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However, many entrepreneurs don’t have a lot of Business Financial background. And have a difficult time understanding their financial statements in the business. If this is the case that says accounting Outsourcing. They recommend entrepreneurs understanding a few key terms. To make it a lot easier to understand what their financial statements are saying.
The first thing that entrepreneurs should understand our what gross revenue, gross margin and net income is. Because those will tell an entrepreneur a story about the money that they are bringing into their business, and their expenses as well.
The gross revenue is the first thing that an entrepreneur needs to learn says accounting Outsourcing. Which is all of the money that an entrepreneur has charged their customer for products or services. And that has come back into the business. One of the most important things that business owners should keep in mind about this figure. Is that no expenses have been deducted off of this amount yet. And so this is not all of the money that an entrepreneur gets to keep in their business.
the next terminology that an entrepreneur needs to know is the gross margin. This is all of the money that they have charged their customers, for the services and products that they’ve sold them. Except this one is minus the direct costs. Accounting Outsourcing says the direct costs can be remembered by thinking at Lisa the cost that have directly touched the products or services.
And the direct costs specifically related to the supplies and materials and entrepreneur purchased to make those products or Services. Plus the labor required to produce them. And that labor can be staff on a payroll that an entrepreneur pays. Or independent contractors that they hired just for that job.
The Third term that entrepreneurs should understand is net income. This is all of the money that the business has left once all of the expenses have been deducted from it. This is the direct cost as well as the overhead costs. And the overhead cost can be significantly more than an entrepreneur might think. They include rent, any administrative staff salary, all of their utility bills such as power, water, and gas. But also office supplies, phone and internet bills, and anything else they need to pay to run the business before they even sell a single product.
The most important thing that a business owner should understand these three terms. Is that their products and services need to be priced in such a way that it doesn’t just cover the direct costs of there products and services says accounting Outsourcing. But they also need to cover all of the overhead costs as well.
Learning how to understand the profits of the business is easy says accounting Outsourcing once an entrepreneur understands how to read their financial statements. Until then, it might be very overwhelming. And could lead to an entrepreneur not pricing their products to break even. Or not understanding how many customers they need to attract in order to pay their bills.
Accounting Outsourcing says it’s very important for an entrepreneur to understand that when they are pricing their products and services. He needs to price them so that not only can they cover their tracks cost. But they also need to pay for all of their overhead costs as well.
The overhead costs typically remain fairly static from month to month. Making it a lot easier to plan for says accounting Outsourcing. But an entrepreneur needs to understand what’s their monthly overhead costs are. So that they can divide that by the number of transactions they have, and then know that that amount needs to be made over and above the direct costs on every product and service that they sell. In order to pay for their overhead costs.
Therefore, a business owner might calculate that number at a hundred customers. But if they don’t have a hundred customers and their business in a month. They won’t cover their costs. So it doesn’t mean they need to raise their prices. They just need to attract more customers into their business.
And thinking of it in terms of a per-customer basis is a lot simpler than an entrepreneur trying to figure out how many of each individual product or service they need to sell in order to break even.
By taking an average of all of their different transaction types, they are going to be able to figure out how much money a customer brings them whenever one walks through the door of their business on average does accounting Outsourcing. So that they can figure out how many customers they need in their business.
When they are figuring out all of the different transaction types in their business. Accounting Outsourcing says they need to look at it in terms of the profitability of those transaction types. So for instance, a restaurant owner might have a hundred menu items. but they will all have the same profitability. Whether it is an alcoholic beverage, a lobster tail, or an order of french fries for example.
Since they will all have about the same percentage of profit, they can all fall into one transaction type. However, accounting Outsourcing says if that same restaurant owner has a catering business. All of the catering transactions that they do will have a different level of profit. Because it is a different cost to run a catering event. Then serving diners at a restaurant.
Once a business owner understands the average transaction size per customer. They’re going to be able to know how much money they make on a customer whenever they come into their business. So that will help them figure out how much money they can afford on marketing to attract that customer. And help them grow their business.
