How To Calculate The Breakeven Point In A Business | Virtual CFO
One of the biggest challenges that entrepreneurs face in business according to virtual CFO, is understanding their business finances. Many entrepreneurs get into their business without having prior business ownership experience, which means many of them lacks financial literacy in their business into it, who are the makers of accounting software QuickBooks did a survey of small business owners and entrepreneurs in order to understand how financially literate they were in business finances. The respondents to the survey were asked basic financial literacy questions such as what the breakeven point of the business is, how to increase cash flow as well as what the role of a balance sheet is for example. 82% of all respondents to the survey ended up scoring less than 70% on the survey. If entrepreneurs can better understand business finances, they will be better prepared to ensure that they can be more successful in business.
One of the ways that entrepreneurs can understand business finances better, is by learning how to calculate the revenue accounts in their business. Many entrepreneurs believe that they are being very helpful with breaking down their revenue into several different categories because that wealth of information can help them. However, virtual CFO says that when entrepreneurs have more than three revenue accounts, it actually ends up creating far more work than business owners intend, and also increases the potential for miss classifications. Also, having three revenue accounts or lasts means that the income statement that the entrepreneur will get ends it fitting on one page. The reason why this is important is that a single page income statement is very easy to read, and can be used to help an entrepreneur make financial decisions in their business.
However, virtual CFO says many entrepreneurs believe that their business is unique, and needs to have several revenue accounts. Even the largest companies in the world end up having three or less revenue accounts in their business and have a one-page income statement. If an entrepreneur thinks their business is so unique that they need to have more, they are probably overthinking it. For example, a contractor might have two accounts one for projects and one for service calls. The reason these two should be separated out is that there is an extremely different level of labor, materials, and management required for new projects versus service calls. Also, there is an extremely large difference in how those jobs are acquired. A doctor, on the other hand, would have separate accounts for themselves as well as their associates’ doctors, so that the doctor can calculate the sales that they themselves have generated, and how much their team has generated.
By understanding how to classify their revenue accounts can help entrepreneurs significantly ensure that their income statement is easy-to-read so that they can make informed financial decisions in their business. Since entrepreneurs need to be using this statement before they make any financial decisions from running payroll to paying bills, and larger decisions like asset purchases and hiring staff, by having an easy to read document can help them make the most informed decision possible.
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It is extremely important that entrepreneurs understand how to calculate the breakeven point in their business says virtual CFO. The second most common reason why businesses fail is running out of money. By understanding how to calculate what their margin is in their business, can help them learn what their breakeven point is, and price their products and services in such a way that has them avoiding running out of money in their business.
One of the first things that entrepreneurs should understand when it comes to calculating their margin is the difference between general expenses and direct expenses. Virtual CFO says that the direct expenses are all of the expenses in a business that is directly related to the sale of a product or service. These expenses are only going to exist if an entrepreneur has sales in their business. This will include raw materials and labor.
The general expenses on the other hand, are all of the expenses that are going to exist in the business whether or not an entrepreneur makes the sale. These include expenses like rent, Edmonton staff, phone and Internet bills as well as utility bills and office supplies. Not only do these expenses exist whether or not an entrepreneur makes a sale, but an entrepreneur needs to learn how to price their products so that not only are they recovering the direct expenses, but their products are priced in order to cover the overhead expenses in their business as well. Virtual CFO says that business owners need to figure out how much more they can price their products that over and above their direct expenses so that they can still make sales while making additional money to pay for their overhead expenses.
Once they figure that out, virtual CFO says that entrepreneurs need to figure out how many products or services they need to sell in order to cover their overhead expenses. I figure this out, entrepreneurs can understand what their margin is, and what their breakeven point is. Knowing how many products or services they need to sell every month in order to cover all of their expenses can help entrepreneurs have a target to reach that if they achieve, will have them avoiding running out of money in their business.
It is Extremely important that once an entrepreneur has figured out what their margin is, and what their breakeven point for their business is, that they then keep an eye and all of their expenses. They should ensure that their general expenses are not fluctuating very much from month-to-month, and if their direct costs are going up, that it is because their sales are up. If not, then they may need to produce expenses by looking for new suppliers, or they might need to increase their prices so that they are always maintaining the margin they need in order to turn a profit in their business.