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One of the best ways that they can make an informed financial decision says virtual CFO is by learning how to read an income statement. If they learn how to read the income statement before making any financial decision, business owners can significantly and positively impact the ability to make a great decision. However, in order for entrepreneurs to be able to read their income statement, they need to understand what it looks like and why. The first thing that they need to understand is that their income statement needs to be one page. The reason why, is so that it can distill a large amount of very complex information. That way entrepreneurs can read that statement, and base their financial decision on it. Decisions such as can they afford a large asset purchase that they need in order for the business to grow, can they hire more staff or do they need to lay staff off? Or do they need to change their pricing? All of these decisions become much easier when an entrepreneur is understanding their income statement.
One of the ways that entrepreneurs can ensure that their income statement remains at one page and is therefore easy to read says virtual CFO, is by ensuring that it only has three revenue accounts or lasts. A great rule of thumb says virtual CFO is less is best. Not only does having more revenue accounts make it more complicated for business owners to try and keep things organized, but it also makes the income statement multiple pages which is harder to read. Many entrepreneurs believe that their business is so unique that they need to be able to have multiple revenue accounts to make up for that. However, even the largest companies in the world have three revenue accounts or last and have an income statement that is only one page long.
In order to help an entrepreneur learn how to read their income statements so that they can make a better financial decision, business owners should minimize the revenue accounts that they have, and learn how to read to their income statement so that they can make the best financial decision for their business.
in an effort to help entrepreneurs succeed, virtual CFO says they need to understand the expenses of their business clearly so that they can calculate their breakeven point. When they understand how many products they have to sell and a month in order to cover all of their expenses, they can avoid the second most common reason for entrepreneurs to fail in Canada, which is running out of money. In fact, 50% of entrepreneurs that start businesses in Canada fail before their fifth year in business, and 29% of those entrepreneurs say that the reason why they failed is that they ran out of money. It should be one of the first things that an entrepreneur does when they start selling products or services, is understand what their breakeven point is so they can ensure that they are selling enough products to avoid that problem.
In order to understand what their breakeven point is, entrepreneurs should understand the two different expenses that exist in their business. The reason they need to understand it, is so that they can keep them separate because the reason for those two expenses in the business are so different and can help an entrepreneur understand their break-even point. Virtual CFO says the two different expenses are direct costs which are also known as the cost of goods sold and the direct costs which are also called overhead costs. The direct costs are the costs that are incurred as a direct result of selling products or services in the business and include things like labor and materials, and the overhead costs are the costs that an entrepreneur incurs whether they sell products or not, and include things like rent, Edmonton staff, office supplies, utility bills, and phone and Internet.
One of the biggest differences in expenses is direct costs fluctuate greatly, in conjunction with the sales of the business, and overhead expenses do not. When entrepreneurs looking at their direct costs, they should not be concerned when they see those prices going up, all they should do is verify that the direct cost is going up in conjunction with the sales. If not, then that is an indication that they either need to minimize the expenses of their business or increase their prices.
The overhead expenses on the other hand generally do not fluctuate at all, or very little. They are the costs that are going to exist in the business no matter if sales are being had or not. If an entrepreneur is finding that the expenses are very high, they may want to decrease these costs, one of the most common ways to decrease them is to move into a more affordable location, with lower rent, or laying off the administrative staff, or have them do some income generating activities to help cover their costs.
In order to calculate the margin of the business, they need to figure out how many products or services they need to sell in order to cover their overhead expenses. When entrepreneurs know that, they know how much they need to sell every single month in order to break even and avoid running out of money in their business.
