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E-Myth – “Why most small businesses don’t work & what to do about it”

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Accounting Outsourcing | Understanding Your Profitability

No matter how good a business plan is says accounting Outsourcing. If an entrepreneur can’t understand how to read their financial statements. Or are confused about what some terminology means. They will be at a disadvantage for understanding their business finances. And in turn, their profitability.

However, it can be very easy to teach an entrepreneur what they need to know. So that they can review not just their financial plan, or their cash flow projections. But that they can read the interim financial statements given to them by their accounting Outsourcing company. And understand their businesses’ financial position.

This is incredibly important, given the fact that entrepreneurs set their own pricing. And if they don’t set the pricing high enough, they may not be covering all of their expenses. When an extremely common mistake that a lot of business owners make. Is that they ensure that they are covering their direct costs but their pricing. But they don’t raise the prices enough to cover all of their overhead expenses.

An entrepreneur needs to be able to figure out how much additional money or percentage they need to add to their pricing structure. In order to ensure that they are covering the cost of their overhead. But they also need to ensure that they know how many customers they need to bring into their business that month. To also cover their overhead.

One of the first things that accounting Outsourcing recommends is that an entrepreneur understands what their gross margin analysis is. This is actually extremely important because it is an indicator of how healthy, financially the business is doing. This is so important, that often financial institutions look at it in order to make their decisions on whether to loan entrepreneur money or not.

Because of how important it is, business owners should ensure that their executive summary in the business plan has their gross margin analysis. And that an entrepreneur understands how to read it. So they also know the profitability of their business. So that they can help increase that profitability, or just ensure that they are being profitable.

Other things that are accounting Outsourcing says entrepreneurs should know are the differences between gross revenue, gross margin and net income. So that when they do read their interim financial statements. They will know a little bit more about what information they are communicating.

The gross revenue is all of the money that an entrepreneur has brought into their business through sales of their products or services. The important thing to note is that this number has no expenses removed from it yet. The gross margin on the other hand is the revenue that an entrepreneur has brought into their business. But has had the direct costs subtracted from it.

A business owner can remember the direct costs of a business are the ones that are directly related to the products and services. Such as the materials and the labor needed to produce it. and finally, an entrepreneur needs to understand net income. Which is all of the money that an entrepreneur has brought into the business, all expenses both direct and overhead taken from it.

Understanding How Profitable We Can Be With Accounting Outsourcing?

It’s important for business owners to understand how profitable their business is says accounting Outsourcing. But also what they need to do in order to grow their business. Many entrepreneurs think that they need to calculate the profitability of each product or service that they sell. And then try to figure out how to sell more products or services. But this is actually an inefficient way of looking at it.

A much more time-effective way to calculate misinformation is to consider how many customers have come into their business. And figure out how much money the customers On average generate for the business every time they come into the business.

This Way and entrepreneur can focus on increasing the customers into their business. Instead of trying to figure out arbitrarily how to sell more individual products. However, accounting Outsourcing says in order to come up with this average, the business owner needs to sort out their transactions into three different categories.

The reason why there should be three categories says accounting Outsourcing is it that they can aggregate similar items together to get an average. This way, an entrepreneur should figure out the profitability of a variety of products and services. And the ones with similar profitability be categorized together.

Accounting Outsourcing says the reason why there shouldn’t be any more than three transaction types. Is because it becomes logistically difficult to calculate the profitability of each transaction type. Which the purpose of this exercise is to make it easier for an entrepreneur to figure out the profitability of their business, not harder.

And while many business owners might think that so many of their products should fit into different transaction types. It’s going to be a lot easier than they think. A great example of this would be a restaurant. While they might think that drinks, side dishes, and main courses would fit under different transaction types. Accounting Outsourcing would argue to say that those are all similar in profitability. And should go into the same transaction type.

However, if the restaurant owner also owned an ice cream truck, that they drove around during the summertime. That might have completely different profitability. Because it has completely different expenses and profit margins then the food served in the restaurant.

What’s an entrepreneur understands all of the different transaction types and the average transactions per customer. Then an entrepreneur will be able to calculate how many customers they need in their business every month, to cover their overhead expenses, and to increase their profits.

In addition to that, accounting Outsourcing says that can also help an entrepreneur figure out their marketing budget. Because they will know how much money they can afford to spend on attracting new customers. so that they can advertise for more customers, without cutting into their profits.