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By understanding these simple business financial concepts, can help business owners understand how to deal with cash flow problems, as well as avoid them altogether. Business owners need to understand when revenue is added to their income statement says virtual CFO. Revenue is added to income statements as soon as it is invoice to. But just because it is listed on the income statement, doesnít mean the business owner has received payment before it yet. If business owners can understand this concept of having show as being a profit on their books, well not having the money yet, business owners can start to understand that they have profit in their business but not necessarily cash flow.
Business owners can also be better prepared for cash flow problems they understand why the sudden increase in revenue in place cash flow strain on their business. Many business owners have a goal of increasing their revenue, so they get very excited when it happens, and are not to prepared what happens in their business as they are achieving that goal says virtual FO. The reason for that is although a business revenue may go up, they also have increased expenses go up alongside it. And in the business owner wonít get paid for the increased revenue until usually about a month later, they have to take into consideration that those increased expenses will need to get paid right away. By understanding that a jump in revenue in the future will result in a cash crunch today. With there are several things that businesses can do in order to avoid this cash crunch including shortening the terms of their invoices, lengthening the terms of their bills, financing hard assets in order to free up money for operating capital, and increasing the frequency of their billing cycle. If the business owner is aware of this potential cash crunch when they start getting busier, they can put systems into place and time to minimize or avoid that situation before it occurs.
Once business owners learn some basic business financial literacy, and understand why businesses have a cash crunch says virtual CFO, businesses can put systems in place in order to deal with cash flow issues, avoid cash flow problems and be successful in business.
Half of all businesses that go out of business will do so in five years says virtual CO, and 29% of those failed businesses say the reason why be without a business is that they ran out of money. Entrepreneurs often do not understand why the income statement says they are making money in their business, but their bank account says that they are running out of cash. By helping business owners understand them business financing, business owners can know why this happens, and put systems into place to avoid it.
Something that business owners should understand is when they use cash to buy assets their profit and loss statement is affected, but maybe not in the way they were expecting says virtual CFO. When business owners by assets in their business their bank account shows the change immediately because they have less money in their banker. However it doesnít show up on the profit and loss statement the way they would expect. Most business owners would expect that those assets show up on the problem statement as assets however itís not necessarily the case. Depending on what the asset is whether itís computers, vehicles, or leaseholder improvements for example they will show up on the profit and loss statement as various by products of those purchases. For example increased vehicle maintenance and fuel consumption of the profit and loss statement. When business owners can understand this, it will better be able to understand why their profit and loss statement doesnít increase the same amount that their bank account decreases.
Business owners should also understand what happens on their income statement and their bank account when they pay off bills and credit cards says virtual CFO. Often assume is business owners collect money from their clients, they put it towards bills. His create a situation of showing them as having no money in the bank account. But those bills were added to the income statement as soon as the invoice was received. By understanding that lag happens when invoices are received versus when the money is paid, business owners can better understand how to see how much money they actually have in their bank account and avoid cash flow problems.
Business owners should also be aware how shareholder loans affect the cash flow in their business. Shareholder dividends never show up on an income statement says virtual CFO. If an owner is taking money out of the business, business taking more than their business is profiting, thatís a problem. The profit and loss has to be higher than what the business owner takes. Entrepreneurs need to know how much money their business has to profit in a month in order to avoid taking out more money than they profit. If that happens they will run into a cash flow issue. Business owners should get into the habit of looking at their bank account as well as their profit and loss statements and their income statements to avoid this problem.
