Virtual CFO | Learning What Profit And Loss Is
One of the most important things that an entrepreneur can do early on in their business says virtual CFO is understood what the revenue and direct cost of goods sold in their business is. Warren Buffett is famous for saying, ìaccounting is the language of business. Helping entrepreneurs learn this language, can help them significantly and succeed in business. Since 82% of entrepreneurs scored less than 70% on a financial literacy test in their business, the more an entrepreneur can understand their business finances, can help them significantly in succeeding in running their business.
Important that entrepreneurs learn how to read their income statement very quickly and very easily says virtual CFO. The reason why is because this is a great tool that entrepreneurs can use in order to make financial decisions in their business. In fact, before entrepreneurs make any financial decisions in their business large or small, they should review their income statement in order to figure out if they have the money in their business to do that. If they are planning on making an asset purchase, they need to consult their income statement to see if they have enough money to make that purchase. If they do not and they make that purchase anyway, it could cause their business financial hardship. If they consult their income statement first, however, entrepreneurs might see that they do not have the money to make that decision, and create a plan on how to save the money to be able to afford it, or to get financing. They should even consult this income statement before things like running payroll or paying bills, to ensure that they have money in their business to afford it.
Business owners should understand that by limiting the revenue accounts that they have in their business, can make reading their income statement a lot easier. Virtual CFO says that the reason why is because three or fewer revenue accounts means that the income statement will be able to fit on a single page. The reason why it is important to be on one page only, is so that it can be much more easily read, understood and be able to make good decisions on. If entrepreneurs believe that their business is so unique that they need to have more than three revenue accounts, they should keep in mind that even the largest businesses in the world only have three or fewer revenue accounts, and their income statement does only fit on a single page.
Some examples of different businesses and the revenue accounts they have are a contractor that only have two accounts, one for projects and one for service calls. Those two are broken down because there is a huge revenue difference in the skills, management, materials, as well as the way that business was acquired. A restaurant, on the other hand, might only have one account which is food. I dentist might have three, one for the doctor’s income, one for the Associates’ income, and one for the hygienists’ income.
By understanding how to keep their revenue accounts separated, and simplified can help entrepreneurs significantly ensure that their income statement is readable says virtual CFO. By doing this consistently, entrepreneurs can end up with a great tool to help them make informed financial decisions.
Virtual CFO | Learning What Profit And Loss Is
Many entrepreneurs struggle with running out of money in their business says virtual CFO. In fact, it is listed as the second most common reason why businesses fail in Canada. 29% of all entrepreneurs that go out of business say that running out of money was the reason why. This can be significantly minimized if entrepreneurs can understand the expenses in their business, and understand how to calculate their gross margin. When they do this, they can ensure that there pricing their products and services properly, and they know how many sales they have to make in order to break even in their business.
The gross margin and business is when an entrepreneur ends up with when they take the revenue of their business and subtract the direct cost says virtual CFO. Important that an entrepreneur understands the difference between their direct expenses as well as their general expenses are. Since the direct expenses will change month-to-month depending on how many sales an entrepreneur has, and the general expenses will not change, it is important that an entrepreneur understands both separately so that as sales go up or down, an entrepreneur is still covering the cost of their overhead.
Not only does an entrepreneur have to price their products or services in such a way that they cover their direct costs, but that there making additional money on each sale, so that they can cover their general expenses says virtual CFO. By figuring out what they can sell their products for at what Mark up, then how many products or services they need to sell every month in order to cover their general expenses is there breakeven point. When entrepreneurs understand their gross margin and their breakeven, they will be able to ensure that they know what sales need to be in their business in order to avoid running out of money.
Not only is it important for an entrepreneur to understand what their margin and breakeven point is, that there also keeping an eye on the costs and their business. While their general expenses should not change month-to-month, they need to be monitoring it to ensure that that is the case. Also, an entrepreneur needs to understand that if the sales are up in their business, so will the direct cost increase. They should be ensuring that the direct costs are increasing by the same percentage as sales, and if not, they may need to look at minimizing expenses where possible, or increasing the price of their product if necessary to avoid running out of money.
When entrepreneurs can better understand the expenses in their business, and understand the difference between direct expenses and general expenses, they will be able to calculate their gross margin and calculate their breakeven point. Virtual CFO says that when entrepreneurs do that, they can significantly avoid running out of money in their business, which will help them succeed in business because there avoiding the second most common reason why businesses fail.