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

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Virtual CFO | Understanding Revenue Accounts And Expenses

Warren Buffett famously said, ìaccounting is the language of businessî, and virtual CFO says that when entrepreneurs can learn to speak this language of business, they can significantly impact their ability to succeed in business. 50% of all entrepreneurs fail in Canada, and 29% of those entrepreneurs that failed said that the reason why they were not able to succeed in business, is because they ran out of money. When entrepreneurs can understand how to read their financial statements, and learn what decisions they need to make based on that information, they can significantly impact their ability to succeed in business.

For example, entrepreneurs need to understand how many revenue accounts they need to have on their income statements. Virtual CFO says the rule of them should always be three-year lasts, while keeping in mind that less is best. The reason why, is because having many revenue accounts not only creates a lot of work, trying to figure out where to classify all of the various revenue streams but also increases the potential for miss classifications. This is extremely important when an entrepreneur is reviewing quarter to quarter or year over year, and seeing the variances in the revenue accounts. Rather than it being revenue that is going up and down, it could simply be miss classifications. That way, the fewer classifications the best.

Another reason that entrepreneurs should ensure that they have fewer revenue accounts on their income statement, is so that their income statement can fit on one page. No business in the world needs to have an income statement longer than one page. Even the largest businesses in the world, like publicly traded companies still only have one-page income statements. The reason for this, is so that important decisions can be made by looking at that one-page statement. The longer it is, the harder it is for entrepreneurs to make decisions based on that statement says virtual CFO. Decisions such as do they need to lay off a staff member, can they afford to hire staff on? Can they afford to buy a piece of equipment that is going to significantly impact their business? These decisions can be made much more easily and accurately when one-page income statement exists.

Many businesses tend to believe that their business is different, or unique and needs to have more than one revenue account. However, business owners need to understand that even if the largest companies in the world can have a one page income statement, so can they. For example, a restaurant may think that they need to have several different revenues accounts one four their dying and customers, one for take-out customers, one for desserts, one for parties. However, virtual CFO recommends that that business only have one classification called food. Maybe they went have a second classification if they sold merchandise out of their store as well.

When entrepreneurs can understand how important revenue accounts are to their income statement, they can significantly impact the accuracy of that financial statement, and ensure that it becomes a great tool for them to use to make the right decisions in their business.

Virtual CFO | Understanding Revenue Accounts And Expenses

When small businesses can understand how to calculate the revenue in their business, especially when it comes to cost of goods sold and gross margin, virtual CFO says that they can start to make impactful decisions that can help them calculate their breakeven point, so that they know how much in sales they need to bring into their business to avoid running into a cash crunch. Since 29% of all failed businesses say that the reason why they failed was that they ran out of money, this can significantly impact the entrepreneur’s ability to remain in business.

One of the more important things that entrepreneurs can ensure that they do says virtual CFO, avoids having an income that is not related to their core business listed in the revenue section of their income statement. While it is necessary for entrepreneurs to put this information into their business, so that they can avoid paying personal taxes on it, it should not live in the revenue section of their business. The reason why, is because it can definitely impede that entrepreneurs’ ability to appropriately calculate margin if there is costs in the revenue stream that have nothing to do with the business. Business owners should understand that they can always be included in the other category. It is literally listed as other income and expenses for all additional income that is not related to their core business. Such as: rental income from a property that they own, dividends from their stock portfolio. Everything that needs to be kept separate is a revenue, cost of sales, gross margin, overhead expenses, income operation, and the other income and expenses.

Entrepreneurs should understand that direct costs are normally fluctuating in their business, while overhead expenses do not. Virtual CFO says that direct costs, or cost of goods sold go up or down with the sale of products or services. If an entrepreneur has generated 25% more sales, the cost of producing that product or those services, will also go up 25%. The only thing that entrepreneurs should be aware of when it comes to their cost of goods sold, is that they fluctuate with the sales at a predictable margin. On the other hand, overhead expenses should not fluctuate very much at all. Overhead expenses include things like rent, administrative staff, office supplies says virtual CFO. By understanding that an entrepreneur needs to get enough money from the sale of their products, to cover their direct costs, but also cover their overhead expenses. The breakeven point that an entrepreneur will have, will be what they have to sell in order to pay for their overhead expenses as well as their direct costs. That amount is there breakeven point.

When entrepreneurs understand what their breakeven point is, then they are more prepared to be able to meet that minimum amount of money every month, and avoid running out of business due to not having enough money.