When a business owner starts their business, there are some things that they should learn early on in order to help them make informed financial decisions in their business says Edmonton bookkeeping. Understanding how to read and understand their financial statements can help an entrepreneur make great financial decisions in their business. The two reports that makeup that financial statements are the balance sheets and the income statement. It is important that an entrepreneur learns how to read the balance sheet first, and next to the income statement.
When an entrepreneur is looking at their income statements, they should see three sections: revenue, cost of goods sold and expenses. The revenue section of the income statement should have a handful of income accounts for each of the types of services or products they sell. Edmonton bookkeeping recommends that entrepreneurs have around three because many more might be difficult for an entrepreneur to organize and manage. Business owners often wonder what they should do if they are business only has one main product or service. If they can break down that one product or service into smaller categories, that can help them see where they are generating most of their revenue, and the cost associated with generating that revenue.
The second section is the cost of goods sold account, and this is going to correlates directly to each of the income accounts that a business owner has. By keeping track specifically of the various costs associated with generating each type of product or service can help entrepreneurs not only stay organized, but see where there generating the revenue, and what the cost of generating that revenue is. Edmonton bookkeeping says that some businesses may not have any cost of goods sold at all, and those are likely to be businesses like accounting offices, bookkeepers and lawyers. They do not generally incur any additional expenses in order to provide their services.
The last section are the expenses categories of the business. A lot of times entrepreneurs are confused as to what the difference is between the cost of goods sold and the expenses of the business. An easy way to remember it is the cost of goods should correlate directly to the income accounts and other direct costs of generating that revenue. This is entrepreneurs can keep track of what materials went into what products were sold and the cost of goods should explain the entrepreneur’s income. Edmonton bookkeeping says that the expenses, on the other hand, are all of the various costs associated with running the business and whether or not an entrepreneur sells anything in their business this cost is going to exist.
Understanding the income statement can be significant for entrepreneurs in understanding where they are making their money, how much money it is costing them to generate that revenue, and all of the additional costs to running their business. Understanding this can help entrepreneurs ensure that they are making money in their business and staying profitable.
Edmonton Bookkeeping | The Value Of Understanding The Income Statement
When business owners do not understand how to read their income statements in their business, they can end up making poor financial decisions says Edmonton bookkeeping. The income statement is a very important report that entrepreneurs should be getting at least once a month from their bookkeeper. The reason why they should be getting this report, is to help them understand what is going on in their business, and how they can make more informed financial decisions in their business. Learning how to read the income statement can be simple, but very impactful in any business.
The three sections of an income statement are the revenue that a business owner generates, the costs associated with generating that revenue, and the additional expenses in the business that an entrepreneur has whether they sell products or not. Edmonton bookkeeping says that many entrepreneurs should be extremely aware of all of the expenses in their business, and minimize those expenses whenever they can to avoid cutting into the profits of their business.
Business owners can keep track of all of the various expenses that they have in their business through various expense accounts on their income statements. By understanding what each of those expense categories are, can help entrepreneurs keep track of where they have spent the money in their business. For example, says Edmonton bookkeeping, many entrepreneurs are not sure what should be posted in the professional fees account. They think this is where they can put expenses related to joining the chamber, or networking groups, or networking meetings. However, business owners should only be using this if they are a professional that needs to have a professional designation in order to do their job. Accountants need to pay their professional fee to maintain their CPA designation, engineers need to pay to keep therapy end, doctors, dentists, and lawyers are other examples of professions that need to put the professional fees here. For the most part, this category should stay empty for most small businesses.
Another section that entrepreneurs get confused about are the other expenses. Business owners can put expenses that do not fit anywhere else into this category and the most commonly used expense that is but here is the owner’s salary. Often called the management fee, business owners should be keeping their pay separately from their staff partly because they are not staff, but so that entrepreneurs can pay their staff and then see what is left over to see if they can pay themselves. Of their amounts that might be put into this category would be the rental income that an entrepreneur generates. It does not actually fit anywhere else because it is not a part of their traditional business, but it is income that they are generating so it should fit somewhere.
By understanding all of the various categories on their income statement, business owners can keep track of all of their expenses, their revenue and that can help them be profitable in their business says Edmonton bookkeeping.