Virtual CFO | Demystifying Profit And Loss Statements
Business owners often have ill-informed understanding of why they are making money in their business, but are running out of cash says virtual CFO. Business owners often donít understand basic business financial literacy. They may be great at running their business, but lacking this basic understanding is causing them to run into financial problems in their business. Since 50% of all businesses are out of business in five years and that 29% of those businesses failed because they ran out of cash, helping businesses understand basic business financing can help several businesses avoid this problem and avoid going out of business. As Warren Buffett, the all-time great investor says accounting is the language of business. We need to help businesses learn this language.
There are several things that business owners do not understand when it comes to their business financing the first one is business owners wonder is the revenue added to their income statement at the time of invoicing, or at the date of receiving payment? Virtual CF says this is a huge mindset for business owners to get into. The revenue is added to the income statement at the time of creating their invoice. However just because it is a income statement, doesnít mean the business received the money for it. Thatís why it may show up on the income statement as being positive but there is no money in the bank account.
The next thing that can help business owners understand business financing is that how sudden increase in revenue can place a strain on a businesses cash flow. Virtual CFO says that this is a hard one for many business owners to understand, because while the revenue in the business goes up, business owners often think that this is a great thing but they donít often consider that as the revenue goes up, so do with their expenses. And even though they donít get paid for those jobs until later, the expenses that have gone up immediately also need to be paid immediately. This can lead to a cash crunch if the business is not aware of how increased revenue can increase their expenses, or if they donít know how to manage sudden influx of expenses. Virtual CFO says one of the ways that businesses can help to eliminate this cash crunch, is by working to get shorter terms on their invoices, and longer terms on their bills. The way this works is that businesses that can get paid quicker on the invoices they send out, will get the money in sooner. If they are able to get longer terms on their bills from their suppliers, then often this can help a business owner bridge the gap between when they receive the bills and be expected to pay them, and getting paid for the job. Itís can help businesses finance projects on a typed or nonexistent budget. This way business owners can eliminate cash crunch happens when a business that lease is increased revenue in their business
One of the main problems in businesses today is that 50% of all businesses go out of business within five years, and 29% of those businesses will say that the reason they failed was because they ran out of money says virtual CFO. Business owners often donít have a good understanding of why their business is making money, but they have no cash in their bank. By helping business owners understand some basic business financing, they can learn how to avoid the cash crunch that causes so many businesses to fail.
One of the things that business owners can understand to help them operate their business more effectively, is help a long cut off and processing. For payroll can help increase the cash flow in their business. Business owners may want to consider having a long cut off for their payroll. The reason for this is the longer the processing period is, the longer time the business has to collect money from their clients in order to use that for people. Business owners have a short processing. For payroll, they often end up using their own cash to pay for payroll. The last thing business owners should have a cash crunch on is being there staff.
Business owners also should consider how often they are building a clients, they often believe that building monthly is the only option they have, virtual CFO asks the question of why build monthly when the business owner can bill weekly? Once business owners get into the habit of building their clients weekly, they can not only eliminate cash flow problems, but they can create a situation where they are being and cash into their business on a weekly basis, which can be significantly helpful to a businesses bottom-line.
Another thing that business owners should understand is what happens to their cash balance when they pay off tables and credit cards says virtual CFO business owners often paid bills as soon as they collect their money so it appears as though they have no money in their bank account, but since those bills the income statement earlier, when the invoice happened, there shows a bit of a lag when invoices are received and put on the income statement and when the money is paid towards that bill. Once business owners are aware of and get used to that lag, they can understand why there is a difference between income statement and bank account. That understanding can help them avoid the cash crunch that goes with not understanding income statements.
By helping the business owner gain business financial literacy, you can be better equipped to handle the problems they run into or even eliminate cash flow problems before they start says virtual CFO. By avoiding cash problems before they happen, business owners can avoid the problem that 29% of failed businesses run into business which is running out of money.