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In order to understand their financial statements, especially their income statement, virtual CFO says that business owners should understand what an income statement should look like, and what information should go on it. One of the first and most important things that an entrepreneur needs to keep in mind about their income statement, is that it should only be one page. The reason that it needs to be one page, is so that it can be read very easily. Entrepreneurs should be reading this income statement every time they are about to make an important financial decision so that they know if they are making the right decision or not. For example, if they want to understand if they can afford to buy a large asset purchase that they need in the business, if they need to hire more staff or lay them off, or if they need to be changing their prices. All of this is done by looking at an income statement that is one page.
In order to ensure that their financial statement is only one page, virtual CFO says that means revenue accounts need to be limited to three or less. Not only does having three or less revenue accounts mean that an income statement can be one page, but also having three or less means that it will be much easier to classify the revenue streams, and avoid miss classifying things. If entrepreneurs believe that their business is unique and needs to have additional revenue accounts, they should keep in mind that even the largest corporations in the world have three or less, and their income statement fits on a single page.
Once an entrepreneur understands what their income state looks like, and why it should be listed the way it is, entrepreneurs can ensure that they are working towards creating an income statement that looks like that, so that they can be able to easily read and understand it, so that they can be certain that they are able to make the best and most financially sound decisions. If entrepreneurs get into the habit of reviewing their income statements before making financial decisions, they will increase their chances of making better decisions more often.
Many entrepreneurs face a very difficult road ahead with business ownership says virtual CFO. In fact, half of all entrepreneurs fail in business before they have been in business for five full years. 42% of these failed entrepreneurs say the reason why they failed is that they were not able to find the right market for their product. 29% said they ran out of money, and 23% said that they were not able to have the right staff hired in their business. In order to help entrepreneurs avoid running out of money in their business, business owners should understand the various costs that they have in their business so that they can learn what their business is breakeven point is, so they know what goal they need to target in order to avoid running out of money in their business.
The two things that entrepreneurs need to understand when it comes to expenses in their business are what the two different types of expenses are. Virtual CFO says that there are direct costs and overhead expenses. Direct costs are the costs related directly to producing the product or service that an entrepreneur sells. It includes the labour as well as the materials. Entrepreneurs need to understand that these costs are going to fluctuate every month, depending on how many sales the business has. When an entrepreneur is looking at their direct cost and sees that they have gone up, the first thing that they should do is verify that their sales have gone up as well. Ideally, the rate that the direct cost goes up should be directly the same as sales. If the direct costs are increasing in price over and above the percentage of sales, that is the sign to an entrepreneur that they need to either minimize expenses by looking for a less expensive supplier or that they need to increase their prices to make up for the rising cost of raw materials and labour.
Overhead expenses, on the other hand, says virtual CFO are all of the costs in the business that are going to exist whether the entrepreneur is selling products or not. These costs are also going to say the same for month-to-month without significantly increasing or decreasing regardless of what the business itself is doing. These expenses are typically rent, administrative staff, office supplies, utility bills, phone and Internet bills just to name a few. An entrepreneur needs to calculate how much money they need to sell their product at, to not only cover the expense of the product, but to cover their overhead as well. The number of products or services that an entrepreneur has to sell in order to cover their overhead, as well as their direct costs, is what is referred to as the breakeven point. When entrepreneurs understand what their breakeven point is, they will be able to set a goal for that amount, and ensure that if they hit that goal every month, they will not run out of money in their business.
