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

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Virtual CFO | Demystifying Cash Flow In Business

Business owners sometimes have a poor understanding of why their business is making money, but yet they are running out of cash says virtual CFO. Business owners often have a great handle on generating income in their business, but their lack of understanding when it comes to business finances, leads to them having cash flow problems in their business, which can lead them to running out of money. 50% of all businesses close the doors to their business within five years, and 29% of those businesses say that running out of money was the reason they had to close their business. By helping business owners understand basic business financial literacy, they can start understanding how to avoid cash flow problems, and avoid running into problems when running their business.
By understanding these financial concepts within their business, business owners can be better prepared to successfully run their business. There are several misconceptions that once business owners can learn, will allow them to operate their businesses more smoothly. The first concept that business owners should understand is, is revenue added to the income statement at the time of the invoice or at the time they receive payment? Virtuals CFO says income appears on the income statement as soon as it is invoiced. But just because it is on the income statement, doesnít mean the business owner paid for it. Understanding this is crucial to the business owner understanding why their income statement shows them as making money, and it their bank account shows that they have no money. This is one of the first concepts that can help a business owner understand cash flow within their business in order to avoid that cash crunch.

The next concept that business owners can understand in order to be better prepared to avoid cash flow problems is how can a sudden increase in revenue place strain on cash flow asks virtual CFO. This one is a hard one for business owners to have their head around it first, because business owners assume that if their revenue suddenly increases, that should eliminate all their financial problems. However when the revenue increases, the expenses also go up. But unlike the revenue that will come in a months later, these expenses will be expected to be paid immediately. So this can contribute to a cash crunch within a business. If a business owner is not aware of this, they can run into serious financial problems. One of the ways they can avoid that says virtuals CFO is if they try to arrange shorter terms on their invoices, but longer terms on their bills. That means they will be able to get paid quicker on their invoices, but have a longer time to pay their bills. This can help business owners finance their projects on a tighter budget. Either eliminating cash flow problems, or financing projects when they have no operating capital. By understanding some basic concepts, business owners can completely avoid the problem that 29% of failed businesses run into which is running out of cash.

With 50% of all businesses who fail within five years, and 29% of those failed businesses say that they ran out of cash, cash flow problems in business is a huge contributor to the downfall of businesses says virtual CFO. All too often, business owners often have a poor understanding of why they are making money in their business, and yet they are running out of cash. Helping business owners basic financial literacy within business, it can help them completely avoid cash crunch problems which are the reason why so many businesses fail.

One concept that can help businesses avoid casual problems is how do shareholder loans affect cash flow asks virtual CFO. Many business owners donít realize that shareholder dividends do not show up on their income statement. Other things that do not appear on the income statements are capital leases and loans. When business owners understand that they still have to make those payments even though they donít appear on the income statement, will be better prepared to understand why it seems like they donít have enough money in their bank account. Business owners need to be very prudent in ensuring that the business makes at least that amount of profit every month in order to cover shareholder dividends, loans and capital leases. If a business owner fails to make that amount in profit, they will run into a cash flow problem.

In the way that business owners can increase cash flow in their business is when they are pursuing financing, they can use loan amortization periods to help reduce the strain of cash will on their business says virtual CFO. Many business owners are mistaken when they believe that the most important factor when they are considering loans is the lowest interest rate possible. While low interest rates are very important, it is more important to have a long amortization period says virtual CFO. The reason for this is the longer. It is, the easier it is for the business owner to pay, even with a higher interest rate. The business owner takes a longer time to pay off loan, we have much smaller loan payments on a monthly basis, which can help a business owner with their month-to-month cash flow. A short amortization period leads to a business owner having to pay back more money every single month, which can lead to casual problems. Business owners can keep in mind that they should for a longer amortization. Even if that means theyíre not getting the absolute lowest interest rate.

By helping business owners understand cash flow problems and solutions in business, they are better armed to solve those problems when they come across them in their own business. By helping demystify these issues, business owners can increase their chances of success and avoid the reason that 29% of businesses fail, they will avoid running out of cash.