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In order to help entrepreneurs improve their ability to make good financial decisions in their business, virtual CFO says that they should learn how to read and income statements. The reason why is because an income statement can provide an overview of the entire business finances so that entrepreneurs can use that information to make informed business decisions. For example, an entrepreneur can look at their income statement and see if they have enough money in their business to make that asset purchase. If they do not, they can come up with a plan on how they are going to save money to make that asset purchase, or they can secure financing. If an entrepreneur does not consult this statement before making the decision to purchase and assets, they could negatively impact their business finances, or cause them to run out of money, which could force them to have to close their business down.
One of the important aspects of the income statement says virtual CFO, is the fact that it is only one page long. It is a very efficient way to take a large amount of information, information that is extremely complex as well and makes it very easy to understand. One of the ways that an income statement is easy to read, is if their revenue accounts are kept to a minimum. Virtual CFO recommends less is best at three or fewer. When an entrepreneur keeps their revenue at three or less, their income statement remains on one page and is easy to read.
Not only is it much easier to read, but it minimizes the possibility of classification errors when there are fewer accounts. Many entrepreneurs believe that they are being very communicative by increasing the number of revenue accounts they have, without realizing it makes it more difficult to read. Also, many entrepreneurs believe that their business is unique, and needs several revenue accounts. However, the biggest companies in the world have three or fewer and end up with the one-page income statement.
When entrepreneurs are able to keep their revenue accounts down, they not only increase the accuracy of their income statement, but they ensure that it remains a very useful tool in helping them make informed financial decisions that can help their business grow.
One of the most significant challenges that entrepreneurs face in business in Canada says virtual CFO, is running out of money in their business. In fact, it is the second most common reason for business owners to fail. 15% of all Canadian entrepreneurs fail in their first year of business, 30% fail by their second year, and 50% have failed by year five. These are tremendous statistics, that can be minimized if entrepreneurs learn very early on in their business what their breakeven point is. By learning that, they can ensure that they are setting their sales targets high enough to avoid running out of money.
The way a business owner will calculate their breakeven point is by understanding their expenses. There is two different types of expenses that need to be kept separate in order to properly calculate the breakeven point. The first type of expense says virtual CFO is the overhead expense. These are all of the costs that an entrepreneur will have regardless of how many products they sell in a month or not. These expenses are static and will remain constant from month-to-month. Examples of overhead costs are office supplies, rent, utility bills, cell phones and the Internet, and any administrative staff.
The other type of expense says virtual CFO is the direct cost, also known as the cost of goods sold. These expenses are directly related to the sales of their products or services. If an entrepreneur does not make any sales in that month, they will not incur any expenses. Examples of direct costs are raw materials and labor. These costs can fluctuate quite a bit, based on how many products a business owner has sold in that month or not. If an entrepreneur has a 25% increase in sales, they should see a 25% increase in the cost of goods sold. If the cost of goods is increasing at a much higher rate in the sales, an entrepreneur may need to minimize those expenses, either through finding a less expensive supplier or even by increasing the price of their products to make up for inflation.
When a business owner understands all of their expenses, they can simply calculate their breakeven, by figuring out what they need to sell their products or services that in order to cover their direct costs plus extra. The more they can sell their product or service for over and above their direct cost goes directly onto their overhead expenses. By figuring that out, they can calculate how many products or services they need to sell in a month in order to pay for their entire overhead. Once an entrepreneur knows their breakeven, they know what they are aiming to hit for sales every single month so that they do not run out of money in their business. They can increase their revenue-generating activities such as sales calls and advertising in order to reach that amount. If it is too difficult for them to reach their breakeven, they may need to minimize their overhead expenses to achieve that.
