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E-Myth – “Why most small businesses don’t work & what to do about it”

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Virtual CFO | Avoiding Cash Flow Problems

Often entrepreneurs donít have a good grasp of why they are making money in their business, but their business is running out of cash says virtual CFO. With 50% of all businesses closing their doors to their business within five years, and 29% of those businesses saying that running out of money was the reason why they had to close their business, business owners need to learn the difference between profit and cash flow in their business and some basic financial literacy in order to understand finances in their business, as well as avoid problems that plague so many business owners and avoid cash flow problems. Once they understand how to avoid these cash flow problems, business owners will be in a better position to succeed in business.

One of the things that is an extremely important concept for business owners to grasp is revenue is added to the income statement at the time of invoicing. Many business owners assume that itís on the income statement once they get paid for it, but this actually isnít the case says virtual CO. It appears on their income statement is income as soon as that job is invoiced. I understanding this, business owners can understand why you chose profit and yet they donít have the cash for it.

Something else that can help business owners understand cash flow in their business says virtual CFO is how a sudden increase in revenue can cause financial strain on the business. Many business owners think that by increasing their revenue drastically wonít affect their expenses. If revenue of the business goes up, the expenses will also go up. In the reason why this creates cash flow problems is the expenses will need to get paid right away, while the business owner will be waiting up to a month in order to get paid on those jobs. So this can contribute to a cash crunch in businesses says virtual CO. Once business owners are aware that increased revenue means increased expenses, they can put plans into action in order to avoid the cash crunch.

Business owners often believe that when they purchase assets with cash, that is going to show up on their profit and loss statement as Increased assets. However a business owner needs to understand, that while that cash will be out of their bank account, it doesnít show up on their profit and loss statement in the same way. Being aware of this is very important for business to understand cash flow.

By helping Entrepreneurs learn some basic financial literacy in their business, and understanding causes cash flow problems, and also how to get around those cash flow problems says virtual CFO, they can avoid these situations in their business, and perhaps avoid running out of cash, and thing to close their business. Once business owners can increase cash in their business, they can start to become even more successful than they ever were before.

One of the large problems that are plaguing business owners in Canada say is running out of cash says virtual CFO. The reason for this is because business owners often have a poor understanding of why they are making money in their business and yet their bank account is running out of cash. With 50% of all businesses running out of business in five years, and 29% of those businesses will say that they ran out of cash as why they failed, helping business owners not only understand the difference between cash flow and profit in their business as well as some basic financial business literacy, business owners can be the odds and avoid the reason why almost 30% of failed businesses ran out of business and become more successful than they ever thought they could.

Business owners need to understand how cash flow works in their business, and how to not only avoid cash flow problems, but also increase cash flow in their business. One of the ways that they can do this is by increasing the processing period Between cut off and payroll the reason for this is the short amount of time a business owner has between cut off and payroll date, the less opportunity they have for collecting money in order to cover the cost of the payroll says virtual CF services. The longer amount of time between cut off and payroll, means the more amount of time the business owner has to collect money from clients in order to pay payroll . By avoiding a cash crunch when it comes to payroll, business owners can avoid either drawing on their own cash in order to pay payroll or avoid seeing payroll altogether which would create huge issues than their own business.

Another way that business owners can affect the cash flow in their business, is when they are arranging financing for their loans, is choosing an option has the longest amortization period possible. The reason for this says virtual CFO is the longer the amortization period is, the easier it is for the business owner to pay. This is true even if that means a business owner has to take a slightly higher interest rate. The longer length of time, means the lower the payments are. The less amount of money a business owner has to pay a monthly basis, means the less likely their business is going to run into cash flow problems. All too often, business owners choose the lowest interest rate and have to pay back the loan very quickly, and then run into cash flow problems and default on the loan.

Another way that business owners can avoid cash flow problems is to build early and Bill often says virtual CF. Why would they will monthly when they can build weekly should be a mantra of business owners. Especially because payment terms for invoices are often 30 days or more, if business owners are only billing monthly, that can lead to a lag time of up to two months before they get paid for the work that they completed job. This can definitely to cash flow problems. However if they switch to a weekly billing cycle says virtual CFO, then they will get into the habit of receiving cash on a weekly basis and eliminating those cash flow problems.