There are two documents as a part of the interim financial statements that entrepreneurs should learn how to read as early on in their business as possible says Edmonton bookkeeping. These two reports are the balance sheet and income statement of an entrepreneurs business. They should be getting those reports every month, or if they have a great bookkeeping company like always bookkeeping, the get those reports every two weeks. By reviewing the statements regularly, and especially before they are about to make a financial decision, entrepreneurs can ensure that they will be making the right decisions for their business, that will not only avoid them making poor decisions that financially stressed their business, they can actually start making proactive decisions that can help them grow their business.
By looking at the expenses on their income statement, business owners can gain insight as to where the money in their business is being spent. Edmonton bookkeeping says that entrepreneurs often question the difference between expenses and the cost of goods sold. While the cost of goods is directly related to the products that an entrepreneur sells, expenses, on the other hand, have nothing to do with the products and will exist in the business whether or not an entrepreneur sells their products or not. Some examples of expenses in their business would be rent, utilities, and office supplies.
Other things that entrepreneurs should take into consideration when dealing with the expense accounts on their income statement, is what it should be posted into each account. While many business owners think the meals and entertainment account is okay to put all of the meals that they beat in a restaurant, they should actually take into consideration the reason for eating those meals. This account is actually intended for advertising purposes and meant for entertaining potential or existing clients. Restaurants, sporting events or parties are some of the ways that entrepreneurs can appropriately put expenses into this account. If an entrepreneur is traveling for business, they are also able to claim that expense here, because they do not have the option of eating at home. Also, if an entrepreneur ever works overtime, they will occasionally be allowed to claim some of those costs.
Payroll expenses are also going to be indicated on the income statement, and it is important for entrepreneurs to organize their expenses here. Health benefits, as well as source deductions, can be accounted for in this section, not so that entrepreneurs can minimize those costs because taxes cannot be minimized this way, but so that the entrepreneur can keep track of all of the different source deductions they withheld from their employees checks and check back to ensure that the amount that they have taken off is the amount that they have sent. There should be two different CPPs one for the employer and one for the employee, EI and income tax says Edmonton bookkeeping.
By keeping track of these expenses carefully, entrepreneurs can have a detailed account of everything that they are spending in their business, should they ever need to minimize those expenses.
It extremely beneficial for entrepreneurs to be able to review their interim financial statements before making any financial decisions in their business says Edmonton bookkeeping. Since 15% of all entrepreneurs fail in their first year of business, and 30% of all entrepreneurs fail within two years, helping entrepreneurs learn how to make informed financial decisions as soon as possible in their business not only is beneficial but can help increase those odds.
When entrepreneurs are looking at their income statement, they should understand there is the revenue section, where their income accounts are located, their cost of goods sold section which will have as many accounts as income accounts, and the expenses at the bottom. Edmonton bookkeeping says that of a general rule for entrepreneurs to follow when figuring out how many income accounts they need to have on their revenue section, is more than one but no more than three. The reason entrepreneurs should have different income accounts is so they understand where their money is coming from. Not only is that important, but the cost of goods sold account relates to those income accounts, so the also be able to tell what revenue has the highest cost associated with it. Having more than three different categories of services or products could get very difficult to manage, maintain and be consistent.
For the cost of goods sold, if entrepreneurs are in a service type of business, they may actually not have any cost associated with the products that they sell. Examples of businesses that would not, include accountants, bookkeepers, and lawyers. However, all other businesses will have the cost of goods sold, trades business, a retailer or manufacturer.
If an entrepreneur is unsure what the difference is between an expense and the cost of goods sold, then they should take into consideration what that expense was for. If it directly touches the product that an entrepreneur sells, then it is most likely a cost of goods sold. Examples would be paying for the labor of the employee who worked on that product or the raw materials that went into that product. Other examples of the cost of goods sold by purchasing the products that an entrepreneur resells to the end-user. Retailers such as food stores, clothing stores or bookstores by those products premade somewhere and sell them to the customers and purchasing those products would be considered their cost of goods sold.
When entrepreneurs learn how to review their income statements properly, the also be able to make financial decisions in their business based on the information in the income statement. Once an entrepreneur can read and use their balance sheet, using the balance sheet together with their income statement can be a powerful tool in understanding what is going on financially in their business says Edmonton bookkeeping, and not only how to avoid poor financial decisions, but actually how to be proactive in growing their business as well.