Virtual CFO | Figuring Out The Breakeven Point In Business
It is a significant problem that many entrepreneurs have no prior business ownership experience says virtual CFO. The reason why is because when entrepreneurs lack business ownership experience, they often do not understand their business finances. In fact, into it, the makers of QuickBooks did a survey of small business owners in order to gauge their basic business financial literacy. The respondents were asked a series of questions about business finances. Such as balance sheets, income statements, accruals and how to increase cash flow in their business. They discovered that over half, 82% in fact of all of the respondents score less than 70% on this quiz. By helping, entrepreneurs understand business finances, can help them increase their chances of succeeding in business.
One of the most important things that entrepreneurs can do understands their financial statements to a higher degree says virtual CFO. By understanding profit and loss, margin and overhead as well as revenue, can help them not only understand what is going on, but make decisions more efficiently, effectively and in a way that is going to positively impact their business. One of the things that they should do, understands that their income statement needs to be very easy to read. The goal should be for it to exist on one page. All the businesses in the world, including the largest and most powerful publicly traded corporations, will have income statements of only one page.
The reason why having it in one page is important is because it will be able to be easier to read and understood. The goal of the income statement is to distill a large amount of complex data in a very efficient manner. Entrepreneurs should be able to review their income statement, and quickly be able to use that information to make large financial decisions in their business. Decisions such as can I afford to buy this large asset or do I need to come up with a plan on how to save money for that purchase. Can I afford to hire more staff or do I need.to lay any staff off? They also need to be able to understand if they need to change their pricing. The only way that they can do that very efficiently is by having a very easy to read the income statement.
In order to have an extremely easy to read income statement, entrepreneurs should understand that their revenue accounts be very minimal. Virtual CFO says the rule of thumb should be under three and entrepreneurs should keep in mind that less is best. If entrepreneurs believe that their business is unique, because they need to have more than three revenue accounts, they should keep in mind that the largest companies in the world only have three. By keeping it to a minimum, entrepreneurs keep their income statement easy to read.
When entrepreneurs are much more able to read their income statements efficiently and effectively, they will be able to make better decisions in their business that can dramatically impact their chances of succeeding in business.
What is a point you need a Virtual CFO
Because there is such a high failure rate of entrepreneurs in Canada says virtual CFO, helping entrepreneurs understand their financial statements can drastically improve their ability to succeed. 29% of entrepreneurs that fail have said that the reason why their business failed was that they ran out of money. With the failure rate of 50%, that is a large number of entrepreneurs that fail in business because they ran out of money.
Helping entrepreneurs understand how to classify things in their expense accounts can significantly help them understand margin and breakeven. Virtual CFO says the first thing entrepreneurs should do is understand that when it comes to expenses, there is two different types. Direct costs are also called the cost of goods sold, and are the costs associated with producing the product or service that the business sells. Without those sales, those expenses would not exist. This includes labor, materials, and anything else needed to provide that product or service. For example, and optometrist’s office would pay for the labor of one of their doctors to do the eye exam, and to fit the glasses, as well as the expense of the glasses. The more sales there are in the business, the higher the direct costs are. If an entrepreneur sees a 20% increase in sales, they will know that they need to pay an additional 20% to their doctors for the additional work, plus 20% more in the prices of glasses. An entrepreneur needs to verify that the expenses are only going up the same amount that the revenue goes up, because if their expenses start to go up at a higher rate than their sales, then they either need to minimize expenses by looking for a less expensive alternative or raising their prices to make up for the fact that they are not making as much profit as they used to.
Virtual CFO says the other type of expense are the general or overhead expenses of the business. These are the expenses that always exist in the business, no matter how much products the company is or is not selling. These costs are not going to fluctuate from month-to-month, or very much at all. These costs are rent, admin staff, office supplies, utility bills just to name a few.
Business owners need to understand that when they are pricing their product, they need to ensure that they are covering their direct costs, and then making extra so that they can pay for the overhead. Then they need to figure out how many products being sold at that price they need to sell in order to cover their overhead. Once they figure out that amount, that is there breakeven. By understanding where there breakeven is, they can ensure that they are reaching their sales targets of at least that much, so that they can avoid running out of money in their business.
When entrepreneurs understand their various expenses, and what they need to sell in order to avoid there breakeven point, then they can significantly impact their ability to succeed in business and avoid running out of money.