Virtual CFO | Understanding Profit And Expenses
If entrepreneurs are struggling to understand their business finances says virtual CFO, they stand a greater chance of failing in business. As Warren Buffett has famously said, accounting is the language of business. And 82% of entrepreneurs who were quizzed on basic financial literacy score less than 70% on the quiz. This shows that many entrepreneurs are struggling with understanding the language of business. When entrepreneurs can better understand their income statements, they can use that information to make better financial decisions and learn a bit more about their business finances so that they can succeed.
One of the first things that entrepreneurs should understand when it comes to their income statements, and learning how to read it, is that it should only have three revenue accounts at most says virtual CFO. Even the most powerful companies in the world have three revenue accounts or less on their income statement. The reason why, is because the power of the income statement is the ability to read to the information quickly and be able to make decisions. It is designed to distill a large amount of important information very efficiently. By having more revenue accounts, actually confuses that and makes it harder to read. Also, the more accounts there are, the less likely it is going to be able to fit on one page, and when the income statement is more than one page, it becomes that much harder to read.
Also, an entrepreneur should keep in mind that when it comes to their revenue, they should not have income that is not related to the main business in their revenue section says virtual CFO. It needs to be kept separate, so that an entrepreneur can calculate the margin of their business properly. If they had a bunch of different revenue streams in their business revenue, it may look like the business is more profitable than it is, and because an entrepreneur to make the wrong financial decisions in their business. Therefore, entrepreneurs need to ensure that the revenue section is for their core business only. However, other income should belong on the income statement, but in the category called of their income and expenses. If an entrepreneur has rental income from other properties that they own, dividends from a stock portfolio that they had, this should go into the other category. This way says virtual CFO, the entrepreneur can ensure that they have their revenue being claimed, but not in a way that puts their business at risk.
When entrepreneurs can more efficiently read the income statement of their business, they can make a far better decision about the finances of their business. Such as are they able to buy an important asset, they need to and can afford to hire more staff, or are they needed to lay them off. Does that an entrepreneur need to change their pricing in order to break even? All of these decisions are made much more easily with correct and easy to read income statements.
Virtual CFO | Understanding Profit And Expenses
learning how to read the financial statements of the business says virtual CFO can significantly impact an entrepreneurís ability to succeed in business. The reason why, is because 50% of all Canadian entrepreneurs fail in business, and 29% of those failed Canadian entrepreneurs have said that the reason why their business failed is that they ran out of money. When entrepreneurs can learn how to read their financial statements better, they can make better decisions, and know what they need to do in order to avoid running out of money.
When it comes to understanding their financial statements, entrepreneurs need to understand the costs of their business says virtual CFO. The two different types of costs that entrepreneurs will have in their business are direct costs and overhead expenses. Virtual CFO says both are important, but entirely different and need to be handled separately so that entrepreneurs can truly gain an understanding of why they go up, how to control them, and how to price their product and service so that they are efficiently and effectively covering those costs consistently.
Direct costs are the costs that the business incurs when they sell products. In order to produce the product or service that they sell, the direct costs are associated in that. If it is a contractor that needs to buy building materials if it is an optometrist that needs to purchase frames and lenses if it is a restaurant that needs to buy food. The more products or services that they sell, the more their direct costs are going to go up says virtual CFO. It is also important to note that as sales fluctuate, so will the direct costs. However, an entrepreneur should ensure that they are fluctuating at the same rate as sales. Sales go up 20% direct costs should go up 20% for example. If they are not, and the direct costs are going up even higher, a business owner may need to minimize expenses by looking for another supplier, switching to different products to save money, or even increasing their pricing because the fluctuation was because of typical inflation.
Overhead expenses on the other hand, do not fluctuate very much at all from month-to-month. Overhead expenses include things like rents, utility bills, phone and Internet, office supplies and administration staff. Virtual CFO says that an entrepreneur needs to understand what their overhead expenses are, so that when they are pricing their products or services, not only do they have to pay for the direct costs, but they also need to price in such a way they are covering their overhead expenses. The minimum number of products that an entrepreneur needs to sell in order to cover their direct costs and overhead expenses is considered the entrepreneur’s break-even point. By understanding what that breakeven point is says virtual CFO can help entrepreneurs ensure that they are striving to reach that amount so that they can ensure that they ate that goal monthly so that they can avoid a situation of not having enough sales and going out of business because they do not have enough money.