It is very important that entrepreneurs learn how to read their income statement says Edmonton bookkeeping. Not only is this important, but also reading their balance sheet is just as important. Together, these two reports make up the interim financial statements that an entrepreneur should be getting at least once a month. These reports can help an entrepreneur understand how to make informed financial decisions in their business that cannot only help them avoid financial problems but actually can help them be proactive in growing their business. Several questions that entrepreneurs have when they are learning how to read their income statement that can help them gain a deeper level of understanding.
The first question is, is it okay to review the income statement by itself? Entrepreneurs often make this error frequently in their business. Because income statements are more understood than balance sheets, so they look at the income statement first or only and expect to be able to make great decisions from that. Edmonton bookkeeping says that this is not what business owners should do. They should learn how to read their balance sheet, fix any errors and then use the balance sheet alongside the income statement to make business decisions.
Another question that entrepreneurs have about their income statement is about the expenses that are being kept track of. Business owners want to know what the professional fees are on the income statement. Edmonton bookkeeping says that this is specifically for professionals like doctors and lawyers and accountants. They have to pay a professional fees to maintain their professional designation so that they can continue to practice. This is a section where most business owners do not need to worry about putting anything. Often, entrepreneurs make mistakes and put things like chamber memberships here. This should only have one expense in it, and only if they are a certain types of business.
The third question that entrepreneurs often have when reading their income statements, is what are the other expenses? This is a place for entrepreneurs to keep track of anything that does not fit the other expense categories. One common use of this account is for entrepreneurs to put their salaries. Not only should it be kept separately from their employee’s salaries, but it is often kept here under the heading of the management fee. This way, an entrepreneur can pay their staff, and if there is any money left over than they can pay themselves. Other expenses that might fit into this category are if entrepreneurs incur any income from rental properties. This is not a part of their traditional business expenses, but it is income so it should be put somewhere.
By being able to understand all the various aspects of the income statement, Edmonton bookkeeping says that business owners can start to learn not only the information on their income statement but what the information means and how they can use it to make great financial decisions in their business.
One of the reasons why entrepreneurs need to learn how to understand their income statement says Edmonton bookkeeping, is so that they can understand the information to make important financial decisions. Half of all Canadian entrepreneurs will fail before their fifth year in business, and when asked, those entrepreneurs who fail will say that their business failed because they ran out of cash. Learning how to make more informed financial decisions can help entrepreneurs avoid this problem.
There are several questions that entrepreneurs often have when it comes to understanding their income statements. One of the most common questions is what is the difference between the cost of goods sold and expenses. The biggest difference between these two is that the cost of goods should correlate directly to generating their revenue in the business, and the expenses are what an entrepreneur pays whether or not they sell anything. For example the cost of goods sold would include things like labor and materials purchased to produce the products. A good way of remembering it is the cost of goods sold are the direct costs of doing business they come in direct contact with the product. The expenses are what an entrepreneur will pay no matter what products they sell that month. Examples are rent, utility bills, and advertising.
The next question that entrepreneurs often have is how many income accounts should a business have? Edmonton bookkeeping says this is one where some business owners are confused because even though they might have one product or service they might end up with up to three income accounts. The reason for this is so that entrepreneurs can keep track of all of the different categories in their business, so they know what is generating the most income, as well as keeping track of what of the various costs associated with those products. Sometimes a business will have several different products or services that they offer, and sometimes a business will just have one but that one can be broken down into a few different categories. This can help an entrepreneur gain a deeper understanding.
The third question that an entrepreneur often has about their income statement is what if they do not have a cost of goods sold account? This is very possible says Edmonton bookkeeping that not all businesses will end up having a cost of goods sold the account. The reason for that is because if a business does not incur any bills by way of creating their product or delivering their service, they will not have this expense account. Businesses like accounting firms, lawyers’ offices and bookkeepers might not have any additional costs to providing their service. If this is the case they simply will not have this section on their income statement.
By answering these questions, entrepreneurs can gain a great understanding of what is going on in their business financially, and if they need to increase prices, minimize expenses or cut costs.