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

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Outsourced CFO | financial literacy in business

One of the favorite quotes of outsourced CFO is from Michael Gerber, the author of the E myth: ìthe fatal assumption is if you understand the technical work of a business, you understand a business that does that technical workî. This unfortunately is not true especially for small businesses. Many small businesses and entrepreneurs do not have the financial literacy that is needed to make informed financial decisions about their business. Intuit, the makers of QuickBooks did a survey of small business owners and quizzed them on some basic business financial literacy questions. Questions such as what is the role of the balance sheet, how to improve cash flow, accruals for example.

Over 80% of the small business owners who took the quiz scored less than 70% on the test. This is very eye-opening; business owners donít understand how much money they need to make in order to cover their overhead expenses. Often they end up underestimating how much they need to sell in order to keep the lights on. Teaching business owners about financial literacy in relation to their own business can make a significant difference in them succeeding over all in making money within that business.

First thing that business owners should understand is what are general and overhead expenses. Outsourced CFO says general and overhead expenses are the expenses that are not directly related to the business. Some examples of general and overhead expenses are rent, utilities, insurance, software licenses, phone bills just to name a few. The most important thing to know about overhead expenses is they are fixed costs and donít change. It doesnít matter how much a business sells or not these costs will be the costs regardless.

Expenses that are not general and overhead expenses are called direct expenses. Examples of direct expenses are the raw materials necessary for producing the product business sells explains outsourced CFO. For example if itís a bakery, the flour, sugar, ingredients in the baking would be considered the direct costs. Also included in the direct cost is labour. So the labour involved in producing those products is included in this cost. The labour that is not included in the direct expenses are the administrative staff. For example a receptionist who is answering the phones of your business would be considered general expenses, and the staff that is assembling your product would be considered direct cost.

Now that business owners can understand the differences between direct and overhead expenses, what is the next step? Business owners should arrange their balance sheet so that it is listed in numerically descending order. That is to say that the largest expenses are at the top and as Alyssa progresses expenses get smaller and smaller. This is a much more efficient way of listing things other than for example alphabetically. Some business owners like to have their balance sheets being listed by alphabetical order, because it makes it a lot easier to find specific expenses. However is much more efficient to have it listed by expense. The reason for this is when businesses can literally see where the biggest expenses in their business owners, they will know where to focus their time says outsourced CFO.

Outsourced CFO | financial literacy in business

The makers of quick books surveyed some small business owners, and quizzed them about basic business financial literacy, for example he asked what the role about was or how to improve cash flow. Over 80% of the businesses surveyed scored less than 70% on the test. Business owners understand the finances of their business, they will be able to understand how much money they need to make to cover their overhead expenses.

Once business owners know the difference between general and overhead expenses and direct expenses and know how to this their balance sheet, most important thing they must ask themselves is how they should price their products in order to turn a profit. Learning how to turn a profit means they must know what their overall expenses are, and therefore how much money they need to make it to break even point says outs outsourced CFO. For example a business that has a 25% margin means that for every four dollars business brings in, one dollar of that is their profit. That means three of those dollars is going towards paying their overhead.

Remembering that overhead is the cost that youíre going to pay whether you sell anything or not. So without completely understanding what their overhead is, a business owner be able to understand how to properly price. For example a business owner who as $20,000 of overhead the 25% margin needs to multiply that number by four to their breakeven point. So for $20,000 to 25% margin, the business owner needs to bring $80,000 in sales just to break even. It means owner says they need to add $5000 to their bottom line, they actually have to sell $20,000 with of products or services in order to profit that additional $5000 with a Outsourced CFO!

So business owners who truly understand their balance sheet so that they know how much to price their products and services. Can business owners can affect their bottom line by saving money is a question most business owners have. How can business owners save money within their business, asks outsourced CFO. One of the biggest mistakes that business owners make in cutting expenses is they try to cut the general and overhead expenses. The reason why this doesnít work is because the overhead expenses are the ones that are. The two biggest line items in a business owners balance sheet is rent and staff.

It ís difficult for business owner save on rent unless they new locations, and itís almost impossible to save money on people will unless you lay them off, or their hours or will back their wages. One of the best ways a business owner can actually affect their bottom line is to actually increase the sale of products in their business. The more sales means the more money. Since a business owner doesnít have to spend more money on overhead, this is one of the best ways to affect their bottom line.