Virtual CFO | Revenue And Expenses Demystified
When entrepreneurs first get into business, they get into business because they love the industry that their business is in says virtual CFO. But being good at what their business does, does not necessarily mean that they are good at running that business. This is a constant struggle for many entrepreneurs, lacking knowledge about how to operate their business. Therefore, they are on a very sharp learning curve and have to learn while doing it, and any mistakes mean that they risk going out of business. Many entrepreneurs lack a lot of financial literacy in their business that if they had more financial knowledge about their business, they may be able to significantly impact their ability to succeed in business.
One way that entrepreneurs can succeed, is by making more informed financial decisions. How they can do that is by using their financial statements to review their finances before they make any large financial decisions in their business. Virtual CFO says that entrepreneurs actually get into the habit of reviewing their income statement before any financial decisions whether it is paying vendors, running payroll, or anything significant like making a large asset purchase, hiring new staff or laying staff off, and can make decisions like do they need to increase their pricing. All of these decisions become much easier when an entrepreneur uses their income statement.
One of the most important parts of using their income statement to make financial decisions is that it is very easy to read the document. It takes a large amount of information, and a lot of complex concepts and distills it down into an easy to read a piece of paper that entrepreneurs can get a lot of information from very quickly. Virtual CFO says that in order to accomplish this, entrepreneurs should ensure that they only have three revenue accounts on their income statement or less. And virtual CFO stresses less is best. Some entrepreneurs think that their business is so unique that it has the need to have several more revenue accounts on it. However, the most successful corporations in the world and the largest companies only have three or fewer revenue accounts, and their income statement is only one page.
Some examples of businesses in the number of revenue accounts that they should use are: a physician should have a revenue account for their own income and for the Associate’s income. A dentist, on the other hand, might have three, one for their own income, one for their Associate’s income and one for their hygienist. A restaurant might only have one because all they sell is food. The contractor would have two, one for projects and one for service calls because of how differently those two different jobs are acquired and the difference in materials and labor needed to complete them.
When entrepreneurs understand how to minimize their revenue accounts on their income statement, and that they should be reviewing their statement before they make any large financial decisions in their business, they can significantly impact their chances of succeeding in business.
Virtual CFO | Revenue And Expenses Demystified
It is extremely important that entrepreneurs learn very quickly and their entrepreneurship how to reach their breakeven point says virtual CFO. 50% of all Canadian entrepreneurs fail in their business within five years, and the second most common reason why entrepreneurs fail is that they ran out of business. In fact, and 29% of all entrepreneurs that fail say this is the reason why. By understanding their costs, entrepreneurs can also understand what their breakeven point is so that they can ensure that they are always reaching their breakeven which will help them avoid running out of money in their business.
The most important thing that an entrepreneur should understand when it comes to their expenses, is that they will have two different types of expenses that only do they need to understand these, but they need to keep them very separate. If they do not separate these expenses out, it can be very difficult for an entrepreneur to calculate their breakeven point says virtual CFO. These different types of expenses are the direct costs, and overhead expenses. The overhead expenses referred to all of the expenses that are going to exist in the business with the be entrepreneur is doing sales or not. This is rent, utility bills, phones and Internet and office supplies. These are not going to change from month to month, and exists whether or not the entrepreneur is selling products or not.
Direct costs are the direct cost associated with producing their products and services. This includes the labor involved in making the products or doing the service, as well as the raw materials needed to produce that product. The most important thing to note with these direct costs is that they fluctuate every month. However, virtual CFO says that they fluctuate in conjunction with the entrepreneur’s sales of products that month. In fact, entrepreneurs should verify that when their direct costs go up, that it is because their sales have gone up by the same percentage. If the direct costs are going up at higher increment then the sales, then that can indicate to the entrepreneur that they need to minimize their expenses or that they need to increase their prices.
When they calculate how many products or services they need to sell in a month to pay for their overhead expenses while paying for the direct cost at the same time, that is the entrepreneurs calculated breakeven point. By knowing that that is how much money they have to make every single month in order to break even, they can avoid running out of money by reaching that goal every month. They can increase their marketing or their revenue-generating activities in order to get there. When entrepreneurs know that information, they are more likely to be able to avoid running out of money in their business, and can significantly grow their business as well