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

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Outsourced CFO | Need General and Overhead Expenses Covered?

Outsourced CFO | general and overhead expenses

Business owners donít understand how much money they need to make in order to cover their overhead expenses says outsourced CFO. Often they end up underestimating how much they need to sell just to keep the lights on. Business owners who do not have a basic understanding of financial literacy are less likely to be able to make informed decisions about expenses in their business. The makers of QuickBooks, Intuit did a survey of small business owners and quizzed them basic business financial literacy questions for example what is the role of the balance sheet, accruals, how to improve cash flow. 82% of the respondents scored less than 70% on the test. This is a sobering statistic that shows how important it is for businesses to understand the basics when it comes to their expenses. By helping them understand, businesses can make better decisions when it comes to setting their prices.

The first thing that business owners should know the difference between when it comes to their expenses says outsourced CFO, is what are general expenses versus overhead expenses. Overhead expenses are the expenses that are not a direct cost of sales. Examples of these types of expenses are rent, power, administrative staff and office supplies. These expenses donít usually vary, and are often considered the expenses to keep the lights on. General expenses are directly related to the cost of sales. This includes materials required to produce the product.

To help business owners understand their expenditures outsourced CFO recommends sorting the business expenses on the balance sheet in numerically descending order. The reason to organize the sheets this way, as opposed to in alphabetical order for example is because this method keeps the biggest expenditures at the top. The reason itís important to have the biggest expenditures at the top, is because that puts the most important expenditures at the top, that has the greatest impact on a business. And that the top two items on this list is almost always the administrative staff wages and rent. Knowing that these items normally rank as the two highest expenditures in a business says the CFO, can help a business understand where their money is being spent.

With the business owner can understand their highest expenditures in the business, they must understand that it is more difficult to do to reduce the overhead expenses compared to direct costs. The reason for this is itís not usually possible to lower rent in the business, this is often seen as a fixed rate and therefore very difficult to change. And cost of the staff is harder to changes will especially because usually the only ways that businesses can save money on staffing is by laying them off, rolling back there wages or cutting hours. This isnít always possible or viable and in addition to that it is much harder changed to implement.

The helping businesses become more financially literate about their business and help them make better decisions about how to save money, and set their prices.

Outsourced CFO | general and overhead expenses

Intuit, the company that makes QuickBooks did a survey of small business owners and quizzed them on basic business financial literacy questions says outsourced CFO. Over 80% of the respondents scored less than 70% on the test. Helping business owners understand some basic business financial literacy can help them run their business effectively by allowing them to know where they can save money and how they can set prices.

First things to help a business owner understand their expenses, is knowing the difference between general and overhead expenses. General expenses are the expenses that are related to the cost of sales. These expenses donít to vary, except when more products are being sold. Expenses such as materials are included in this category. Overhead expenses are expenses that are not directly related to the cost of sales such as rent, power, staff, or office supplies for example says outsourced CFO. These expenses are often known as expenses that keep the lights on in the business, and are almost impossible to change.

It is much more difficult to reduce overhead expenses as compared to direct costs because whatís included in the overhead expenses are things like rent, and staff. Itís almost impossible to save money on rent, because most businesses are locked into a lease, which may have a term for several years. The other way business could try to save money on overhead, is by changing staff expenses such as laying off staff, rolling back wages or cutting hours. These are uncomfortable or impossible changes to make. That way general expenses are for easier to change, or save money on.

Business owners can take into consideration is that interest and bank charges usually increase with revenue. Rather than saying that as a negative, business owners should look at it as a good thing, because the more money you make, the more these charges go up says outsourced CFO. Therefore these costs going up is a sign that the business is selling more products. For example many businesses accept payments with a credit card or debit machine, and the more transactions being processed on those machines means the more money you business will pay for that machine.

If business owners are able to understand their overhead expenses, they will be better equipped to understand their breakeven point. The reason for this is knowing how much money their business has to make will help business owners set their prices, and know how much a business has to sell to get to that break even point says outsourced CFO. For businesses not sure what their expenses are, theyíll be less likely to set their prices that will allow them to bring even, or make money.

By helping business owners understand their balance sheets, expenses and overhead, they can be better equipped to set prices in their business which will help them make more money.