Avoiding Running Out Of Money In Business | Virtual CFO
When entrepreneurs financially struggle in business, virtual CFO says it puts them at a large disadvantage, and they could even go out of business by not understanding the finances of their business. The company that makes accounting software QuickBooks, Intuit did a study of small business owners and entrepreneurs in order to understand how financially literate they were about their business finances. Respondents of the quiz were asked questions such as what is a balance sheet, what are accruals and how an entrepreneur can increase the cash flow in their business. An extremely high percentage, eighty-two of the respondents got less than 70% on this test. Proving that entrepreneurs tend to struggle with understanding business finances. If entrepreneurs can learn the most important things to know early on in their entrepreneurship, they can significantly impact their ability to make informed financial decisions that can help them avoid running out of money in their business.
When entrepreneurs do not understand their financial statements, that means they do not understand their profit and loss, their gross margin or their overhead, and it can impact their ability to make informed financial decisions. One of the first things that entrepreneurs should learn early on their business is what it income statement says virtual CFO, so that they can use that statement in order to make informed business decisions. The income statement can give the entrepreneur information about their business finances so that they can make decisions such as if they have enough money in their business to purchase assets, hire staff, or if they need to lay staff off or increase their pricing.
The most important thing that entrepreneurs should understand what the f income statement says virtual CFO, is that it needs to be one page. One page means it is easy to read and easy to make decisions on. If it was longer than one page, is be much more difficult to read, and less likely that entrepreneurs would use it to make their financial decisions. Virtual CFO says that what makes it one page, is if an entrepreneur can minimize the number of revenue accounts that they have two three or less. The more revenue accounts there are, the longer the income statement will be. Many entrepreneurs think that it is very prudent in being communicative about what is going on in their business by increasing the number of revenue accounts, but all this does is adds length to the reports, and makes it difficult to classify things in the future.
By having easy to read and clean your income statement, entrepreneurs can then use that report to make financial decisions in their business that can help them make good financial decisions that not only can help them avoid running out of money but actually can help them significantly grow their business. All they need to do is learn how to read to their income statement, and then to simply pull that report before making any financial decision in their business big or small.
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When entrepreneurs get into business for the first time says virtual CFO, many are getting into it because they are passionate about the product or service that they are selling. They are usually very good at providing that product or service, and most do not have previous entrepreneurship experience. That lack of entrepreneur experience means that they often lack the knowledge about business financing and how to run a business. 50% of all entrepreneurs in Canada fail by their fifth year, and the second most common reason for that is running out of money. One of the ways that entrepreneurs can avoid running out of money is by calculating with their breakeven point in business is and then working to ensure that they are making sales beyond that. One of the reasons why entrepreneurs run out of money in their business is because they do not know how money products they need to sell in their business in order to cover all of their costs.
The first step in calculating and entrepreneurs’ breakeven point in their business says virtual CFO is understanding the difference between the different costs in their business. The reason why they need to figure out the difference between these two costs is that the reason for those costs are different, and need to be factored indifferently to the breakeven point of the business. The two different types of costs are direct costs which are also known as the cost of goods sold and general expenses also known as overhead expenses.
The overhead expenses of the business are the static costs. They are not going to fluctuate very much from month-to-month, and are all of the costs that an entrepreneur is going to incur independently of selling any products or services in their business. Examples of overhead costs say virtual CFO are rent, utility bills, phone and Internet, office supplies and any administrative staff.
Direct costs, on the other hand, are all of the costs that an entrepreneur will incur only as a direct result in selling a product or service. These are labor costs and material costs. An entrepreneur will not increase costs if they do not to sell a product, it also, the more products they sell, the more costly they will have. Virtual CFO says that when an entrepreneur notices that their direct costs are going up, they should look to ensure that their sales are also going up to pay the same amount. If not, that may indicate that they need to minimize their direct cost expenses by going with another supplier, or it might indicate that they need to increase their pricing.
In order to calculate their breakeven point, entrepreneurs need to figure out what they can sell their product or service act, which is going to be able to not only cover the direct costs, but the additional amount needs to cover the overhead expenses as well. When they figure out how much they can sell a product or service that for an additional amount in order to cover their overhead, then they need to figure out how many products or services they need to sell every month in order to completely cover the overhead expenses. This is an entrepreneur’s breakeven point, and when they know this, they can ensure that there ensuring their sales reach this amount so that they can avoid running out of money in their business.