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Outsourced CFO | Understanding Business Finances
Business owners donít understand how much money they need to make in order to cover their overhead expenses says Outsourced CFO. With 50% of businesses failing within five years of opening, and 29% of those business who failed say that running out of money was to factor to their businesses failure, it stands to reason that if business owners can learn how much money they need to make in order to cover overhead expenses can eliminate that reason for failure. The company behind quickly exited a survey of entrepreneurs and quizzed them basic business financial literacy questions such as what cash flow, accruals and the role of a balance sheet. Over 82% of those responding scored less than 70% on the test. By helping business owners learn more business financial literacy, and understand how to cover their expenses in order to turn a profit, and business owners can beat the odds and become successful.
The first thing that business owners need to understand is what are their overhead expenses, and what the other expenses are. General in overhead expenses are the expenses a business faces that are not the direct cost of sales. This includes rent, utilities, Internet and phone business, office supplies, insurance, software licenses. Basically this covers anything they have to pay thatís not directly related to production of their products. Expenses that are not considered overhead are called direct expenses and direct expenses are exactly what they sound like, says outsourced CFO they are the direct costs of producing the products of the company. Included in this are supplies and raw materials needed to make product. Direct labour cost such as contractors or subcontractors.
Business owners should get in the habit of writing their in numerically descending order, that is the largest cost items at the top descending to the smallest at the bottom. The reason for this is it will bring the most significant items that most of the money spent on the top of the list. Business owners can look at the top half of the list, in order to see where they can make the biggest impact on the business says outsourced CFO.
Often, business owners believe that they will be able to affect their bottom line by drastically reducing their expenses, and itís important to know which expenses can be affected. The top two expenses the business are most often the rent or the mortgage of the business, and administrative wages. Businesses need to understand that unless they move into a different space, theyíre not likely to change the rent mortgage explains outsourced CFO. If they do, they are usually then locked into a single year lease, which makes changing that more difficult. Administrative wages are second largest expense of a business, and itís very difficult to save money there because all business owner can do is lay off the staff, back wages, or cut hours. This may not be possible, and if itís possible it may not be comfortable conversation or something that the business owner is willing to do.
Outsourced CFO | understanding business finances
50% of all businesses close their doors within five years of opening them, and 29% of those businesses will say that running out of money was the biggest reason their business failed says outsourced CFO. That makes this the second most common reason for business failure. If business owners can learn more basic business financial literacy, and understand much they need to make in order to cover their overhead expenses, they can change those odds and succeed.
First thing that business owners should learn is knowing what their overhead expenses are, because by understanding those expenses can help business owners reach and exceed the break even point. Overhead expenses are the expense of the business that are not directly related to the adoption of their products. This includes rent, utilities, office supplies, insurance, licenses of software, phone and internet bills, office supplies just to name a few. These are the items that the business must pay regardless of how much or how little they sell. So the business owner needs to figure out how much money they need to make every single month, to cover these basic expenses says outsourced CFO.
The other costs that business owners will face in business are the direct cost to produce in their product. This includes things such as supplies and raw materials to produce their product, and the direct cost of labour to produce that including contractors and subcontractors. This is a cost that the more product to business sales, the more this price will be increased. Business owners need to learn that for every dollar they sell, they have to cover their expenses. This is called a margin. I understanding expenses, business owners can figure out the margin. That is, how much of the money they sell goes to the expenses before they make money. A business that has a 25% margin means that for every four dollars the business brings in, three of those dollars goes towards expenses. T
hat means if a business has $20,000 worth of overhead, with a 25% margin, the business needs to bring in $80,000 with the sales in order to break even explains outsourced CFO. By helping a business owner understand this breakeven point, they can increase the odds of succeeding in their business and not running out of money. Since many business owners donít understand the breakeven point, they are in danger of running out of money within their business because theyíre not bringing enough in.
This way business owners can learn how much money they need to bring in, and how they can appropriately price their products in order to reach that break even and increase their margin confirms outsourced CFO. This way business owners can not only just break even, they can turn a profit and become more successful in business than they ever were before, helping them avoid the second most common reason businesses fail in Canada today.