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Outsourced CFO | Increasing Profit Margin
Increasing the profit margin in business can be simple, says outsourced CFO. However, many small business owners donít understand how much money they need in order to cover their overhead. So, they end up underestimating how much they need to sell, or how much they need to sell their products and services at in order to keep the lights on. Helping business owners understand this can be a simple task.
The first thing business owners need to learn when looking at the finances of their business is knowing what general and overhead expenses are. These are the expenses the business incurs in their daily operation. This is separate to their direct expenses. Some examples of overhead and general expenses, explains outsourced CFO is rent, utilities, phone bill, office staff or administrative staff. These expenses donít change with how much business is conducted. Even if no sales occur, the business still needs to pay these expenses. Rent to open the doors, power to turn on the lights for example.
The other side of overhead is direct expenses. Direct expenses are the ones that increase, the more products a business sells. For example, a bakery that is selling many muffins will require flour and sugar as well as to pay the time of the baker to bake those muffins. If the business sells twice as many muffins, they need twice as much sugar and flour and another baker to make those muffins explains outsourced CFO.
Itís often difficult to save money on expenses. It may be possible to save money on rent, however, the opportunities to save that is few and far between. Once you sign the lease on your office space, thereís no more opportunity to save that money. A business owner canít save money on staff, unless they lay them off, they roll back their wages or cut their hours. And depending on the business, may not be possible if the business is growing. And itís difficult to save money on direct expenses explains the CFO. Once you have the best raw materials at the best price, itís hard to continue to save money, and it wouldnít be enough to vastly change a company ís bottom line.
However, what a business owner can control when it comes to increasing the companyís bottom line is encouraging the staff that are not in revenue generating positions to take them on. For example, getting the administrative staff to do some collections calls or sales calls. What that does is gives the staff that doesnít usually bring in revenue, to bring in revenue explains outsourced CFO. The next thing that a company can control when it comes to increasing revenue is by increasing sales. Itís actually very simple ñ thereís no magic formula when it comes to business, know your expenses, understand your margins and sell more products and services.
Once small business owners can start to positively affect their bottom line, they will increase the odds of succeeding past the five year mark, which 50% of all businesses in Canada fail to do.
Outsourced CFO | Increasing Profit Margin
A rather sobering statistic is that Intuit ñ the company behind QuickBooks did a survey of small entrepreneurs and tested them on basic business financial literacy questions ñ what are accruals, how to improve cash flow, or what is the role of a balance sheet reports outsourced CFO. Out of all of the people who took the test, over 82% scored less than 70% on the test. In order to help business owners succeed in business, like 50% of all businesses in Canada fail to do, teaching them financial literacy as it relates to their business is very important.
Business owners need to know what their overhead expenses are in order to understand their break even point explains outsourced CFO. If a business owner knows what their overhead expenses are, they can then figure out how much money they need to pay that. Theyíll be able to calculate how many sales they need to make, and how much they need to mark up their products or services in order to achieve that. Making more sales is a more effective technique than trying to slash prices. Even by drastically reducing expenses, business owners still will have to pay that certain amount every month just to open the doors to their business.
Other than to save money on staff expenditures, business owners may want to put administrative staff on revenue producing activities instead of cutting their hours. This will help positively affect the bottom line of the business, as well as allows business to avoid thing off staff. When faced with being their hours cut, getting their wage cut, or being laid off, may employees choose to learn how to work on revenue producing activities instead.
Business owners also see that the more products they sell, the more their bank charges increase. Rather than having this is an expense that needs to be cut, business owners should see this as a good thing. The reason for this is typically bank charges increase because they businesses selling more products. Credit cards and debit card terminals cost per transaction, meaning the more itís used more business pays. The cost of using these machines should be built into the price of the product or service Says outsourced CFO.
Something else that business owners will want to take into consideration when figuring out pricing for their products is if the business has to repay any debts, or pay back any shareholders loans. Even if a business is making and sales to pay for their general and overhead expenses as well as their direct expenses, if theyíre not taking into consideration their debts they still have a negative cash flow. Business owners what taken all variables when considering their margin and figure out a price to sell their products.
I helping business owners understand basic business financial literacy, they will be able to take control of setting prices and ensuring that they make enough money to pay other expenses as well as profit.
