Virtual CFO | Cash Flow Versus Profit
Business owners often have poor understanding of why they are making money in their business says virtual CFO, but they are running out of cash. Helping business owners understand the difference between cash flow and profit, business owners can be better equipped to make financial decisions in their business to help them avoid running out of cash. Since 50% of all businesses are out of business within five years, and 29% of those businesses say that running out of cash was the reason their business failed, helping business owners understand this, they can beat those odds and succeed in business.
There are several things that business owners can understand when it comes to cash flow and profit as well as income statements and profit and loss statements. Refinanced several of these questions, business owners can demystify their business finances. The first question is how does a long cutoff and processing for payroll help? Virtual CFO says often a business owner is drawing upon their own cash in order to pay their company payroll. But a longer cut off allows for a longer time for businesses to collect money from their clients in order to use that to pay payroll.
Next question is how can a longer loan amortization period reduce the strain on cash flow? Many business owners believe that a low interest rate is the most important thing when they are considering loan, but virtual CF argues that a longer amortization is often more important factor. The reason for this is the longer amortization period is, the easier it is for a business owner to pay. If a business owner is trying to pay back a $20,000 loan in five years, it will affect their cash flow significantly more than if that business owner had 10 years to pay that $20,000 back. The longer amortization period means that a business owner has to pay smaller payments every single month which is easier on the cash flow. Business owners should take into consideration a long amortization period even with a slightly higher interest rate, as the best option for their business.
The third question to help businesses understand their business finance, is why should a business owner want shorter payment terms from customers, with longer supplier terms? The reason for this says virtual CFO is that when a business owner has shorter payment terms from customers, they will get paid quicker themselves. Longer supplier terms will allow the business owner more time in order to pay their supplier, which helps a business owner bridge the gap between receiving the bills for the job in getting paid for the job. Especially if business owners already have a cash flow problem, having shorter payment terms and longer supplier terms can help businesses finance projects on a tight budget.
These are just some of the ways that business owners can understand their business finances in a way that can help them not only run your business efficiently, but make better financial decisions to avoid running out of cash business.
50% of all businesses are out of business within five years of opening their doors and 29% of those failed businesses will say that running out of cash was the primary reason why their business failed, says virtual CFO. Helping business owners understand their business finances and the difference between cash flow and profit within their business, can help them make better financial decisions within their business that can help them avoid running out of cash.
First question that business owners should ask themselves when it comes to business financing is why is it important to bill early and bill often? Virtual CFO says the reason for this is that the longer a business owner waits to bill the client, the longer itís going to take to get the money. If the business owner gets into the habit of the building early in the billing often, they then create a situation where there being money into their business on a weekly basis instead of the monthly. A good business practice to get into would be to bill the client is often as a business owner can get away with in order to maximize the cash flow in their business.
The next question a business owner should understand when it comes to business financing is why should profits in their business be at least as high as shareholder draws and the loan payments? The reason for this is simple says virtual CF whatever business owner needs to pay in loans, capital leasing and what ever they take out of the business, needs to be what that business profits. A Business owner canít take more out of the business then what they profit on a monthly basis, or else it will run into a cash flow problem. As long as a business is making the same amount of money or more than what is coming out of the business, the business owner will have no problem.
The third question to help business owners understand their finances, is does the principal portion of the loan repayment show up on the income statement? This is one that business owners need to really pay attention to says virtual CFO because no the principal amount of the loan repayments does not show up on the income statement, just the interest shows up. Business owners need to be very diligent to be aware of that because if the business shows a profit, but thatís the same amount of money that needed to go towards the principal on a loan repayment, then that money will not be in the bank as the business owner expects it, because it went to pay the principal. If the business owner is not aware of all the loans that need to be paid back on a monthly basis, they may not have the cash in the bank to pay it. Business owners need to be very diligent when the loans to pay.