It is extremely important for entrepreneurs to be able to completely understand their income statements says Edmonton bookkeeping. The reason for this is because the income statement is one half of an interim financial statement that entrepreneurs need to be able to understand to make important financial decisions. The balance sheet is the first half of their financial statements that they should understand, and once they learn that they can turn to their income statement and use both together to gain a complete understanding of the financial position of their business. Since half of all Canadian entrepreneurs fail within the first five years, and 29% of those failed entrepreneurs say that the reason why their business was not successful, was because they ran out of money. Helping entrepreneurs make better financial decisions by understanding their interim financial statements can vastly improve their chances of succeeding in business.
One of the most important ways that entrepreneurs can do that, is by understanding all of the various parts of their income statements. The three main sections of their income statement are the revenue, the cost of goods sold, and the expenses. Edmonton bookkeeping says that understanding each of those parts can help those entrepreneurs gain a deeper level of understanding of their income statement. When it comes to understanding their revenue, entrepreneurs should take into consideration how many products or services they sell. Typically, an entrepreneur will only have one main product or service that they sell, but it can be broken down into categories. The standard guideline for entrepreneurs to follow is to figure out what the main three categories of their product or service are, and that is going to be each of the income accounts that they use. An example of this would be a bakery. They might sell wedding cakes, fried goods, and baked goods. The reason why an entrepreneur should only have around three or less is because trying to have more might be confusing as well as difficult to be consistent in. Three is usable, without creating a lot of time in trying to organize it Says Edmonton bookkeeping.
When entrepreneurs looking at the cost of goods sold account on their income statement, they should ensure that they have as many costs of goods sold accounts as income accounts. Edmonton bookkeeping says the reason is so that entrepreneurs can keep track of what costs are associated with each stream of income. This can help them stay organized when trying to minimize the expenses that they incur. By being organized this way, entrepreneurs can understand how profitable each section of their business is.
Edmonton bookkeeping says entrepreneurs will be better prepared to understand the information on their income statement. Using their income statement in conjunction with their balance sheet can help entrepreneurs understand their business finances so that they can make better and more informed decisions in their business sit is so that they are better prepared to proactively grow their business.
There are several parts of an income statement and entrepreneurs need to be able to understand says Edmonton bookkeeping. The reason it so important to understand the income statement is because it makes up the interim financial statements that an entrepreneur needs to understand to make informed financial decisions in their business. The other half of this interim financial statement is the balance sheet, and while entrepreneurs need to read and understand their balance sheet first, they also need to use the income statement to complete the financial picture and make informed business decisions.
Business owners tend to misunderstand the difference between the cost of goods sold and what expenses of their business are. Cost of goods is the direct costs for producing their goods or services, while expenses are the bills that the entrepreneur generates whether they sell products or not. Examples of expenses in the business include rent and utilities By understanding the differences between income and cost of goods and cost of goods and expenses.
Edmonton bookkeeping says that when it comes to the expenses of the business, they are going to have several different expense categories at the bottom of their report. By breaking down all of the different expenses into different categories can help entrepreneurs stay organized, and be able to easily minimize expenses by seeing what expenses are used where.
One of the most misunderstood categories of expenses is the meals and entertainment says Edmonton bookkeeping. Entrepreneurs tend to believe that they can eat out every day and account for all of the meals as business expenses. However, this is accurate. Business owners need to consider the reason why they need to eat those meals. Are they entertaining a client or a future client? Are they a traveling salesman and have no option to go home and eat which is why they are eating in a restaurant? So entrepreneurs cannot just count all of the meals of the in the restaurant as a business expense. Unless they are working extremely late and counted as an overtime.
There is also a section for other expenses. And this is the section that entrepreneurs should use to put expenses that do not fit into any other category. Quite often, Edmonton bookkeeping says that entrepreneurs put their salary in this expense account and call it management fees. The reason they have this under a different category is that it is important to keep it separate from the employee’s salaries because owners are not employees. And their expenses that may be put into this section would be the rental income that an owner gets from rental properties. This is important to keep separate from their traditional business expenses because it is different.
When entrepreneurs can organize information in their income statements effectively, they are better prepared to understand their income statement which can help them significantly understand it and use it to make better financial decisions in their business.