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E-Myth – “Why most small businesses don’t work & what to do about it”

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Virtual CFO | Learning How To Use Financial Statements To Make Decisions

Many entrepreneurs struggle with understanding basic business financial literacy says virtual CFO. In fact, into it, who are the makers of the accounting software QuickBooks did a financial of survey of entrepreneurs, asking them basic financial literacy questions such as what is the role of the balance sheet and what our accruals. They discovered that 82% of the respondents score less than 70% on this test. If entrepreneurs can gain a deeper understanding of their business finances, they can make better financial decisions that can help them not only avoid running out of money in their business but help them succeed in business as well.

One of the important things that entrepreneurs need to learn how to read in order to make informed financial decisions, is their income statement. Virtual CFO says that when it comes to their income statement entrepreneurs need to understand that the power of the statement is the fact that it distills a lots of very important information down to one page. This one page will allow entrepreneurs to read it easily, so that they can make great financial decisions with it. For example, entrepreneurs need to be able to understand if they can afford to make important and large asset purchases in their business. They also need to understand if they can need to and can afford to hire more staff, or if they need to lay them off. They should also be using the statements to understand if they should change their pricing. Even the largest companies in the world have only a one-page income statement.

In order to ensure that it stays as one page, entrepreneurs need to ensure that they only have three or less revenue accounts in their business. Many entrepreneurs believe that they should have the revenue split out into many different categories in an effort to be very clear. However, all this does is says virtual CFO is creates a lot of work and increases the potential for an entrepreneur to miss classify things. In several businesses, an entrepreneur does not even need as many revenue accounts is three. For example, a restaurant should have one under food. Maybe they will have a second one catering or if they have a merchandise area that they sell T-shirts and glasses out of. A contractor should have only to, one for projects and one for service calls. It is important that those are separated out, because of the difference is in cost to acquire that business, deliver the service and what supplies they need to bring. Any sort of doctors should have one for their own income, and for each of their associates.

By understanding their income statements, virtual CFO says that entrepreneurs can understand why they need to be very simple, and how to keep them that way. By having simple income statements, entrepreneurs can learn how to read that information and make very important decisions very easily.

Virtual CFO | Learning How To Use Financial Statements To Make Decisions

One of the most important things that entrepreneurs struggle with, is understanding their business finances says virtual CFO. 50% of all entrepreneurs will fail, and 29% of them will fail because they ran out of money in their business. Helping entrepreneurs understand their business finances can impact the financial decisions that they make, and can help them stay in business longer.

One of the most important things that entrepreneurs can understand, is the expenses of their business. One of the first things that entrepreneurs should understand when it comes to costs, is the difference between direct costs and overhead expenses. While the overhead expenses are the costs of the business that are going to be the same from month to month, is also important that an entrepreneur understands that they have to cover all of the overhead it expenses every single month from the sale of their products or services says virtual CFO.

Direct costs or cost of goods sold do not stay the same in the business, because they fluctuate with sales. If the sales go up 50%, the direct costs are going to go up 50%. If the sales go down 10%, the direct costs will go down 10%. An entrepreneur should be reviewing the direct costs with sales, to ensure that it is fluctuating at the same rate says virtual CFO. If not, they should check to see if any of their expenses have gone up unexpectedly, or if they need to increase their pricing. They need to ensure that not only is the sale of their product or service needing to cover the cost of goods sold, but also the overhead.

Once an entrepreneur has calculated how many products or services they need to sell and a month in order to pay for their overhead while paying for the cost of goods sold at the same time, that is the entrepreneur’s breakeven point. This is the amount that they need to make in sales every single month in order to pay all of their expenses and avoid running out of money in their business.

In order to help entrepreneurs understand their expenses, they need to break down those expenses so they can understand them. For example, the virtual CFO says that trades should typically break down their expenses into labour, subcontract and materials. Any entrepreneurs are not sure why entrepreneurs need to break down labor and subcontracting separately. But the reason is so that entrepreneurs can specifically review their employee revenue separately. Doctors, on the other hand, should have expense accounts for themselves, and each of their associates, because most clinics pay each of their associates a percentage of their billing. Dentists, have those same expense accounts but perhaps an additional one for hygienists and lab costs. Optometrists will also have the same, but instead of hygienists and lab costs, they will have glasses and contacts.

When entrepreneurs can understand the expenses of their business, that can help them avoid running out of money in their business, because they will know what they need to sell every single month to avoid that.