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

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Outsourced CFO | Interested In Understanding Your Expenses?

Outsourced CFO | understanding expenses

One of the problems several businesses face in business today is that business owners do not understand the money thatís required for them to cover their overhead expenses says outsourced CFO. The business owner often ends up underestimating exactly how much money is needed to keep their business in operation. If entrepreneurs can understand basic financial literacy much better than they currently do, they will be better equipped to make financial decisions for their business including where they can save money, how they can set the prices of their business so that they can break even and profit within their business.

One of the first things that business owners can do to increase their financial literacy is by helping them understand the difference between overhead expenses and general expenses recommends outsourced CFO this is a quick and easy way entrepreneurs can become much more knowledgeable about their expenses. Overhead expenses are those expenses within the business that are not related to the cost of sales in any direct way. Examples of overhead expenses are rent, administration staff, electricity gas, and water, even including office supplies like pens and paper and staples. Overhead expenses are often fixed, which means they are locked in and are unable to be changed. The only way a business owner can change those expenses are by renegotiating the lease, which isnít always possible for several years at a time. General expenses on the other hand are directly related to the cost of sales, such as the materials needed to generate the product that the company sells. These expenses also donít usually vary, and these costs go up as sales of the products within company go up.

A mistake that businesses often think about is that by drastically reducing their expenses, they can save enough money to affect the bottom line of their business. This isnít a viable solution to create more money within the business says outsourced CFO. the reason for that is it is very hard to save money on rent, phone bills, power bills, office supplies, administrative staff. A lot of these costs are built into contracts, and the only way a business owner can actually change any of them is by changing the cost of their staff.

That means they will either have to lay off their staff, cuts hours of the staff or rollback wages. If a business is quite busy, this isnít a viable option because having less staff when a business needs staff is counterproductive. Also a staff that gets their hours cut may decides to look elsewhere for work, meaning itís not a viable solution to saving money either. A solution to needing to save money actually is by selling more product or services. Rather than trying to save money a business is much further ahead by increasing the revenue in their business. In order for them to increase their revenue however, a business needs to understand their expenses, as well as their margin. By properly understanding these things a business is in the best decision to set their prices accordingly.

Outsourced CFO | understanding expenses

The company who makes QuickBooks, Intuit – did a survey of small business owners says outsourced CFO. What Intuit found out after quizzing those small businesses on basic business financial literacy, was that 82% of those who were quizzed scored less than 70% on the test. The test included questions such as what is the role of a balance sheet, what are accruals, how can you improve cash flow. By helping entrepreneurs become more financially literate, businesses can help themselves control expenses as well as know how to appropriately set prices for their products and services to not only reach breakeven point of their business, but actually turn a profit. If business owners do not understand their own expenses they will be less likely to succeed, greatly affecting the likelihood of succeeding in their business.

Entrepreneurs need to understand first of all that even when their income is at the breakeven point, they still could have negative cash flow. The reason for this says outsourced CFO is there may be other things to consider debt wise when it comes to the business. If a business has to pay back shareholders, or if there is debt servicing, that can affect the bottom line of the business even if it looks like the business is in a positive cash flow on the balance sheet. For these reasons very important that an entrepreneur understands all of their costs in their business as well as their margin so that they can set their prices in a way to make the money.

The second most important thing that entrepreneurs should understand within their business is what is the difference between general expenses and overhead expenses. General expenses are the things that are related to the direct cost of sales within the business examples of general expenses are raw materials as well as contractors. These expenses are directly related to the product that the company sells, and go up when the company is successful in selling more products. Overhead expenses are the expenses that are not directly related to the production of the products that company sells. Examples of overhead expenses are office supplies, administration staff, power, rent, gas, water and most importantly rent. The reason why itís not possible to change overhead expenses is because these expenses are usually set and are almost impossible to change says outsourced CFO. Rent is usually locked into a several year lease, and power bills, phone bills, water bills are never going down in price. If anything businesses can expect those prices to rise on a yearly basis.

By helping entrepreneurs understand the expenses within their business, they can make better purchasing decisions and are more knowledgeable when it comes to setting the prices of their own products and services. By being armed with this knowledge, business owners will be able to understand that rather than slashing their expenses, they need to increase revenue.