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

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Virtual CFO | Eliminating Cash Flow Problems

Entrepreneurs often donít understand why theyíre making money in their business, but there running out of cash says virtual CFO. The reason for this is often because business owners donít have a good understanding of cash flow and profit in their business as well as how to read income statements and profit and loss statements. By helping business owners understand these basic business finance terms, itís owners can increase their chances of success in business. Since 50% of all businesses close their business within five years, and when that percent of those failed businesses say that the reason why they failed because they ran out of cash. Helping business owners understand their business finances, they can increase their chances of success in business.

The things that business owners can understand in order to help increase their business success is how revenue is added to their income statement. Often some business owners believe that revenue is added to their income statement as soon as they get paid, but virtual CFO says this isnít true. Revenue is added to the statement as soon as itís invoiced. This can help explain why business owners are confused why they may have positive income on their income statement however there bank account does not show the same story.

Something else that can help businesses avoid cash flow problems is understanding that a sudden increase in revenue can place a strain on a business owners cash flow. Since increasing revenue is the main goal of businesses, many business owners donít stop to consider how that will affect their cash flow when it happens. Virtual CFO says that sudden increase in revenue places a strain on businesses casual because even though the revenue goes up, the expenses go up as well. And while they may be getting paid later on down the road for that revenue, those expenses will be expected to be paid immediately. This difference leads to a cash crunch within their business. By understanding that it happens, business owners can avoid it in their business.

When business owners use cash to buy assets, they also need to understand how their profit and loss statement is affected. Virtual CFO says that although business owners see that purchase can one of their bank account, it does not show up on their profit and loss statement as increased assets. Depending on what the assets are, whether there computers, vehicles or even leasehold improvements, they will show up on the income statement various ways, rather than as large assets to the bottling.

Once business owners can understand some of these business financing terms in situations, it will be better able to not only avoid cash flow problems in the future, but they can use the strategies theyíve developed to avoid cash flow problems and use that to grow their business. This way they will be better prepared not only to understand their business, but to also avoid the problem that caused so many businesses to go out of business.

One of the main problems businesses face in Canada is that 50% of them will go out of business within five years, and 29% of failed businesses will say that the reason they failed was because they ran out of cash. The reason for this is because business owners often have poor understanding of why they are making money in their business, but they are running out of cash. Helping business owners understand business finances, they can that only learn how to overcome cash flow problems, they can also develop strategies on how to avoid them in the first place and grow their business. As Warren Buffett great investor once said, accounting is the language of business. Helping businesses learn that language can go a long way in helping them succeed.

One of the things that can help us owners avoid cash flow problems in their business is lengthening their processing period For payroll. Often business owners have an employeeís mentality when they have a very short processing period for their payroll, and to choose to have a very short amount of time between cut off and the pay date. The reason why this is a problem is because a very short processing period doesnít give the business owner very much time to collect payment from the clients if there is not enough money in the bank to pay their employees. If they increase the processing period, the business owner will have enough time to collect money from their clients in order to pay for that payroll if they donít have money in their bank. Otherwise a business owner would have to draw on their own cash to pay for payroll which is not a desired situation.

Another strategy in helping increase cash flow in the business is by utilizing financing as a way to increase cash will business. This works says virtual CFO is when arranging financing, a business owner should aim to have the longest amortization period possible. The reason for this is the longer the amortization is, the lower the monthly payments. The monthly payments are going to have less of an impact on a businesses bottom-line then hi monthly payments. Often business owners think that the most important consideration is a low interest rate, but if a business owner can get a significantly longer amortization period, itís in their best interest even if that means having a slightly higher interest rate.

Something else that business owners can do in order to increase cash flow their business is to shorten terms on their invoices. If they can shorten amount of time between when the client is their invoice and when they pay that invoice, business owners will be better able to increase their cash flow in their business. If a business owner is order terms with a shorter billing cycle, then they will really be able to increase successful in their business. Virtual CFO recommends billing customer as often as they will tolerate. That could be bimonthly or even weekly, which could help a business owner increase their cash flow throughout the month and not just at month end when businesses are paying that invoice.