only have one product or service may have multiple income accounts based on the different categories of that one product or service. It is important that entrepreneurs categorize their products, so they can keep track of the costs associated with each of those categories, and understand where the revenue in their business is coming from. A great rule of them businesses should keep in mind however is not to have more than about three income accounts. The reason for this, is so that entrepreneurs do not have to spend a lot of time managing all of those income accounts. It can also increase the accuracy of where they put information if there are only three.
When an entrepreneur is looking at the cost of goods sold, they should have a different cost of goods sold the account for each of their different income accounts. This way, an entrepreneur can keep track of all of the costs associated with each different revenue stream. This can help entrepreneurs not only understand where their revenue is coming from but how profitable each stream of revenue is in their business.
The next section is the expense section and many entrepreneurs are not certain of the difference between the cost of goods sold and expenses. Edmonton bookkeeping says that the cost of goods sold is related directly to a product or service where is the expenses are all the costs that a business owner incurs whether or not they sell a product. Examples of the cost of goods sold our labor and materials, or as examples of fixed costs are rent and utilities.
Helping entrepreneurs understand how to read their income statements can help ensure that they are accurately categorizing all of the various aspects of their business so that they can gain the most information from the statement as possible. That balance sheet says Edmonton bookkeeping will show an entrepreneur a financial overview of the business year to date, and the income statement conjoined the entrepreneur’s financial health of the business as it currently is. These two reports together can help entrepreneurs understand very clearly what is going on in their business so that they can use that information to make decisions. We hope to see you soon!