Virtual CFO | Understanding Revenue Accounts
Understanding the revenue in their business is extremely important to helping entrepreneurs make informed financial decisions says virtual CFO. Many entrepreneurs getting into business for the first time lack basic financial literacy in their business, and that can contribute to making some financial decisions that put their business at risk. Entrepreneurs can learn early on in their business about the revenue accounts in their business, can help them up to calculate the gross margin in their business, which can help them make more informed financial decisions in their business.
The first thing that entrepreneurs need to understand is it is important that they have three revenue accounts or lasts in their business. Many entrepreneurs believe that having many more revenue accounts is a way that they can be very detailed about all the way that the revenue comes into their business, however, virtual CFO says that all this does is creates a lot of work, as well as it increases the ability for revenue to be misclassified from month-to-month, which will end up with an entrepreneur having poor information. Also, having three revenue accounts or lasts ensures that the income statement can fit on a single page. The reason this is important, is so that they can be used by the entrepreneur to make informed financial decisions.
Many entrepreneurs believe that their businesses complex enough that three is not adequate, but some of the largest businesses in the world have three or fewer revenue accounts. Entrepreneurs who think otherwise may be overthinking things. For example, restaurants should have one single account because what they sell is food. Maybe will have a second if they sell merchandise like T-shirts or mugs, or if they cater on the side. Contractors say virtual CFO should have two accounts, one for projects and one for service calls, because of the differences in skills, labor, materials, and management required for each of those jobs. Professional corporations may have two different accounts one for professional and one for their Associates. As a general rule, business owners should understand less is best.
It is also important that entrepreneurs ensure that they keep income that is not related to their core business out of their revenue section. They can put it with other income and expenses for things like rental income, dividends from stocks, or gains on any investments they have made. If it is not directly related to the business, it should not be in the revenue section. The reason for this, is because this can help ensure the accuracy of calculating their gross margin. It is important that that additional income is accounted for, but it needs to be accounted for properly in order to avoid impacting the ability to correctly calculate gross margin.
When entrepreneurs are new in their business, they should learn right away how to account for the revenue in their business, so that they can avoid making mistakes that will cost them the ability to calculate margin correctly in their business.
Virtual CFO | Understanding Revenue Accounts
The reason why it is important for entrepreneurs to understand revenue accounts in their business says virtual CFO, is to help entrepreneurs avoid running out of money in their business. 50% of all entrepreneurs end up feeling, and 29% of the failed entrepreneurs say the reason why they failed is that they ran out of money in their business, making this the second most common reason for entrepreneurs to fail in Canada. Business owners can directly impact this statistic by learning how to calculate their gross margins in their business.
In order to understand how to calculate their gross margins, entrepreneurs should understand the difference between general expenses and direct expenses. General expenses are all of the expenses that an entrepreneur incurs that they have sold any products or not. Examples of these expenses include office supplies, administrative staff, rent, utility bills and phone and Internet costs. These expenses will not fluctuate from month-to-month very much and will exist no matter how many sales an entrepreneur has or not.
The direct costs, on the other hand, are all of the costs that are associated with producing the product or service that the entrepreneur sells says virtual CFO. For example, it is the raw materials as well as all of the labor that went into producing that product or service. The most important thing to understand is the direct costs are going to fluctuate monthly directly related to the sales. An entrepreneur should be ensuring that their direct costs are going up at the same rate, because if the costs are going up higher than sales, they may have to minimize expenses.
In order to calculate the gross margin says virtual CFO, an entrepreneur needs to take the monthly revenue of the business and subtract the monthly direct cost. The resulting amount is the gross margin. It is extremely important that an entrepreneur understands with their gross margin is, because that is the amount of money that they have made in the business and needs to pay for all of their overhead expenses. By calculating how many products an entrepreneur needs to sell in a month in order to pay for all of their overhead expenses as an entrepreneurs breakeven point. By understanding this number, an entrepreneur has a goal of how many they need to sell every single month in order to avoid running out of money in their business.
By understanding how to calculate the gross margin, and then calculating the breakeven point, can help an entrepreneur set goals in their business. By having a goal to reach every single month, and creating a plan on how to achieve it can help entrepreneurs ensure that they are doing what they can to cover all of their expenses in their business. If entrepreneurs do not understand this, they may not have any idea that there running out until it is far too late. My staying on top of all of their expenses on a monthly basis and understanding what their revenue and gross margin is can significantly help an entrepreneurís chances of succeeding in business.