Many entrepreneurs face a steep learning curve when it comes to understanding their business finances says Edmonton bookkeeping. Intimate, who are the makers of the accounting software QuickBooks did a survey of small business owners, in order to determine their basic business financial literacy. They ask questions about what the role of the balance sheet is, water accruals and how they can increase their cash flow. Out of all of the respondents, 82% scored less than 70% on the test. This shows that many entrepreneurs lack understanding of their business finances, therefore helping them understand even on a general level can help them make better business decisions.
There are some very common questions that entrepreneurs have when they are learning how to read their income statements. Understanding the answer to these questions can help them learn not only the information on that report, but how to use it. One of the first questions that entrepreneurs ask is how many income accounts should a business has? The reason why entrepreneurs ask this says Edmonton bookkeeping, because even if they only have one main product or service they usually have up to three different income accounts. The reason for this is so that an entrepreneur can have different categories of the different revenue streams that they have. This can help them understand where the money in their business is coming from and the cost associated with generating that revenue. Even if an entrepreneur only has one product, chances are they can categorize it easily.
The second most commonly asked question that businesses have about their income statement is should a business have the cost of goods sold accounts? Almost all businesses will have this section on their income statement, however, there are some businesses that do not incur any costs to produce their product or service. Edmonton bookkeeping says that businesses like bookkeepers or lawyers will not have any additional costs associated with providing their services. Once their business is up and running, it just takes their time and brainpower.
The third most commonly asked question is how many costs of goods sold accounts should a business have? The cost of goods sold account should be related directly back to the number of income accounts that a business has. If they have three income accounts, they should have three costs of goods sold accounts. This way, not only can an entrepreneur understand all of the different revenue streams that their business has, but what the cost is with each one. This can help entrepreneurs understand several things including if they need to minimize expenses in a certain area or increase prices in another.
By gaining a deeper understanding of what is on their income statement and why it can help us owners make more informed financial decisions in their business says Edmonton bookkeeping. Especially when used in conjunction with their balance sheets, entrepreneurs can ensure that they are making the most informed financial decision for their business.
If entrepreneurs are reviewing their income statement without understanding all of the information on it, Edmonton bookkeeping says that they may not be using the report to the best of their ability. Best practices they entrepreneurs should review their balance sheet first, and then use the income statement alongside the balance sheet in order to make great financial decisions. However, if entrepreneurs are not sure of how to read their income statement, it will not help them make informed business decisions.
One of the most commonly asked questions that entrepreneurs have their learning how to read their income statements, is what is the difference in cost of goods sold and expenses? The cost of goods sold should correlate directly to the various income accounts of the business. If a business has three income accounts, it should have three costs of goods accounts. The cost of goods sold account is going to keep track of all of the materials that went into the products that a business owner sold. These should be considered the costs that directly touched the products or services that an entrepreneur sold. Whether it is a retail business that purchased products and resold them later, or if it is the food in a restaurant, the products that an entrepreneur purchased for their manufacturing facility to manufacture their products or even a trades business, would have a cost of goods associated with that trade.
Edmonton bookkeeping says the expenses in the business, on the other hand, are not related at all to the products that an entrepreneur has sold, and are going to exist in the business even if an entrepreneur sells nothing. These are not necessarily fixed costs but exist every month on average and typically stay the same. Examples of a fixed cost in the business would be utilities, rent, office supplies, and advertising. By understanding the difference in the cost of goods sold and expenses can help entrepreneurs categorize those purchases accordingly in their income statement.
The next most commonly asked question about the income statement is what expenses should be included in the income statement? Edmonton bookkeeping says that the expenses should be included is anything that an entrepreneur spent in order to run their business. If it did not go towards the cost of goods sold, and they need to do it for their business, it should be included in the income statement. Examples of various expenses that entrepreneurs would have, are administrative staff, gasoline for their vehicle, phone bills, office supplies, and rent just to name a few. It is important that not only should entrepreneurs be putting all of the expenses that they have in their business and their income statement, but they should be categorizing them quickly as well as examples of different expense account in an income statement our meals and entertainment, payroll and professional fees.
In order to help entrepreneurs make in financial decisions in their business, they should learn the information on their income statement, and the significance of it. Doing this, business owners can not only avoid making poor decisions but for and how they can proactively grow their business and increase the profit that they have.