Accounting Outsourcing | Put the Gross Margin Analysis in the Executive Summary
Even though a business owner might have the best business plan ever says accounting Outsourcing. If they don’t know how to read their financial statements or understand their profitability. They may not be able to help their business grow.
And while it’s extremely important for entrepreneurs to understand this. Many business owners are opening the doors to their business without truly understanding what they need to know. And that’s impacting their ability to generate enough Revenue.
In fact, 15% of all entrepreneurs fail within the first year of business ownership in Canada. And within five years, only half the business owners that have started their business are still around. there are many factors as to why entrepreneurs are failing. But looking at what’s these failed entrepreneurs attribute their downfall to can be prevented.
23% of all failed entrepreneurs say the reason why their business failed was that they couldn’t find employees to work in their business. 29% of entrepreneurs said their business failed because they ran out of money. And 42% of all failed entrepreneurs in Canada said that not having enough customers was the reason they were not successful.
This means that following a business plan can help an entrepreneur avoid all of these obstacles says accounting Outsourcing. However, if an entrepreneur does not understand their financial statements. Not only can they not understand their profitability. But it impacts their ability to avoid running out of money. And it impacts their ability to know how many customers they need to stay viable. Which might account for the lack of customers attributing to their failure.
There are three things that an entrepreneur should learn about right away. So that their financial statements such as their income statement and balance sheet will make more sense to them. Accounting Outsourcing says they are gross revenue, gross margin, and net income.
Gross revenue refers to all of the money that an entrepreneur bills their clients and receives for services and products rendered. Its importance to notes that an entrepreneur should not use this money because all of their expenses of the business still need to come out of that sum.
Gross margin is the next term that they should understand which is all of the revenue that they have generated by selling products and services to their customers. However, this is – that direct costs of producing their products and services. Business owners should keep in mind that if they don’t have sales, they won’t have direct costs. Because they are the costs associated with producing their products and services.
Finally, an entrepreneur should understand what net income refers to. And this is the amount of money that an entrepreneur is left with once they’ve paid their overhead expense and their direct costs say accounting Outsourcing. This is the money that an entrepreneur can use to grow their business, by putting it back into their business for marketing, or purchasing assets that will help them get to their next level.
Put The Accounting Outsourcing Where It Should Be
There are many things that can help an entrepreneur calculate the profitability of their business says accounting Outsourcing. And it’s very important that they learn how to do this right away as a new entrepreneur. Because if they don’t know how to calculate their profitability. They won’t know how many transactions and how many customers they need to cover their expenses. And they won’t know what their pricing structure should be in order to cover not just their direct costs. But their overhead expenses as well.
The first thing that an entrepreneur should do is understand what a gross margin analysis is says accounting Outsourcing. And how to calculate it. The first thing that a business owner can do is classify all of their different transaction types into categories.
The recommendation is for entrepreneurs to not have more categories then 3. Because otherwise, it becomes very cumbersome to try to figure out what’s transaction types belong in what categories. Accounting Outsourcing says that a business owner should ultimately classify their transactions based on the profitability of each one.
A great example of this is a contractor that does brand new projects, as well as maintenance. While the brand new projects are going to take far more time and material. They will have a certain amount of profitability. And the maintenance projects while not taking nearly as much time or any materials. Will have completely different profitability.
A contractor might only have two types of transaction types for their gross margin analysis. And that’s okay. Just because they shouldn’t exceed three doesn’t mean they need to ensure that they do have three in their business.
Another example would be a restaurant owner. And they might assume that because Seafood has completely different profitability than appetizers for example. That those two things should be within different categories and this is not true. Accounting Outsourcing says all of the food and drink within the restaurant might fit into one transaction type. Because they all can be averaged out into the same type of profitability.
However, if the restaurant owner has a food truck, as well as a catering business. The profits associated with the food truck and the catering business might be exceptionally different than the restaurant itself. And then they deserve their own transaction categories.
It’s far more effective for an entrepreneur to classify action types into categories and then take an average says accounting Outsourcing. Because if an entrepreneur tries to figure out the profitability of each individual product and service, not only can that take a significant amount of time. It’s not going to end up with an entrepreneur being able to understand what they need to do to grow their business.
While when working in averages. A business owner will be able to easily see how many customers they need to cover their expenses in a month. And what they can do to attract more customers to increase their profits.