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

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Virtual CFO | Decreasing Cash Flow Problems

Entrepreneurs often either donít understand, or have a poor understanding of why they are making money in their business, but they are running out of cash says virtual CFO. If business owners can understand some basic business finances they can understand why they ran out of cash, and use that information to avoid that problem. 50% of all businesses close their business within five years, and 29% of these failed businesses will cite they ran out of cash. By avoiding the problem of running out of cash, business owners can increase their chances of succeeding in business. As Warren Buffett the great investor said, accounting is the language of business. Business owners should get well acquainted with that language in order to succeed in business.

Business owners should understand how their income statement works, and that their income statement will show revenue at the time of invoicing. Business owners often make this mistake because they believe that statement will show that revenue as soon as that revenue is received, and thatís not the case says virtual CFO. But just because revenue shows in the income statement doesnít mean the business received the money for it. This is often why business owners see their income statement and know that they are making money, and yet they have no money in their bank. Just understanding this can help business owners succeed.

Business owners should also understand that a sudden increase in revenue can negatively affect their cash flow. The reason for this is as revenue goes up, so do expenses. And unlike revenue where business owners will get paid on that a month later, the expenses of the business go up immediately and need to be paid immediately. If the business owner is not prepared for this influx of business, they will run out of money. There are several things that they can do in order to avoid this cash crunch that includes increasing the billing frequency as well as shortening their invoice terms says virtual CFO. If they are able to shorten the amount of time it takes them to get paid after sending an invoice, and if they are able to get paid or often throughout a month, that will enable a business owner to pay for increased expenses that is associated with a sudden increase in revenue.

Another thing business owners should understand is when they use cash to buy assets, how that is affected on their income statement. When they buy those assets, it doesnít show on their profit and loss statements as those assets. It shows up in a variety of different ways, their bank account will show that they donít have that cash and more. Business owners need to be aware of this difference in order to understand even though there is less money in the bank account, their profit and loss statement does not immediately increase.

These are just a few ways that business owners can learn some basic business finances in order to avoid running into a cash flow problem in their business.

One of the biggest reasons that businesses in Canada fail says virtual CFO is that they run out of money. The industry Canada statistic says that 50% of all businesses are out of business within five years, and that 29% of those failed businesses say that the reason they failed was that they ran out of money. By helping business owners have a clear understanding of why their statement so there making money in their business, but they are running out of cash, build strategies in order to avoid running out of money in their business as can help business owners beat the odds and succeed in business when so many others have not.

A very simple way that business owners can avoid running into a cash flow problem in their business is by shortening the terms on their invoices. Many businesses have 30 day terms or even longer such as 45 or even 60. This is not great practice if a business can get away with it says virtual CFO because the shorter amount of time as in order to pay the business money, the better it is for that business cash flow. By shortening the terms as short as they are able to, to help a business owner increase cash flow in their business. Something else that a business owner can do is also to try to arrange longer terms on their suppliers. What this can do in the business is bridge the gap between getting the bills for job and getting paid for that job. Business owners can often use this strategy in order to use the amount that they get paid for that job in order to pay for the bills in order to do the job. This can help business owners finance projects on a tight or nonexistent budget, or just help avoid cash flow problems in their business.

Another way that business owners can increase cash flow in their business is to increase their billing frequency . Virtual CFO says that business owners should into Bill early and fill often. Business owners should Bill as often as their clients will tolerate, billing by monthly or even weekly if they are able to build this often, then they will start to increase cash flow because they will be getting my into their business and more regular intervals. So by increasing the frequency of their billing cycle in their business, business owners can alleviate a lot of their cash flow problems.

Third way that business owners can increase cash flow in their business is five is financing. When arranging financing in their business, business owners can look for the loan terms that have the longest amortization period available. The reason for this is the longer the amortization is, the lower the monthly payments, and lower impact it will have on a businesses bottom-line.