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Virtual CFO | Differences Between General And Direct Expenses
It is extremely important for entrepreneurs to be able to understand business financial literacy early on in their entrepreneurship says virtual CFO. The reason why is by learning how to understand business literacy including the difference between general and direct expenses can help entrepreneurs calculate the breakeven point of their business, which can help them avoid running out of money. Since many out of money is the second most common reason why businesses in Canada fail, this can be significant in helping entrepreneurs succeed.
The biggest thing that entrepreneurs can understand is not just all of the expenses in their business, but the differences between general expenses and direct expenses. Virtual CFO says that the direct expenses refer to all of the expenses in their business that are directly related to the production of the products or the services that an entrepreneur sells in their business. This includes the raw materials needed to produce the product or service, as well as the labor that is used to making that product or service. An entrepreneur will incur these costs only if and when they do you generate sales for their business and will fluctuate with the sales of the business.
General expenses, on the other hand, are all of the expenses that an entrepreneur will incur whether they generate sales are not. These expenses include things like rent, office supplies, and utility bills for example. These costs generally remain the same month-to-month and will not fluctuate with sales says virtual CFO.
It is very important that an entrepreneur avoids putting an income not related to their core business into the revenue section of their income statement. It is very important to keep this separate so that it does not interfere with the ability to calculate the margin correctly. How an entrepreneur calculates the gross margin of their business, is to take the revenue of the business and subtract the direct costs, that is the gross margin. It is important to know this so that entrepreneurs can understand what they need to price their products or services so that they are covering their overhead expenses in their business.
When entrepreneurs understand their gross margin, they can ensure that they are pricing their products and services in such a way that they are covering their overhead. By understanding what their gross margin is, and setting the prices of their products and services, entrepreneurs end up with how many products or services they need to sell every single month in order to pay their general expenses in their business. By understanding this, they can understand what the sales of their business need to be to help them avoid running out of money in their business.
Helping entrepreneurs understand the differences between general and direct expenses can help them figure out the gross margin so that they can understand what the breakeven of their business is. By knowing how many products they have to sell in order to break even, business owners can be more prepared to avoid running out of money in their business by having a goal to reach every single month.
Virtual CFO | Differences Between General And Direct Expenses
Many entrepreneurs do not have any prior business ownership experience, and therefore struggle with understanding the finances in their business says virtual CFO. In fact, the company behind accounting software QuickBooks, Intuit did a survey of small business owners in order to understand how much they understood of their business finances. The respondents of the survey were asked questions about balance sheets, income statements, what accruals were and how to increase cash flow in their business for example. 82% of all of the small business owners that responded to the quiz scored lower than 70% on the test. This shows that many entrepreneurs struggle with understanding business finances, which contributes to entrepreneurs making poor financial decisions.
One of the first things that entrepreneurs should understand is how to read their financial statements says virtual CFO. But a being able to read their financial statements can help entrepreneurs understand profit and loss, gross margin and expenses. One of the most important financial statements for an entrepreneur to learn to read is the income statement. The reason why is that an income statement can be a great tool for an entrepreneur to get a lot of complex information and it very easy to read format so that they can make informed financial decisions in their business. By consulting this statement before making any financial decisions in their business to help them to be informed.
If an entrepreneur is running payroll, paying bills, or making large decisions like asset purchases, or hiring new staff, by reviewing their income statement, entrepreneurs can ensure if they have the money in their business to be able to make that purchase or not. By consulting this statement before any financial decision says virtual CFO, entrepreneurs can ensure that they are not building their business at a financial risk.
In order for this income statement to me easy-to-read, entrepreneurs need to ensure that they are ensuring that their business has three or fewer revenue accounts. Not only does having more than that create a lot of work, as well as increases the potential for business owners to miss classify revenues, but having more than three means that the income statement is not able to fit on a single page, which can impact the ability for an entrepreneur to use that to make informed decisions about their finances.
By learning how to read their financial statements including their income statement, entrepreneurs can ensure that they are ending up with a powerful document they can help them significantly avoid running out of money in their business. Since 29% of all failed entrepreneurs say that running out of money was the reason why their business failed, this can significantly help entrepreneurs avoid running out of money in their business, which can help them succeed.