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Many entrepreneurs struggle with understanding their business finances says virtual CFO, which actually ends up causing them to make financial decisions that unintentionally harm their business. In fact, into it, who is the maker of accounting software QuickBooks surveyed a number of small businesses and new business owners in order to gauge how financially literate they were about their business finances. They discovered that out of all of the respondents, 82% lacked a basic understanding of their business finances, scoring less than 70% on the financial literacy test. If entrepreneurs can gain a deeper understanding of their business finances, they could make better financial decisions and the more successful in business.
When the most important things that they can do, learn how to read their income statement. Their income statement should be reviewed before they make any financial decisions in their business in order to understand if that is a financially sound decision. Such as if they can afford a large asset purchase that they need in their business, can they afford to hire more staff, or give their staff a pay raise or do they need to lay staff off. It can also help an entrepreneur understand if they need to change their pricing to become more profitable.
One of the reasons why this income statement is so impactful says virtual CFO, is because it is very simple to read. It takes a large amount of very complex financial information and makes it easy to read. When it is easy to read, business owners can understand what it says easily so that they can make their financial decision. One of the ways that it remains easy to read, is the fact that it is only one page long. It can stay one page long because entrepreneurs are ensuring that their revenue accounts never exceed three. Many entrepreneurs believe that their business is unique enough to require more revenue accounts, but virtual CFO says that even the largest companies in the world do not need more than three revenue accounts, and all of their income statements fit on one page as well.
It is also very important that business owners ensure that they do not have additional income in the revenue section of their income statement. While it is important to have that information on the financial statements, if it is in the revenue of their core business, it can make it very difficult to calculate the margin of the business accurately. Therefore, any additional income such as from the rental of the property that they own, or dividends from their stock portfolio should exist in the other income and expenses category, so that it gets included on the financial statements of the business, but without affecting the ability to calculate how profitable the business is.
By understanding their revenue accounts on their income statement, business owners are better equipped to make impactful financial decisions that can help their business grow.
Many entrepreneurs know that they need to sell products in their business in order to make money says virtual CFO, but have no idea how many products they need to sell, or how they need to price those products in order to be profitable. In fact, almost 30% of entrepreneurs that have failed said that the reason why they failed was that they ran out of money. If they understand their breakeven point and what their margins are, many entrepreneurs may be able to avoid running out of money in their business so that they can succeed more easily.
In order to start calculating the breakeven and the margin of the business, virtual CFO says that entrepreneurs need to understand the two different costs in their business. The reason why it is important to understand them is so that they can keep them separate. By keeping their expenses separate, they can more easily calculate the breakeven point. The two different costs are direct costs also known as cost of goods sold, And overhead expenses which are also called general expenses. General expenses say virtual CFO are the expenses that exist in the business whether they sell products or services or not. Examples of overhead is the utility bills of the business, phone and Internet, office supplies and rent. These costs are going to be the same from month to month with very little variance, and if an entrepreneur sells a lot of products or very little product, the prices are not been a change.
The cost of goods sold on the other hand says virtual CFO are all of the costs that exist that are directly related to producing the product or service. That includes the labor and raw materials. The most important thing to note of direct costs, is that these costs will fluctuate from month to month. However, business owners should understand that the costs should fluctuate in conjunction with the sales. If the sales go up 20% the cost of goods should go up 20%. If the sales go down 50% of the cost of goods should go down 50% if the cost of goods is increasing higher than the sales and the business, that is a good indication that an entrepreneur should minimize expenses if possible, or increase the prices of their product.
In order for an entrepreneur to calculate the breakeven point, an entrepreneur needs to figure out how many products or services they need to sell in order to pay for their overhead so that they pay for their direct costs and their overhead. When they find that number out, that is their breakeven point. Having a goal of that amount every single month at a minimum, can help entrepreneurs avoid running out of money as long as they are hitting that target. They can increase the revenue-generating activity and sales and advertising to reach that amount, and avoid running out of money in their business.
