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There are many important financial decisions that entrepreneurs often need to make in their business says CFO services. Such as buying equipment, hiring staff or letting staff go. By understanding their profit and loss statements can help business owners what’s going on financially with their business, that can help them make those important financial decisions. Making financial decisions without completely understanding what’s going on financially, can result in business owners making poor financial decisions in their business. Since 50% of all entrepreneurs close their business in five years, 29% of those entrepreneurs say that running out of money was the reason their business close, helping business owners make better financial decisions can go a long way in changing the statistic.
When reviewing their financial statements, business owners need to understand what they need to look for and what type of reports they should look at. There may be obvious errors on the income statement that are less obvious to a business owner unless they look at the balance sheet first says CFO services. This is especially important with interim statements because they are not as rigorously checked for errors the way a business owner can expect in their year-end statements. Because of this possibility of errors, entrepreneurs should always look at their balance sheet first in order to understand what’s going on their, before looking at their profit and loss statement. If
Another tip to keep in mind when business owners are looking at their financial statements, is that instead of looking at the two-month individually, CFO services recommends doing a six-month comparison. This way, business owners can more easily catch mistakes, or see trends. This is especially important in a business that tends to be cyclical, or have been periods of busyness and followed by slower periods.
It’s also important for business owners to understand that their income statement needs to be on one sheet says CFO services. Business owners will be able to run the report based on various subcategories when they need, but when they’re looking at their income statement, ensuring that it is only one page load helps it become a powerful decision-making tool said CFO services. If they have too many subcategories on the income statement, it becomes more difficult to read and therefore harder to make decisions on.
Business owners should also review their year to date before reviewing their prior-year profit and loss statement. Because this will help them compare what’s been going on in their business. CFO services says that business owners should also ensure that they’re looking at six-month comparative balance sheets, so that it’s easier to see trends in their business. They need to be very comfortable looking at the statement before they move on to their prior-year profit and loss statement in order to get a good idea of what’s going on in their business.
It’s not just important for business owners to understand what the different reports are, CFO services says that business owners also need to be able to understand how to route look at them to get the most information out of it to in order for them to make great financial decisions.
Some of the most important financial decisions business owner needs to make in their business, is how to reduce expenses and says CFO services. Reducing expenses needs to be something that a business owner is concerned with throughout their fiscal year, not just at year end. By being comfortable with reading income statements in profit and loss statements in their business, business owners can see what their expenses are, which can help them reduce those expenses when needed, to help their business become profitable.
When reviewing their income statements in profit and loss statements to help minimize expenses, CFO services says that when the most important things that business owners can do is organize their income statements in numerically descending order. This way, the most significant expenses appear at the top of the list, and the bottom half of the list contain all the expenses that are less important. If a business owner truly wants to impact their expenses, they should spend more time working on the top half of the list to minimize those expenses because that will give them a higher return on investment then working on the expenses that are on the bottom half of that list.
Business owners also need to understand the difference between direct cost and general expenses in order to understand how they can affect the cost of each. CFO services says that general expenses are the overhead that exists in the business whether an entrepreneur is selling products or services or not. Examples of general expenses are rent, utilities, office supplies and admin staff. Direct costs on the other hand, are the expenses that are only incurred as a cost of producing the products and services that their business provides. Examples of these costs are labour and supplies. If an entrepreneur is not doing any work in their business, these bills would exist.
When looking at their direct costs, business owners often see those costs increasing on their income statement, they get worried that their direct costs are out of control. CFO services says that business owners must take into consideration the direct costs along with their revenue. If the revenue is increasing the same amount as their direct costs, there is nothing to worry about. If the business owner is making more money it’s probably because they’re providing more products and services, which will affect their direct cost.
By understanding how to read their statements, in order to know how much revenue there producing and what their expenses are, can help business owners take steps to minimize the costs that they can, and be as efficient as they can in their business says CFO services. It’s important for entrepreneurs to be able to this anytime in their business, in order to keep their business as profitable as possible throughout the year.
