Virtual CFO | Learning About Expenses And Profit In Business

If entrepreneurs are not comfortable understanding their business finances says virtual CFO, they can negatively impact their business. In fact, the makers of accounting software QuickBooks, Intuit did a survey of several small businesses in order to learn how well entrepreneurs understand basic business financial literacy. Respondents were asked a variety of financial questions such as what the role of the balance sheet is, what is an income statement, how can increase the cash flow in their business just to name a few. Out of all of the people who responded, 82% got less than 70% on the test. This is very eye-opening to show that entrepreneurs while being very good at the business that they are in, are not necessarily good at running that business. If entrepreneurs can learn some basic business financial literacy, they may be able to significantly and positively impact their business, not only avoiding failure but growing as well.

In order to understand their income statements, business owners should understand what is on those income statements. Learning how to count the revenue in their business can go a long way in helping them understand their business, and how to make themselves even more profitable. Virtual CFO says that the first thing that entrepreneurs should ensure that they do is to have no more than three revenue accounts. Many entrepreneurs believe that their business is so unique that they need to have more than three. Virtual CFO says even the most powerful and largest companies in the world have a one-page income statement, therefore no entrepreneur needs to have one that is longer. The reason why it is important to have three or less, is so that it can stay on one page. The power of the income statement is so that it can distill a large amount of complicated information so that it is very easy to read.

The reason why it is important that an income statement be easy to read says virtual CFO, is because an entrepreneur needs to be able to make important decisions quickly. Such as do they need to lay staff off, or do they need to change their pricing. These decisions need to be made very quickly, in order to avoid financial disaster. By having the simplest document possible to help guide that decision is very important. In fact, an entrepreneur will be reading this financial statement any time they are about to make a financial decision in their business. Such as if they can afford an asset purchase or if they need to come up with a plan on how to increase the revenue so they can buy that asset. So it needs to be very simple.

Another reason why it is important for an entrepreneur to have fewer than three classifications for their revenue is so that entrepreneurs can avoid classifying things incorrectly. Virtual CFO says that having many classifications make it difficult for an entrepreneur to be consistent, therefore makes it very difficult when doing a variable review, from one year to another.

Virtual CFO | Learning About Expenses And Profit In Business

When entrepreneurs struggled to understand the expenses of their business, the virtual CFO says they put their business at risk of running out of money. In fact, 50% of all entrepreneurs fail within five years, and 29% of the businesses that fail have gone on to say that the reason why a business was not successful was that they ran out of money. Helping entrepreneurs understand their cost of goods sold and overhead expenses can help them understand margins so that they can avoid running out of money.

Understanding costs is very important to says virtual CFO. Entrepreneurs need to understand general expenses and direct costs. Direct costs are what is involved in providing the product or service of the business. The overhead expenses, on the other hand, are all of the expenses that exist whether an entrepreneur is selling a product or not. Examples of overhead expense is rent, utility bills, phone and Internet, administrative staff. These are the costs that are going to exist in the business no matter what and generally will not change very much from month-to-month.

The direct costs of the business will fluctuate, and fluctuate quite rapidly, depending on the sales of the business. If the sales go up 20%, the direct costs should go up 20% as well. It is important that the entrepreneur ensures that the direct costs go up or down the same amount that the sales go up or down so that they can verify that costs are controlled. If the direct costs start to increase more than the percentage of sales, an entrepreneur will have to look at cost minimization or raising their price.

When calculating the expenses, entrepreneurs need to figure out where all of the different costs are coming from and split them up on it income statement. Virtual CFO says this is important so that an entrepreneur can understand where all of their costs are coming from so that they know what to do when it comes to cost minimization. It is very important that an entrepreneur learns how to price their products so that they can cover all of their direct costs plus extra. The plus extra is so that the entrepreneur can also pay the overhead expenses. When they have figured out how much they need to price their products at, they need to figure out how many products they need to sell every single month in order to cover their overhead expenses and that will be there breakeven. Understanding the breakeven is extremely important says virtual CFO, because that can give the entrepreneur a target to hit every month. If they reach that target, they know that they have made enough money to cover all of their expenses. Fall short, and the entrepreneur is at risk of running out of money.

By understanding their expenses, entrepreneurs can ensure that they are meeting their targets so that they can pay for all of their expenses consistently.