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

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Virtual CFO | Revenue Accounts And Expenses In Business

When entrepreneurs are unable to understand their business finances says virtual CFO, they are at a big disadvantage for being able to make the right decisions that can help their business grow. In fact, the company that makes accounting software QuickBooks did a financial survey of small business owners in order to determine how financially literate they were about business finances. Out of all of the respondents that answered the quiz, 82% score less than 70% on the test. If entrepreneurs can simply understand income statements in their business, they would be able to make better financial decisions that could drastically improve their chances of succeeding in business.

One of the first things that entrepreneurs need to know, is why they should care about what their income statement looks like. The reason why is because an income statement can help an entrepreneur significantly make financial decisions in their business. Whether they can afford a large asset purchase, or what they need to do in order to save to purchase that asset in the future. If they can afford to hire more staff, or give them raises or even if they need to lay off the staff. They can even make the determination if they need to change their pricing in order to turn more of a profit. This income statement is so necessary for entrepreneurs to use in order to make informed financial decisions.

Once an entrepreneur understands how important the income statement is, virtual CFO says that they should also understand that the power in the income statement is that it is a single page. Even the most powerful and biggest companies in the world have a single page income statement. This is so that a lot of complex information can be processed and understood very quickly. If an entrepreneur is using the information to make financial decisions, then the right to have to review the report many times, and the simpler it is the better.

In order to make this income statement very simple to read, entrepreneurs should understand that they should only have three revenue accounts or lasts. Having three revenue accounts or lasts allows the income statement to be on one page only, but also it minimizes the chances of misclassifying various revenue on the report. By having an extremely simple stream of revenue accounts, can help an entrepreneur classify everything quickly and without error. Some examples of various businesses and the revenue accounts they should have are: a contractor should have only two accounts one for projects and one for service calls. Since both of those types of work are extremely different, not only and how they are required, but in how they are billed, managed, and even the labor and supplies used in billing those jobs. A restaurant should have one account for food. Not one for food and one for desserts and one for drinks and one for take-out.

When entrepreneurs are better able to understand their income statement, they will be far more likely to end up making financial decisions that can positively impact their business.

Virtual CFO | Revenue Accounts And Expenses In Business

What of the most significant challenges that entrepreneurs face today says virtual CFO is running out of money in their business. In fact, it is the second most common reason for entrepreneurs to fail behind not finding the right market for their product or service. If entrepreneurs had that better understanding of the expenses in their business, and how to get to their breakeven point, they could significantly avoid running out of money in their business and increase their ability to succeed.

When it comes to costs, entrepreneurs should understand that there is two different types of cost. Virtual CFO says the overhead expenses are the expenses that an entrepreneur is going to have regardless of what they sell or do not sell in a month. Examples of overhead expenses are the rent of their office space, administrative staff, office supplies, utility bills like power water and heat, as well is bills such as the Internet and phones. These expenses exist no matter how much an entrepreneur does not sell.

The direct costs are also known as cost of goods sold says virtual CFO, and referred to all of the expenses that are incurred by producing the product or service that the entrepreneur sells. This includes labor as well as all of the raw materials to produce the products. When an entrepreneur is making the pricing for their product or service, not only do they need to take into consideration the direct costs, and price it so that they do not lose money on the direct costs, but have enough of a mark up on their cost so that they can pay for their overhead expenses as well. This is a delicate balancing act between knowing what they can sell their products for in order to pay for their overhead expenses, but not charging more than the market can bear. Once they figure that out, they need to figure out how many products or services they need to sell in order to pay for those overhead expenses. When they have figured that out, that is their breakeven point. If an entrepreneur is having a hard time reaching that breakeven point, they either need to increase their prices or decrease their overhead expenses. They may need to lay off some admin staff, put their administrative staff on revenue-generating activities, or finding an office space with lower rent or utility bills.

When entrepreneurs figure out what their breakeven point is after they understand their direct costs and overhead expenses, they will be able to ensure that they are reaching that breakeven point every month. By understanding this, entrepreneurs can significantly avoid running out of money in their business, it is the second most common reason why businesses in Canada fail. By doing this, they can significantly increase their chances of succeeding in business.