Virtual CFO | Understanding The Breakeven Point In Business
Many entrepreneurs struggle with understanding their business finances, simply because they do not have any experience with business owners before they become one says virtual CFO. They should have a list of all of the most important things that they need to learn immediately and business to be able to positively impact their ability to make informed financial decisions. One of the most impactful ways of doing this is by understanding the income statements of the business.
The reason why income statements is so important to understand in business says virtual CFO, is because it takes all of the financial information of the business and makes it very easy to read. An entrepreneur can look at their income statement and understand very clearly the financial position of their business. This can help them make informed financial decisions like if they have money in their business to be able to hire more staff, give them a raise, purchase an important asset, or if they need to change their pricing in order to make more money.
One of the most important ways that an entrepreneur can ensure that this income statement is readable and useful, is by ensuring that it stays down to one page. The reason why it becomes very easy to read is because it takes a large amount of complex information and makes it easy to read by condensing it onto one page. Virtual CFO says that if entrepreneurs add to many different revenue accounts to their business, it can make their income statement very difficult to read. Many entrepreneurs believe that they are being very communicative and helpful in keeping multiple revenue accounts, but all it does is makes their income statement longer and harder to read, and also the more revenue accounts that there are, creates a lot of work and increases the potential to classify things incorrectly. The recommendation is to keep it to three or less. Even the most successful businesses in the world have an income statement that is one page long, and revenue accounts of three or less.
An example of different businesses and how many revenue accounts they should have would be a contractor that has to accounts, projects and service calls. Because of the extreme difference in how those jobs are acquired, also in the amount of revenue, labor, and supplies in getting them. Also, restaurants might only have one account which is food. Despite the fact that many restaurant tours want to have one account for food, one for drinks, one for dessert, and one for take-out. Keeping it simple ends up with a powerful tool to make financial decisions.
Virtual CFO says that when entrepreneurs learn how to read their income statement, as well as keep it simple, can have an extremely powerful tool that they can use to help them make informed financial decisions. These decisions can not only help them avoid running out of money in their business but help them make decisions that are going to impact their ability to grow and succeed as a business.
Virtual CFO | Understanding The Breakeven Point In Business
The failure rate for entrepreneurs in Canada is extremely high says virtual CFO. 15% of all entrepreneurs fail within their very first year of business. 30% fail in their second year, and by the time five years have been reached, half of all businesses will not be around anymore. There is three main reasons why entrepreneurs fail, and 29% of them fail because they have run out of money. By understanding how to avoid running out of money early on in their entrepreneurship can help them succeed. It is important that they do this early on in their business since 15% fail in the first year. How entrepreneurs can significantly impact their ability to avoid running out of money in their business is by calculating what their breakeven point is, and ensuring that they are reaching that amount every single month.
In order to reach their breakeven point calculation, entrepreneurs need to understand the two different types of expenses they have in their business. The first expense type that they have is the cost of goods sold, which is also called their direct cost. It is called direct cost says virtual CFO because it is directly related to the sales of the business. These are the costs that exist if an entrepreneur makes sales. If they do not make any sales, they will not have this cost in their business. It is the labor and raw materials needed to produce their products or services. When the direct costs increase in a business, an entrepreneur should ensure that it’s increasing the same amount of that they are increasing sales. If the sales have increased by 25%, the direct costs should also increase that amount. If not, that could indicate to an entrepreneur that their expenses need to be minimized or their prices need to account for that.
The overhead expenses, on the other hand, are all of the costs of the business that exist whether an entrepreneur sells anything or not says virtual CFO. These costs include rent, administrative staff, utility bills, phone and Internet, office supplies to name a few. In order for an entrepreneur to cover these expenses, they need to have enough in sales that they are covering their direct costs and their overhead. They price their prices to cover their direct costs, and then an additional amount to cover their overhead expenses. Virtual CFO says they need to then calculate how many products or services they need to sell in the month to pay for all of their overhead expenses.
Once an entrepreneur understands their breakeven point, virtual CFO says that business owners can develop a plan to hit that amount every single month through marketing efforts, advertising and revenue-generating activities. By understanding what their target to reach every month is, they can make that their goal instead of just trying to sell is much as possible without having a tangible amount they need to hit. By doing this, entrepreneurs can be insured that they are in a better position to avoid running out of money in their business and succeeding.