Free consult & free copy of book

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

Contact Us


Most 5 star CPA Google reviews in Canada

Read Reviews

Chartered Professional Accountants E Myth

1 Fixed Monthly Fee - Planning | Accounting | Taxes | Consulting

Helping Canadian businesses beat the odds!

Virtual CFO | Calculating The Breakeven Point In Business

In order to help entrepreneurs understand their business finances, virtual CFO says that they should understand how to read their financial statements of the business. The reason why is because by understanding their financial statement, can significantly help them make more informed financial decisions. By making better financial decisions in their business, not only can help entrepreneurs avoid making decisions that might harm their business, but can actually help them make better financial decisions as well. Making informed financial decisions is something that many entrepreneurs actually struggle with. Into it, the company behind QuickBooks the accounting software did a financial survey of entrepreneurs and small businesses. They were quizzing them on their financial literacy, with questions such as what is a balance sheet, water accruals and how to increase cash flow in their business. Out of 82% of all respondents scored less than 70% on the test. This proves that many entrepreneurs struggle with understanding their business finances.

In order to understand their financial statement, entrepreneurs should understand what it looks like, and how to use it. Virtual CFO says that their financial statement should have one page because the power in the report is that it takes a lot of very complex information, and it makes it easy to read. If an entrepreneur learns how to read the statements, they can use that information to make informed financial decisions. In order to ensure that it stays one page, virtual CFO says that entrepreneurs should ensure that they have three or fewer revenue accounts. If entrepreneurs think that their business is so unique that they need to have additional revenue accounts, virtual CFO recommends that entrepreneurs understand that even the largest companies in the world still have a minimum of three revenue accounts, and their income statement is also just a single page long.

Another great reason why entrepreneurs should ensure that their financial statement only has three revenue categories on it, is so that it can be much easier to classify the information. The more revenue accounts there are, the greater chance an entrepreneur has at miss classifying the information. That misclassified information can negatively impact the ability to use that information in their business to make financial decisions. Therefore, when an entrepreneur ensures that they have three revenue accounts or less, they can be certain that the information is classified properly and consistently so that the best financial decisions can be made.

Some examples of different businesses and how many revenue accounts they should have include: doctors’ offices, as well as dentists and optometrists, generally have one for their own income and then another one for the Associate’s income. A dentist might have hygienist and lab costs, whereas an optometrist would not have the hygienist cost but they would have the cost of glasses and contacts. A restaurant should have one for food, the contractor should have two one for projects and one for service calls because there is a large difference in the labour, supplies and management needed to finish that job.

When entrepreneurs are more equipped to make better financial decisions, they can positively impact their business, and make financial decisions that can significantly help their business grow.

Virtual CFO | Calculating The Breakeven Point In Business

One of the most important things that an entrepreneur can do according to virtual CFO is calculating the breakeven point of their business. This can significantly help them avoid running out of money in their business, which is the second most common reason why businesses in Canada fail. In order to do this, entrepreneurs need to understand their expenses, and how much sales they need to make in order to cover those costs.

One of the most important things to understand about the different costs in their business is that there are two types. They need to keep these types separately because if they do not may be difficult to calculate the margins. They have the direct costs that are associated with producing their product or their service that they sell, and the overhead costs, which is the bills that an entrepreneur has simply by doing business. These costs will stay the same regardless of how many products or services the entrepreneur is selling says virtual CFO.

The direct costs are the literal costs of producing the products or services that a business sells. This includes labor and raw materials. It is very important that entrepreneurs keep these expenses separate from their overhead expenses because while the direct costs will fluctuate with the sales of the business, overhead expenses do not. When an entrepreneur is calculating their margin, they need to figure out how much their products have to be sold for, in order to cover their direct costs and pay for their overhead expenses. If the two expenses are mixed in together, an entrepreneur has no idea what the baseline cost of their products needs to be, and then that will make it impossible to calculate how many they need to sell in their business in order to cover their overhead.

The overhead of the business says virtual CFO all the costs that an entrepreneur incurs whether they use any sales or not. For example, overhead expenses are usually rent, utility bills, phone and Internet as well as expenses like administrative staff and office supplies. If an entrepreneur is having a hard time reaching their breakeven point, they can minimize their overhead expenses which can help them significantly reach their breakeven point. It may be that their rent needs to be minimized, and if an entrepreneur can find rent some are less expensive that can help minimize costs, they can put their administrative staff on revenue-generating activities in order to minimize that expense in the business, but as long as an entrepreneur is aware of what their breakeven point is, then they will be able to aim to hit that breakeven number and avoid running out of money in their business which increases their chances of succeeding.