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In fact, when a big mistake that entrepreneurs often make is in pricing their products. If they are only ensuring that the pricing is enough to cover their direct costs. They might not be able to cover their overhead expenses says accounting Outsourcing.
The results are that no matter how much a business owner sells, they may never be able to pay for their overhead expenses. Resulting in running out of money. Or thinking that they simply don’t have enough customers to cover their expenses.
Interesting Lee and Ness, accounting Outsourcing says those are the two largest problems that failed entrepreneurs say is the reason why they were not successful. Industry Canada did a survey to find out why half all entrepreneurs ended up failing in Canada. And discovered that 29% of failed entrepreneurs say they ran out of money. And 42% of all failed entrepreneurs said they couldn’t bring in enough customers to cover their expenses.
Perhaps, if entrepreneurs could read their financial reports better. And had a better understanding of their pricing. And how to ensure that their overhead expenses factored into their prices. Maybe fewer businesses would fail for these two obstacles.
In order for a business owner to calculate how much markup they should have on their prices to account for overhead expenses. A business owner needs to figure out the average number of transactions per month. How they can do that, is add up all of the months that they’ve been open. And if they’ve been open for a year, do it for the past year.
Once they’ve added up all of the transactions over the last year or several months. They should divide that by the number of months that they added up. This will result in Knowing the average number of transactions per month.
The next thing for an entrepreneur to do is to add up all of their overhead expenses. Including their rent or mortgage, administrative employee salary, all of their utility bills. As well as phone bills, and turn it bills, and office supply costs. Once they have this total, they should divide it by the number of average monthly transactions. To end up with a final amount that they need to make on each transaction in order to pay for their overhead expenses.
The great thing about this calculation. Is that it also gives entrepreneurs an idea of how many transactions they need in their business in order to break even. That can significantly help them with their planning as well as marketing. So that they can use that information to meet their revenue goals and exceed them.
Understanding and entrepreneurs profitability says accounting Outsourcing is a little bit more complex than simply pricing their products over and above the direct cost it takes to produce them. In fact, this is a much more complicated calculation. What if business owners don’t know how to do. Can impact their ability to actually make a profit in their business.
Therefore, accounting Outsourcing says that if entrepreneurs learn some basic business financial literacy. They’re going to be able to be much more knowledgeable about not only their product prices. But how they can grow their revenue. Reach targets, and how many customers they need in their business to break even or grow.
One of the first reports that an entrepreneur needs to learn how to read is called the gross margin analysis. This is an indicator of the business owners companies Financial Health. It tells the business owner how much gross profit every dollar of Revenue a business is earning.
This is extremely important to know. Because if it is showing a large gross profit. Then and entrepreneurs business is doing well. And if it’s showing a small gross profit, they should look at if they need to change pricing, minimize expenses, or attract more customers.
This report is so important. That’s accounting Outsourcing recommends that entrepreneurs put it into the executive summary of their business plan. This way, if they apply for financing. The financial institution will be able to see how well off the business is doing financially. And be more likely to loan them money so that they can use that to grow their business.
Other terms that entrepreneurs need to know is gross revenue, which refers to all of the money that an entrepreneur has brought into their business by selling their products and services. The most important thing to keep in mind about this number. Is that no expenses have been deducted from it yet.
Next is the gross margin. Which is all of the revenue that an entrepreneur has brought into the business. However, all of the direct expenses have been removed. This way, if an entrepreneur takes the gross revenue and subtracts the gross margin. They will get all of the direct costs for all products sold that month.
An easy way for an entrepreneur to remember what direct costs are. Is that they came in direct contact with the product or service in order to produce it. These things are likely to be supplies and materials. And the labor required to manufacture them. Regardless of how that labor was procured. It could be an employee salary. And it could be hired, independent contractors.
By understanding these things. Can help an entrepreneur gain insight into their business finances. So that they can make more informed decisions. That will allow them to ensure that they are making enough money to stay in business. So that they don’t end up like 50% of entrepreneurs in Canada that are unable to overcome their financial challenges to succeed.
