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Outsourced CFO | basic business financial literacy
50% of all businesses close their doors within the first five years of starting their business says outsourced CFO. 29% of these businesses cite running out of money was the largest reason for their business failure. Business owners donít understand how much money they need to make to cover their overhead expenses, often underestimating how much money they need to make in order to keep the lights on. By helping business owners learn some basic business financial literacy such as what the role of the balance sheet is, accruals and cash flow, business owners can learn how to price their products, and how much to sell in order to cover their operating costs.
First thing that a business owner should understand is what their overhead is. Overhead expenses are expenses that are not directly related to the cost of sales. This includes their rent, administration staff, office supplies, utilities, insurance. These are all things that are very necessary to the business, but are not direct costs of producing the companyís product. This overhead is often referred to as the cost of ìkeeping the lights onî says outsourced CFO. by understanding these costs, business owners and starts to understand what their margins are, and how much they need to sell every month in order to cover these expenses.
So what are all of the other expenses a business owner incurs says outsourced CFO. Direct expenses are what a business incurs that are directly related to the production of their product. This includes supplies and raw materials as well as direct labour costs. If the business wasnít making products, these expenses would not incur. The direct cost as well as the overhead cost needs to be factored into the pricing of the businesses product. Itís not possible for the business owner to just cover the direct cost of the product in the pricing of their products, they also have to price their product to be able to cover the cost of their overhead. Many business owners make the mistake of covering the cost of their product when there pricing, which leaves them unable to cover their overhead. Business owner needs to figure out how many products they need to sell, and how much overhead costs are included in the price. The more product to business sales, the more they are able to cover that overhead.
By helping the business owner understand how to calculate their overhead expenses as well as direct costs, they can more adequately price their products says outsourced CFO. This will help them not just cover their direct costs but also cover their overhead expenses, allowing them to cover all costs as well as turn a profit. This will help them avoid the second most common reason for business failure, which is running out of money, which is a problem that one third of all businesses who fail saves the reason for their failure. This can help significantly more businesses beat the odds and succeed.
Outsourced CFO | basic business financial literacy
business owners arenít understanding how much money they need to make, and how many products to sell in order to cover their overhead expenses says outsourced CFO. This leads to business owners not sell enough products to keep the lights on in their business. Michael Gerber the author of the E myth says the fatal assumption is if you understand the technical work of the business, you understand the business that does that technical work. Business owners are very good at doing what they do, and arenít as skilled in things like basic business financial literacy. Intuit did a survey of small businesses and asked them questions about what are balance sheets, accruals, and cash flow. 82% of those who responded scored less than 70% on the test. Clearly business owners can be helped greatly by learning some more basic business financial literacy.
The first thing that business owners can learn are what is general and overhead expenses. General and overhead expenses are all of the expenses the business incurs that are not directly related to the cost of sales. Rent and administrative staff are the two largest overhead expenses that a business will have confirms outsourced CFO. Other examples of overhead expenses are utilities, office supplies, insurance, software licenses just to name a few. These costs are what is considered the expenses to just keep a business open, without actually producing any products. A business owner needs to understand that the prices of their goods must also include a markup to pay for these overhead expenses.
The second thing that business owners can learn is what are direct costs says outsourced CFO. Direct costs are all of the other expenses a business faces that are not overhead. These are the costs that are directly related to production of their product or service. That includes supplies and raw materials and the direct labour cost. Many business owners make the mistake of only including the direct cost in the price of their goods and services, which is a huge mistake. They need to cover their overhead cost as well. They need to be able to figure out how to price their products and services so that they not only recover their direct cost, but a portion of each sale must also go to the overhead expenses. This is whatís called a margin.
Business owners also need to understand that even when their income is breaking even, they could still have a negative cash flow. The reason for this is if there are any debts in the business, this also needs to be taken into consideration when figuring out margin. For example if the business has to pay back the loan, or is paying shareholders, these costs need to be factored into the cost of goods as well says outsourced CFO.
By understanding all of the costs of their business, and how to appropriately price their products business owners can learn how to make enough money to not only cover their overhead expenses, but also turn a profit.