One thing that business owners can learn how to do early on their business that will have an impact says Edmonton bookkeeping, is learning how to read and understand their interim financial statements. Their bookkeeper should be giving them these reports at least once a month, and the sooner an entrepreneur can understand them, the sooner they are going to be able to make informed financial decisions in their business. Since 15% of all business owners fail in the first year, this can help many entrepreneurs beat those odds. The financial statements are made up of two different reports one is the balance sheet and the other is the income statement. While entrepreneurs should be reading their balance sheet first, they should also understand how to read and understand their income statements so that they can use both reports to make the most informed decisions possible.
Business owners should understand the three different sections of their income statement. They will have revenue which is represented by income accounts, Edmonton bookkeeping says there is a cost of goods sold section which should have a different cost of goods sold the account for each of their different income accounts. Also, business owners will have the expenses of their business at the bottom of the income statement.
Entrepreneurs may wonder why they have up to three income accounts when they only have one product or service. Edmonton bookkeeping says that the reason for this is the entrepreneurs can understand exactly where the most revenue in their business is being generated. For businesses that have multiple products or services, that is the breakout of the income accounts. However, for entrepreneurs that only have one main product or service, if there is a way to categorize them into different accounts can help them gain a deeper understanding of their business. A great example of this is a hairdresser. They may think that hair is the only service they provide, but they can actually break that down into haircuts, colors, and updos.
When entrepreneurs are looking at the cost of goods sold account, they should ensure that they have the same number of categories that they do income accounts. This can help entrepreneurs understand exactly what the costs of each of those revenue streams are. However, Edmonton bookkeeping says that some service businesses may not have any cost of goods sold. This happens when the business does not have any costs associated with generating their product or service. Accountants and lawyers are great examples of industries that typically will not incur costs associated with their service. However, if they have another professional working with them during the same service, they may have labor as a cost of goods sold.
When entrepreneurs can learn how to read their income statement, and use that information together with their balance sheet, they can make more informed financial decisions in their business that can help them not only avoid financial problems but be proactive in their business to grow their company.
While many entrepreneurs understand the importance of reviewing their interim financial statements, says Edmonton Bookkeeping they do not do that soon enough in their business or do not have a complete understanding of the information on their income statement. By understanding all of the component parts of their income statement and how to use the information can help entrepreneurs significantly make informed financial decisions in their business.
One of the biggest questions that entrepreneurs have when looking at their income statement is what is the difference between the cost of goods sold and expenses. Both happen to be billed in the business and are not sure what the difference is or why they are represented so differently. Edmonton bookkeeping says that the cost of goods sold should correlate directly to the income accounts on the top half of the income statement. The cost of goods sold should explain the income and are directly related to generating the product or service that the entrepreneur sells, the more products the entrepreneur sells, the more cost of goods sold will be. Examples of the cost of goods sold are labor and materials. Expenses, on the other hand, are all of the costs that a business will generate whether there selling products or not. Examples of these costs are rent, utilities, and advertising.
Edmonton bookkeeping says that these need to be tracked very differently, because an entrepreneur not only needs to know what the cost of creating their product or service ends, but they also should ensure that they are keeping track based on exactly what revenue stream it is going towards. On the other hand, the expenses need to be kept track of, by category, so that entrepreneurs can understand what they are spending money on in their business and how they are spending it.
They will have various expense categories such as meals and entertainment, payroll expenses, professional fees, and others. By keeping track of what expenses go where, entrepreneurs can gain a deeper understanding of what is being spent, and if they need to minimize expenses, what category the needs to minimize first.
Edmonton bookkeeping says that once an entrepreneur has learned all of the various aspects of the income statement, the next thing that they need to learn is how to use it alongside their balance sheets. The first thing that they should do, is to review their balance sheet first, to look for errors. It is more possible to find errors on the balance sheet than on the income statement. Ensuring business owners are using the most correct information possible to make those financial decisions is important. Once they have verified that the information is accurate, then an entrepreneur can review the balance sheet and understand the overall financial health of the business on a year-to-date position, before looking at their income statement to see what is currently financially going on in their business. By reviewing their interim financial statements this way, can help entrepreneurs understand the information and use it to make informed decisions.