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

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Outsourced CFO | Looking To Make Good Choices With Margins?

Outsourced CFO | understanding margins

One of the most common reasons that business owners close the doors to their business is that they run out of money, says outsourced CFO. Business owners today donít understand how much money they need to make in order to cover their overhead expenses. They often end up underestimating how much they need to sell in order to just keep the lights on in their business. Intuit did a survey of small businesses and quizzed them on basic business financial literacy such as what the role of the balance sheet is an what is cash flow. 82% of those who responded scored less than 70% on the test. Businesses to learn how to understand basic business financial literacy become more knowledgeable in their business and can learn how much money they need to make in order to cover their overhead expenses, therefore learning how to avoid running out of money. Since this is the second most common reason for business failure in Canada, many businesses can avoid this easily.

Business owners often are under the misconception that you need to slash all of their expenses in order to help raise their profit margin. While itís possible to cut some expenses, itís not possible to cut all expenses explains outsourced CFO. Business owners need to know which expenses they can affect, and which ones they canít. To understand that, business owners need to know the difference between general and overhead expenses versus direct expenses.

Direct expenses are the costs at a business that are not included in the overhead of a business. This includes the supplies and raw materials required in producing the companyís product. For example, if the business is a bakery there direct expenses would be flour, sugar and all the rest of the ingredients needed to bake their products. Direct dispenses are also the labour involved in producing that product, so using the bakery as an example, the bakers needed to bake the product would be direct expenses as well explains outsourced CFO.

General and overhead expenses are all of the other expenses that a business faces, they are not directly related to the production of the product, but are needed in order for the business to be open. Examples of this are rent, utilities, administration staff and office supplies just to name a few says outsourced CFO. These things are needed in order for business to stay open, but are not directly related to the production of their products. Administration staff is included in this list because they are not directly related to the production of the companies products.

Since the two most significant costs in the business tend to be the administrationís wages and the rent or mortgage of a business, business owner needs to understand that the general overhead expenses are the greatest costs to their business. These are also the most difficult expenses to cuts, because rent is usually locked into several your lease, and the stuff that business has on hand are needed to run the organization. However if a business owner can read task the administration staff to be put on some revenue producing activities, they will be able to shift this balance slightly.

Outsourced CFO | understanding margins

Business owners donít understand how much money they need to make in order to cover their expenses, they underestimate how much they need to sell in order to turn a profit says outsourced CFO. By helping business owners understand their expenses and some basic business financial literacy, such as how balance sheets work, what are accruals and how to improve cash flow, they can become more knowledgeable in their business and learn how to price their products, and how much they need to sell in order to not only break even but profit in business.

By first understanding what the balance sheet is and learning how to list their expenses in this balance sheet, business owners can easily see where their spending most of their money. Outsourced CFO recommends listing expenses and a numerically descending order, with the highest expenses at the top, and the smallest at the bottom. This is supposed to an alphabetical list for example, which many business owners use. By listing the balance sheet by expenses, the business owner can spend most of their time looking at the top half of the balance sheet, which is where most of their money is going.

By understanding their overhead expenses as well as their direct cost, business owners can learn where their breakeven point is. Business owners should be able to figure out what their overhead expenses are, and then how much they need to sell based on that number. It can also figure out their price points, if they increase their prices, can they break even? If they can sell more products will they reach that breakeven? Outsourced CFO says by understanding the cost, business owners can be much more in control of setting prices and selling products, which can help them be more financially viable.

When business owners can fully understand all of their expenses, and how much money they need to bring into their business to cover those and turn a profit, they can avoid common pitfall of running out of cash in a business. Many business owners think that just by cutting costs it will be possible to turn a profit, but outsourced CFO recommends that the biggest change to the bottom line a business owner can make is to price appropriately and sell more products. A business owner will be limited to how much money they can save on their bottom line by slashing expenses. The two biggest expenses of the business are rent and staff, and those are the two hardest things to change. The rest of the expenses are smaller, and while it is prudent to save money wherever possible, itís not going to greatly affect the bottom line overall. By understanding this, business owners can easily learn how to turn a profit in their business.