Virtual CFO | Learning How To Understand Business Finances
Early on in business ownership, virtual CFO says that entrepreneurs need to learn how to read their financial statements of their business. The reason why is so that they can make more informed financial decisions about their business. If entrepreneurs and business owners do not understand the financial statements of their business, that means that they also do not understand their overhead, gross margin or the profit and loss of their business. If entrepreneurs can learn the first things that they need to know, that can actually significantly impact their ability to make informed financial decisions that can positively grow their business.
The first thing that entrepreneurs should do is learn how to read their income statements. Their income statement will show them how the overall financial health of their business is, and can help guide them towards an informed financial decision. For example, virtual CFO says that if an entrepreneur wants to make an asset purchase in their business, if they consult their financial statement first to see if they can afford to do that or not, he can make a much better decision. For example, if they decide to make an asset purchase without consulting their financial statements and they cannot afford it, they could cause their business financial hardship and even potentially cause their business to run out of money. However, if they consult their income statement to realize they do not have the money to make that purchase they can then come up with a plan on what they need to do in order to be able to make that purchase.
One of the most important aspects of the income statement in order for entrepreneurs to be able to read it easily is the fact that it should be one page long. Even the largest companies in the world have one-page income statements. The role of the income statement is to take a lot of very complex information and make it easy to read. In order to keep it to one page, entrepreneurs need to ensure that their revenue accounts are three or lasts. A lot of the time, entrepreneurs include many revenue accounts, because they think that they are being helpful by being very descriptive. However, not only does this make an income statement hard to read, but it also can increase misclassification errors. Also, virtual CFO says that many entrepreneurs believe that their business is so unique that it needs multiple revenue accounts. However, most businesses do not and if an entrepreneur thinks that there unique, they are probably overthinking it.
By ensuring they have an accurate income statement, entrepreneurs should have few revenue accounts, is that they can have their income statement be easy to read, and avoid misclassification errors. By doing this, will end up with an important and effective tool that they can use to make financial decisions in their business, whether it is purchasing assets, hiring or laying off staff, or if they need to change their pricing.
Virtual CFO | Learning How To Understand Business Finances
Many entrepreneurs are not aware of the failure rate of entrepreneurs in Canada until after they become a business owner says virtual CFO. It is quite high, 50% of all entrepreneurs fail within five years, and the second most common reason for that is running out of money. If entrepreneurs can significantly impact their ability to avoid running out of money, they can increase their chances of succeeding in business.
One of the best ways that entrepreneurs can do this is by understanding the margins of their business, and what they need to produce every month in order to breakeven. By understanding their breakeven amount, can help entrepreneurs reach that goal and avoid running out of money in their business.
Virtual CFO says the thing that entrepreneurs owners need to keep in mind when it comes to their breakeven point, is figuring out the different expenses in their business. There is two different types of expenses, and they need to be classified separately in order to help keep the margin cost accurate. There is the direct costs which are also known as cost of goods sold, and these of the expenses that are directly related to producing the products or services that an entrepreneur sells. The higher the sales and the business, the higher the direct cost will be.
The overhead cost, on the other hand, are all of the static costs of the business, which is not going to change from month to month. These are costs such as rent, utility bills and cell phones and the Internet. When an entrepreneur opens a business, these are the expenses that they have to pay every single month rather they sell anything or not.
An entrepreneur needs to figure out what they sell their products or services so that they can cover their direct costs, but also make additional money so that they can pay for their overhead expenses. How many products they need to sell in a month in over to pay for their overhead is considered their breakeven. Virtual CFO says that by understanding their breakeven, business owners can ensure that they are working towards that amount every month through marketing, revenue-generating activities and advertising. By knowing what their sales have to be, they can avoid running out of money in their business. Even if they fall short of their goal one month, if they make it up in another month, that can help them ensure that they are not running out of money in their business.
Virtual CFO says that when entrepreneurs understand their expenses, they can calculate their breakeven, and avoid running out of money, which can help them increase their chances of succeeding in business. This is what entrepreneurs should be doing early on in their business so that they can ensure that they are always working towards a breakeven point so that running out of money is never an issue.