Virtual CFO | What Is Gross Margin
Very important for entrepreneurs to be able to understand their business finances says virtual CFO and even Warren Buffett has been quoted as saying îaccounting is the language of businessîthey helping entrepreneurs understand that language, can help them make more financially sound decisions in their business. If entrepreneurs do not understand their financial statements, they do not understand profit and loss, gross margin or overhead, which puts their business at risk of not only making poor financial decisions, also at risk of not being able to price their products in such a way that will help them cover all of their expenses in business.
One of the most important financial statements for an entrepreneur to understand is there an income statement. Virtual CFO says that this is such an important document because business owners should be reviewing this statement before any time they make any financial decisions in their business big or small. If they’re going to run payroll or pay bills, they should review the statement in order to ensure they have the money in their business to cover that cost. If they are planning on making an asset purchase, hiring new staff, or giving raises, entrepreneurs should be consulting their income statement in order to ensure that they have the finances to do so.
One of the keys to ensuring that they have a very easy to read an income statement is by ensuring that entrepreneurs have three or fewer revenue accounts in their business. Many entrepreneurs have several revenue accounts because they either think their business is unique enough that they need to have several, or they think they are giving a lot of information that is going to be helpful. However, virtual CFO says that all this does is creates a lot of work, and increases the potential for miss classifications. Even the largest businesses in the world have three or fewer revenue accounts. For example, a restaurant may want to have several revenues accounts one for dying in, one for take-out, one for drinks, one for dessertís and one for main courses. However, the virtual CFO would recommend that entrepreneurs with restaurants should have one account for food only. Maybe a second if they sell merchandise like T-shirts or mugs, or if they have a catering side Due to the differences in cost, and how the business is obtained.
The reason why it is important to have three accounts or less, not only because it simplifies things, but because it can help the income statement fit on a single page. It is important that an income statement does fit on only one page, is that it can be reviewed very easily. The value of an income statement takes a lot of complex information and presented in an easy to read format. If it is more than one page, it is less easy to read and maybe more difficult for an entrepreneur to make informed financial decisions with it.
By understanding how many revenue accounts an entrepreneur should have in their business, can help them ensure that they have the most helpful document for them to make informed financial decisions with, which can help them significantly run a more financially viable business.
Virtual CFO | What Is Gross Margin
One of the most important reasons for an entrepreneur to learn what the gross margin in their business is said virtual CFO, is so that an entrepreneur can ensure that they are covering all of the expenses in their business. Since running out of money is the second most common reason why entrepreneurs fail, learning how to calculate the gross margin in their business early on can help ensure that they are covering all of their expenses, which will help them avoid running out of money.
In order to calculate what the gross margin is in business, is when an entrepreneur can take the revenue in their business and subtract the direct cost then they get the gross margin. The direct cost of a business is all of the costs that an entrepreneur will have associated with the sale of their product or service. This includes all of the costs of the raw material as well as the labour used to produce that product or service. It is important for a business owner to understand the difference between their direct costs and their general expenses.
The general expenses in business says virtual CFO are all of the expenses that are not related to the sale of their product or service. This is the cost that an entrepreneur would incur whether they made any sales in their business or not. This includes rent, utility bills, cell phones, and the Internet, and things like office supply or admin staff if they have any. It is important an entrepreneur understands the difference between the two, not only so that they can ensure that their pricing their product to cover all of their direct costs, but how much their overhead expenses are, so they know how to price their products so that they are also covering their overhead expenses.
When an entrepreneur calculates their gross margin, and figures out how much they need to sell in order to cover their general expenses, an entrepreneur can figure out how many sales they need to make in a month in order to cover all of their expenses and avoid running out of money. By having this target in mind, an entrepreneur has a direction and a goal that they can aim for in their business that can help them succeed.
It is also important that an entrepreneur understands to keep an eye on their expenses to ensure that the costs do not rise uncontrollably says virtual CFO. As long as the direct costs are going up at the same rate that sales are going up, they know that their costs are in control. However, if direct costs go up at a higher rate than their sales, they may need to minimize expenses, or take a look at their prices again.
If says that entrepreneurs can avoid running out of money in their business if they understand gross margin so that they can calculate what their breakeven point is, and know how many products or services they need to sell their business in order to break even. Understanding this is one of the keys to avoiding running out of money in their business.