Learning how to read an income statement is not difficult says Edmonton bookkeeping, but it can make a huge and lasting impact on an entrepreneur and their business. The reason for this, is because an income statement is one-half of the interim financial statements of the business. Business owners should be reviewing these reports before making any financial decisions in their business to ensure their making the best possible decision that they can. This can help entrepreneurs not only avoid making poor decisions that would cost them money, but it can also help them be proactive in their business and help them continue to grow. Once an entrepreneur is able to read and understand their balance sheet, the next step is learning how to read and understand their income statement and how it relates to their balance sheet.
There are three main categories that entrepreneurs should understand on their income statement. Edmonton bookkeeping says that these three counts are the revenue of their business, which is all of the ways that an entrepreneur makes money. There is also the cost of goods sold, which is all of the expenses that an entrepreneur incurs to make all of those various streams of revenue, and all of the other expenses in the business that are not related to generating their product or service. Business owners need to ensure that they are keeping very good track of all of the different revenue streams in their business so that they can keep track of all of the expenses associated with generating that revenue. This is so that entrepreneurs can understand if they are making enough money from their products or services, and if they need to minimize expenses or increase their prices in order to increase revenue. By understanding this, entrepreneurs cannot only help their business stay priced competitively, but they can also ensure that they are making enough money off of their products and services to pay for the cost of goods sold and the overhead of their business.
The first thing that entrepreneurs need to understand the cost of goods sold account, is that they should have as many accounts for this as they have income accounts. Edmonton bookkeeping says that the reason for this is the entrepreneurs can completely understand all of the different ways their business makes money and the costs associated with each one. For example, a restaurant may have an income account for their dine-in revenue, they are catering revenue and their nightclub revenue. Each of these may have very different costs associated with them, so helping an entrepreneur understand how each of those revenue streams is doing, they need to keep the cost of goods sold separately as well.
By understanding why the cost of goods sold needs to be separated out on their income statement, and how they should be separated, can help entrepreneurs ensure that their understanding the different and separate costs of each of the ways they make money in their business. by understanding this, entrepreneurs can gain a great understanding of their business, and if certain revenue streams are less profitable, and where an entrepreneur should put their time and energy.
Edmonton Bookkeeping What Of The Cost Of Goods Sold On Income Statements
Many entrepreneurs do not have a thorough knowledge of their business finances says Edmonton bookkeeping. This causes them to make financial decisions in their business that puts their business at risk of running out of money or puts them into a financial strain. Entrepreneurs can learn how to read their interim financial statements which include the income statement of their business, they would be able to not only gain a clear overall picture of the financial health of their business, but the income statement specifically can help entrepreneurs understand if their business is profitable if they need to minimize expenses or increase their prices in order to grow their business.
One of the first things that entrepreneurs should understand when it comes to the cost of goods sold section of their income statement, is that they may not have this category. Edmonton bookkeeping says that depending on what type of business an entrepreneur owns, they may not have any costs associated with generating their product or service. Businesses like accountants or lawyers and bookkeepers often do not have any additional costs associated with providing their services. So entrepreneurs should not panic if they do not see the cost of goods sold account on their income statement.
For other businesses, they need to understand that the various cost of goods sold accounts that they have should correlate with their different revenue and income accounts. By helping an entrepreneur categorize all of their products or services can help an entrepreneur understand the costs associated with each one. It might be the case that an entrepreneur only has one product or service in their business. If this is the case, Edmonton bookkeeping says that business owners can figure out how this can be broken out into different categories so that they can gain a deeper understanding of their costs.
A great rule that entrepreneurs should adhere to is not having more than three income accounts on their income statement. The reason for this is so that entrepreneurs will not have to spend a lot of time organizing and categorizing their income statements. The more categories may be difficult for entrepreneurs to the consistent in keeping the income organized as well as the cost of goods sold. An example of the business that does one product or service but may have several different revenue streams are hairdressers. All they do is hair, but they might have different revenue streams for ladies, men, kids. Or they may split it up into cuts, updos, perms or colors. Whatever revenue categories make sense for an entrepreneur should help them keep their cost of goods sold organized as well.
By learning how to organize their income statement, entrepreneurs can start to understand how they earn the money in their business and all of the costs associated with earning that money.