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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 In Business

When entrepreneurs better understand the financial aspect of their business, virtual CFO says that they become better equipped to avoid the second most common reason why entrepreneurs fail in business. That reason is running out of money. With 50% of all entrepreneurs feeling in business, and 29% of them running out of money, helping entrepreneurs overcome that hurdle can increase the success rate for many small businesses in Canada.

Many professional corporations like doctors offices and construction companies often struggle when it comes to understanding their financial statements. By helping them understand their business finances, can increase their ability to succeed in business. For example, understanding how many revenue accounts should be on their income statement is very important. The more revenue accounts there are, the more difficult it can be to be consistent in the classification of various expenses. Also, the more accounts there are means the larger the income statement is going to be. Even the largest companies in the world have a one-page income statement.

A good rule of thumb is for entrepreneurs to have three revenue accounts or less. Virtual CFO says that for doctors such as general practitioners, dentists and optometrists, those three revenue accounts could be the doctor’s income, the Associate’s income and then an additional income like a hygienist for a dentists office. It is very important that they keep the Associate’s doctors revenue account separate so that the doctor can see how much they are bringing into the business and their employees. When it comes to contractors and companies that work in the trades, a great revenue account separation would be projects and service work. The reason why those should be separate is that that work is acquired very differently in the business. And, there is also usually a very big revenue difference in working on new projects versus service work. Some might require more manpower, more supplies and management.

When it comes to breaking down the labour, virtual CFO says that companies that work in the trades are normally going to split costs to labour, subcontract and materials. Although, many entrepreneurs question why splitting subcontract and labour. Even though they are both technically labour, the recommendation is to keep labour and subcontract separated, so that the entrepreneur can see specifically their employees costs versus subcontract costs. And because of the various revenue accounts for a trade that has projects and service work, they may end up with six expense accounts a labour, subcontract and materials for both the projects and the service work categories. Depending on the type of business, this may change.

For physicians, dentists and optometrists, their cost of goods sold made include the associates, they get paid a percentage of their billings. Virtual CFO says dentists may delineate Associates and hygienists as well as lab costs because the lab costs are as a significantly different expense than typical medical expenses like gauze and rubber gloves. Dentists on the other hand will have the Associates also the costs of glasses and contacts as a cost of good expense account.

Virtual Cfo | Understanding Revenue In Business

When medical practitioners and trades start to understand the cost of goods and revenue in their business, virtual CFO says that they will be better equipped to calculate their gross margin, and calculate their breakeven point. When there able to understand what their breakeven is, they can ensure that they are getting sales to cover that, so that they can avoid running out of business because they have not been able to generate enough revenue to keep their business going.

Entrepreneurs should understand what gross margin is, and why it is important to understand the difference between it and total direct costs. Virtual CFO says the gross margin of the business is when the entrepreneur takes the revenue of the business and subtracts the direct cost. The amount that is left over is the gross margin. It is different to differentiate between the two, because direct costs tend to go up or down depending on the sales in the business. The gross margin, refers to the amount of money that the business profits.

It is very important that business owners separate and understand gross margin in order to help understand where their breakeven point is. The overhead of the business is not going to change from month to month, because the rent, utility bills, office supplies, and admin staff are typically not going to change month to month. Therefore, an entrepreneur needs to know how much that is every month so they can ensure that they are making at least that much over and above the cost of goods sold every single month to cover those expenses. Not only does the entrepreneur need to cover the cost of goods sold, but calculate how much they have to make every month to cover the overhead every single month plus the cost of goods sold. When they understand how much they have to make every single month, they can plan to meet that goal every single month, so that they do not end up falling short of their breakeven point, and end up potentially going out of business because they did not make enough money to cover their expenses.

In order to help understand that, small business owners need to keep the following in mind: not having too many revenue accounts, and keeping their costs separated out, so that they understand were all of their costs are coming from. Virtual CFO says that when entrepreneurs can do that, they can start to understand the revenue and the cost of goods sold in their business so that they could more easily succeed in business. Once entrepreneurs learn how to pass their breakeven point, they can significantly overcome the 50% failure rate that Canadian businesses have as well as significantly avoid running out of money in their business, which is but 29% of all failed entrepreneurs sayís exaggerating factor to their businesses failure.