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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 Casual Problems

Business owners often do not understand why their business is making money that they are running out of cash says virtual CFO. Helping business owners understand some basic financial literacy in their business, business owners can decrease cash flow problems in their business, and avoid one of the top reasons why business in Canada fail. 50% of all businesses are out of business within five years, and 29% of those businesses say that they failed because they ran out of cash. Helping businesses learn basic business financial literacy, can go a long way in helping them avoid that problem.

Several things that business owners can keep in mind when they are looking at their income statement and profit and loss statement in their business, is how things will appear on the statements. For example when they use cash to buy assets, there profit and loss statement doesnít show them the way they expect. Their bank account shows that they are less that cash, they are profitable statements donít show the assets in quite the same way, therefore business owners need to be aware of that when looking at their pub and loss statements in order to avoid making errors in their business says virtual CFO.

Another cashflow problem that business owners need to learn about is what happens to their cash balance when they pay off tables and credit cards says virtual CO. Business owners often pay their bills as soon as they receive money from jobs theyíve done. So it looks in their bank account like they have no money, but since those bills were put on the income statement much earlier when invoice happened, there is a bit of a lag that happens between when invoices are received and put on the income statement, and when the money is put towards that bill. Understanding that lag can help business owners understand how to avoid running out of cash in their business.

Business owners also need to understand what does not show up on their income statement. Shareholder dividends and loans never show up on the income statement says virtual CO. However loan interest does. Business owners need to be aware that the principal will never show up on their income statement however the interest will and dividends will never show up either. Business owners need to be especially aware of this, so that they can be sure that their business has made the profit in that month that they are taking out of the business. If they ever to get more money than the business has profited for the month, the business will have a cash flow problem.

By being aware of how of the loss and income statements look, and what goes on each one, and when, business owners can be more prepared in their business finances says Virtual CFO. This can help them avoid running out of money in their business, and become successful in operating their business.

There are several things that a business owner can to in order to avoid cash flow problems in their business says virtual CFO often business owners do not have a good understanding of why their business is making money, but they are running out of cash. Helping business owners become financially literate in their business, they can make great business decisions that can eliminate financial strain in their business, and help them to become successful in business. As Warren Buffett said ìaccounting is the language of businessî. Businesses need to learn the language.

Business owners can do several things in order to positively affect the cash flow in their business, and one of those things is increasing the period of time between payroll cut off and when payroll is. The reason for this is the longer amount of time for the processing. Says virtual CF means the longer amount of time that a business owner has to collect money from clients in order to use that money to pay payroll. Having an extremely short payroll processing period, might require the business owner to draw on their own cash in order to pay payroll. Business owners need to get out of the employee mindset of wanting to have their payroll paid out immediately, and is that with them. In order to be able to come up with the funds for that payroll.

Another thing that business owners can affect in the business very quickly in order to help increase cash will in the business is to build early and Bill often. Virtual CFO asks why build monthly when business owners can bill weekly? If a business owner falls into the habit of only billing there clients once a month, if those clients also have a 30 day payment term, that means that they are getting paid up to two months after that work was complete, and that can drastically affect cash flow to the negative. By taking up the amount of time it takes business owners to build their clients, business owners can start to see payments of those invoices coming in on a regular basis. They can to the habit of billing weekly, business owners can start seeing weekly cash flow infusions to their business.

Something else that business owners can do in order to increase cash flow in their business, is arranging shorter payment terms under invoices with clients, and longer terms on their supplier bills. The reason why this is important says virtual CFO, is because that can create a situation where business owners are getting paid for a job faster, then being expected to pay for that job later. This can create a situation where business owners are getting paid for jobs before they perceive invoices that can help them more easily pay for those invoices. This is a way that business owners can finance their own projects on a tight or nonexistent budget. This is great for business owners to learn to have no operating capital.