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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 To Get Balance Sheets?

Outsourced CFO | understanding balance sheets

A problem many businesses face business they is that is owners donít understand how much money they need in order to cover their overhead expenses says outsourced CFO. They often end up underestimating how much money they need in order to keep the lights on. If business owners can understand to a higher degree basic business financial literacy for example the role of balance sheet, accruals, how to improve cash flow they will be able to make better financial decisions for their business including how to save money, and how to set the prices of their business so that they can break even, or even profit.

The first step of expanding business owners financial literacy is helping them understand the difference between general expenses and overhead expenses says outsourced CFO. Overhead expenses are expenses within the business that is not directly related to the cost of sales. These are often known as expenses that keep the lights on in a business. They are often things like rent, power, administration staff, and even office supplies. These expenses are often fixed, meaning they donít vary and are often locked in. For example rent is usually locked in at a lease for several years, and the only way to save money on staffing is to either lay off a staff member, rollback wages or cut hours.. A business owner should also understand that administrative staff wages and went are usually the top two expenses within a business says outsourced CFO. A great way to minimize the impact the cost of staffing, is by putting staff members on revenue producing activities such as outside sales, or on collections calls. By putting staff that are not usually making revenue on these activities, the business owner can utilize them to bring in money where they werenít producing revenue before, minimizing the impact of staff wages on a companyís bottom line.

Businesses often think that they have an expense problem in their business, thinking that they can slash their expenses in order to save money. But as earlier mentioned it is harder to save money on fixed expenses says outsourced CFO. Business should put their efforts into increasing revenue rather than slashing expenses. By making more money, business can more easily pay for their fixed costs, and have a greater chance to break even – business owners needs to understand how to set their prices to ensure they are charging enough money. By knowing how much money it costs to produce their products, business owners can appropriately set their prices.

By helping business owners understand expenditures in their business, and how much money it takes to keep the lights on as well as produce their products, business owners can make more informed decisions on how to set prices to ensure that there making appropriate margin. This will help them not only break even within their business, it will help them to turn a profit says the CFO.

Outsourced CFO | understanding balance sheets

Intuit, the company who makes QuickBooks did a survey of small business owners and quizzed them on basic business financial literacy questions says outsourced CFO. For example what is the role of balance sheets, what is on accrual, how to improve cash flow. 82% of the participants in the quiz scored less than 70% on the test. Helping small business owners become more financially literate can help them control expenses and their business, as well as knowing how to set the prices for their products and services to get to their break even point. If business owners donít understand expenses, theyíll be less likely to appropriately set their prices, greatly diminishing their chances of success in business.

Business owners first need to understand that even when their income is breaking even they still could have a negative cash flow says outsourced CFO. The reason for this is there may be other debts to be considered when it comes to the business. Things like repayments of debts such as loans, or paid back shareholders can affect the bottom line of the business and cause it to still have negative cash flow even when the income is breaking even. For these reasons, itís very important for business owners to understand costs in their business as well as margin so that they can set their prices to make money.

The next thing business owners need to understand is the difference between general and overhead expenses. General expenses are expenses that donít usually vary, and are related to direct cost of sales within the business. Such as materials and contractors. Overhead expenses are not directly related to the cost of sales and include things like rent, power, administrative staff and office supplies. These costs not only donít vary, there often exactly the same from month to month and are almost impossible to change advises outsourced CFO.

The reason why itís almost impossible to change overhead expenses is because they good things like rent, which is often locked into a lease for several years. If a business owner has opportunity to change the costs of those at all, it is only once every several years. Another example of overhead expenses that canít be changed is staff says outsourced CFO. The only way that you can change the cost of staff is to lay them off, which may not be possible due to the busyness of the business. So the only other ways are to either rollback wages which is an uncomfortable conversation with the staff. Or a business can cut their staffs hours. Which may be detrimental to the business, in the same way that laying off staff isnít possible. If the business is too busy and needs the people, does make sense to save money by not having them there.

So by helping business owners understand expenses, they can make better decisions about how much money they should charge for their products and services in order to not only break even, but increase their business.