Virtual CFO | Understanding Revenue And Expense Accounts
One of the biggest struggles that many entrepreneurs face in their entrepreneurship says virtual CFO is understanding their business finances. Intuitís, the makers of QuickBooks and did a survey of small business owners, in order to gauge how much they knew but their business finances. They asked the respondents questions like what are balance sheets, accruals and profit and loss statements. Out of all of the respondents, 82% score less than 70% on the quiz. If entrepreneurs can learn how to understand their business finances, they will be able to make more informed decisions in their business that will, in turn, allow them to run their business more successfully.
The first thing that entrepreneurs should understand when it comes to understanding their revenue, is how many accounts should be on their income statement. The virtual CFO recommends that there is no more than three. The reason is because having more than three not only can create a lot of work, but it also increases the potential for entrepreneurs to incorrectly classify the different revenue accounts. A great example of minimizing the revenue accounts would be a contractor that only has two, one for projects and one for service calls. A restaurant, for example, might have only one because all they sell is food. Perhaps they would have a second one if they sold merchandise or had a catering side to their business.
Another reason that an entrepreneur should not have more than three, is that it would mean that the income statement would not fit on a single page. The power of the income statement is that it can take a lot of complex information, and distill it into one page for entrepreneurs to be able to review and get the most important information out of it. This can help them make large financial decisions like can they afford to buy an important piece of equipment, can they afford to hire more staff or they have to lay off staff? They can also use the income statement to determine if they need to change their pricing. Virtual CFO says that by keeping it to a single page increases the ability to do that.
Another thing is very important to understand is if an entrepreneur has income coming into their business, but is not related to their core business, this information should not be included in the income statement under revenue. While it is important that an entrepreneur continues to claim all of the various revenue sources that they have, it should not be in the same area of the revenue of the business. The reason why is it so that entrepreneurs can avoid interfering with the ability to calculate the margin of their business. There is a section for other income and expenses where it should be so that the revenue from other sources can be included in the financial information, without interfering with calculating the margin of the business.
When entrepreneurs learn the best way to review their revenue in their income statement, they can become more equipped to make better financial decisions in their business.
Virtual CFO | Understanding Revenue And Expense Accounts
Entrepreneurs are faced with a very high rate of failure in business says virtual CFO. 50% of entrepreneurs that open businesses will fail by year five, and out of those entrepreneurs, 29% will say that they have failed because they ran out of money. If entrepreneurs can better understand their expenses, they will better understand their margin and be able to calculate to their breakeven point so that they can avoid running out of money in their business.
The first thing that entrepreneurs need to understand when it comes to costs, is there is two different types of costs that they need to take into consideration says virtual CFO. There is general or overhead expenses and direct costs or cost of goods sold. Overhead expenses are the expenses that a business owner will have in their business regardless of how much product they are selling. These are to be the consistent costs that they will have just as a byproduct of opening their doors. Examples of overhead expenses are rent, utility bills, phone and Internet, administrative staff, rent, and office supplies.
The cost of goods sold or direct costs are the costs that are associated with paying for the supplies or labor that go into providing the product or service that company sells. This normally fluctuates with the sales, because as the sales go up or down, so to the costs says virtual CFO. If they sell 20% more, they need more labor to produce the products or services, as well as materials.
Business owners need to ensure that all of the products and services that they sell cover the direct cost of their products or services as well as cover their overhead expenses. They must figure out how much they can sell their product for, and cover their costs, and how many they have to sell in order to cover their overhead expenses. Virtual CFO says that once an entrepreneur has figured out how many products they need to sell in order to cover their overhead expenses, that is their breakeven point. By clearly understanding this, entrepreneurs can be better equipped to ensure that they reach that target, or surpass it. By understanding what their sales goals should be, so that they reach their breakeven point can help entrepreneurs avoid falling short of that goal, and understand what they need to do in order to reach that goal, and once they do they will be able to avoid going out of business because they have run out of money.
Understanding their expenses, ones that are going to fluctuates and the ones that will not, will help business owners come up with their breakeven point that they can use to help them avoid running out of business, as well as grow their business and become even more successful.