Virtual CFO | Calculating Margin And Breakeven Points
When entrepreneurs first get into business for themselves, many lack business ownership experience says virtual CFO. This makes it very difficult for them to understand everything that they need to do in order to run a successful business. In fact, the company Intuit who makes the QuickBooks accounting software did a survey of small businesses and entrepreneurs in order to figure out how financially literate they were. Respondents were asked questions about what the role of a balance sheet is, what our accruals as well as things like how can they increase the cash flow in their business. Out of all of the small business owners and entrepreneurs that responded, 82% scored less than 70% on the test. This shows that entrepreneurs often struggle with understanding business finances, which can negatively impact their ability to make informed decisions in their business.
One way that entrepreneurs can impact their decisions in their business and make them good ones, is by learning what an income statement is, and how they can read it. Reading the income statement is very important because if an entrepreneur gets into the habit of doing that before they make any financial decisions says virtual CFO, they will be able to make more informed financial decisions. For example, reviewing the income statement can help an entrepreneur understand if they can afford to make a large asset purchase in their business. Or, they can see if they have the finances available to hire the staff they need to succeed. By using the income statement this way, entrepreneurs can significantly impact their ability to make informed financial decisions that can help them become successful, instead of putting their business at risk.
One of the things that makes an income statement easy to read, is the fact that it is on one page. It takes a significant amount of very complex information and it condenses it into an easy-to-read format, so that entrepreneurs can very quickly get the answer to their financial questions. The easier it is to read, it means that the entrepreneur will be even more likely to be able to read it more often, every time they have a financial decision, so that they can ensure that they are making the best financial decision for their business.
Virtual CFO says that one way that they can ensure that the income statement stays as one page, is by ensuring that entrepreneurs have three revenue accounts or less. Many entrepreneurs tend to believe that their business is unique and needs to have multiple revenue categories, but even the largest companies in the world only ever have three or less. Not only can having three or less make it much easier for entrepreneurs to classify information and avoid having information classified incorrectly, but it can also help keep the statement short period the more classifications, the more pages and the more difficult it is to be able to use it as a tool to make better financial decisions.
Virtual CFO | Calculating Margin And Breakeven Points
The reason why it is so important for entrepreneurs to understand their even point says virtual CFO, is because there is such a high failure rate of entrepreneurs in Canada, and the reason why many of those entrepreneurs fail is that they ran out of money in their business. If entrepreneurs understand how to calculate their breakeven point, they will be able to easily understand exactly how many sales they need to get every month in order to reach that breakeven points. By knowing if they reach their breakeven point they will not run out of money, can be very impactful to an entrepreneur.
In order to understand those breakeven points, entrepreneurs should understand the two different types of costs that they have in their business says virtual CFO. The first cost is the overhead expenses. An entrepreneur will have these expenses regardless of how many sales they have in their business whether it is one or five hundred. Examples of overhead expenses include administrative staff, utility bills, phones, and the Internet as well as office supplies and rent. An entrepreneur needs to ensure that when they are pricing their product, that they are factoring into their price to pay for overhead expenses as well. If they do this, all they need to do is calculate how many products or services they need to sell in order to pay for their overhead expenses.
The direct costs of the business are all of the costs that an entrepreneur will have directly related to selling their product or service. This is raw materials and labor. If the direct costs increase in their business, is generally because their sales have increased to and is not a need for concern. When they see that their costs are increasing, all they have to do is verify that the sales are going up by the same increments. If the sales are also going up but not in the same increment as the costs, that could indicate an entrepreneur that the expenses are increasing, and they should review the expenses to see if they can bring them down again by going with a different supplier, another type of product, or if they need to increase the prices of their products or services.
When entrepreneurs understand the amounts that they have to sell every month to reach their breakeven point they can make plans to reach that target every single month by increasing their sales or their revenue-generating activities said virtual CFO. When they do that, they can significantly impact their ability to avoid running out of money in their business. Not only can they avoid running out of money in their business, but by using this principle they can also grow their business. By learning how to do this, business owners can impact that 50% failure rate of businesses in Canada, and avoid running out of business because they have no money. By doing this, entrepreneurs are increasing their chances of succeeding.