Home » Articles » Outsourced CFO | Need To Start Understanding Finances?
Outsourced CFO | Need To Start Understanding Finances?
Outsourced CFO | understanding finances
Business owners do not understand how much money they need to make in order to cover their expenses says outsourced CFO. This leads to them underestimating how much they need to sell just the lights on. In order to help business owners succeed in business, helping them understand how to set prices can be the key to them achieving success in business. Since 50% of small businesses fail within five years, this could have a huge impact on business.
Understand the expenses in their business, business owners should know the difference between general and overhead expenses and direct expenses. Direct expenses are the costs incurred through the business producing the product or service that they sell. What is considered direct cost includes supplies, the raw materials required to produce that product as well as the labour used to produce it. The more products a business sells, the higher their direct expenses will be. In contrast, overhead and general expenses are the expenses that are incurred regardless of how much product a business produces or sells. Examples of overhead and general expenses are rent, utilities, and office supplies. These are the costs that will remain the same in the business no matter how busy a business gets.
Outsourced CFO recommends sorting expenses and a balance sheet in numerically descending order. This means that the biggest expenses are at the top, the smallest at the bottom. As opposed to alphabetical order. The reason to organize this way is it is easiest for a business owner to see what items make the most impact on business. They can spend most of their time on the items above the midline. Itís important for business owners to note that administrative wages and rent normally rank as the number one and number two expenses in their business.
Not only are these the two largest expenses that the business will occur, there also to expenses that are least likely to be changed. A business owner want to ask if they are in the right location or space for their business, but once a business owner is locked into a lease itís less likely they will be able to change that in order to affect their bottom line. Because of this it is much more likely that a business owner will be able to affect the direct costs of their business in order to save money. By being prudent on how much raw materials to purchase as well as purchasing from the right suppliers will help the business owner save as much money as they can Says outsourced CFO.
Business owners may also be mistaken that bank charges will be something that they can save money on a month-to-month. Once a business owner is a bank that is working with them, itís generally not possible to save money on bank charges. The reason for this is most credit card and debit card terminals are the cause for those bank charges, and those prices are for transactions that are being used on that equipment. Meaning the more that equipment is used, the more you pay outsourced CFO suggests that this is a good thing because it means the higher the charges, the more money a business is making.
Outsourced CFO | understanding finances
Michael Gerber the author of the E myth says the fatal assumption is if you understand the work of the business, you understand a business that does that technical work, says outsourced CFO. Just because a business can do technical work, doesnít mean itís easy to understand that business. The makers of quick did a survey of small entrepreneurs and tested them on basic business financial literacy. For example participants were asked what the role of the belt she was what accruals are, and how to improve cash flow. A whopping 82% of the respondents scored less than 70% on the test. This is something considering small businesses make up such a huge portion of business in this country. But it might also explain why 50% of all businesses fail in business within five years. In order to help business owners succeed in business, understand some basic financial literacy within their business is key.
Businesses often think they have an expense problem, but they actually have a revenue problem. The reason businesses say this says outsourced CFO is because they think that by saving money every month they will positively affect their bottom line. Itís true that through careful spending, especially on direct expenses businesses can affect their bottom line, however there is a limited to that. Itís harder to save money on overhead expenses, and once a business has saved as much money on direct expenses as possible, thatís where the saving money usually ends. The key to business owners making more money in their business is actually really simple. They need to sell more products. With the fixed expenses they will take care of, the more products a business owner sells, the more the label to affect their bottom line. And unlike savings, there is no limit to how much a business can sell.
A business owner should understand the difference between general and overhead expenses as well as direct expenses in order to help them manage these expenses. General and overhead expenses are the expenses that are related to the direct cost of sales. Examples of these are rent, utilities, phone bill, insurance, software licenses, office supplies. Direct expenses include expenses that are directly related to the cost of sales including labour and raw materials. By understanding what expenses are variable every month and what expenses are fixed a business owner manage those expenses.
These are just a few of the ways a business owner can positively affect their own bottom line says outsourced CFO. Using this information the business owner can then figure out what their margin is, and how much sales they need to produce in order to break even profit. Knowing that information is the key to success.