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

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Virtual CFO | How To Increase Cash Flow

Often, business owners donít have a great understanding of why their business is making money, and yet they are running out of cash says virtual CFO. One of the top three reasons why businesses fail in Canada is that they run out of money. 50% of all businesses run out of business within five years, and 29% of those failed businesses will say that they ran out of cash. Helping business owners become financially literate in business, they can either avoid these situations before they happen, or no to deal with them when they come up in their business. Increasing cash flow in business is something that business owners needs to develop.

One of the first things that a business owner should understand is when their business suddenly gets extremely busy, as much as that is a great situation, it can also cause a business to run into casual problems says virtual CFO. Many business owners would expect this because they see increased revenue as a great thing, but they donít see that for the revenue goes up, expenses also go up. And while the revenue in the business has increased which is great thing business owners will not get paid for those invoices until about a month later, however the expenses need to get paid immediately the business owner is not aware of this cash crunch potential over is not prepared for it, this can greatly affect the business.

So why would a business owner want shorter payment terms from customers and longer supply terms says virtual CF. The reason why this is helpful is because the short of the terms on their invoices, means the quicker a business will get paid. The longer terms on the bills that a business owner has, the longer time they have to pay those bills. This can help a business owner bridge the gap between getting paid for a job and paying the bills for the job. This can help business owners sell finance projects, with little or no operating capital. This is a great trick business owners to learn even if they still have lots of operating capital within their business.

Another way that business owners can increase the cash flow in their business is through their billing cycles. If a business owner is only ever billing their client at the end of the month, and that client has a 30 or 45 day term, the business owner often be waiting two months or more to get paid for the job. In order to help shorten that cycle and get paid earlier for jobs, business owners should the mantra bill early and bill often. Virtual CFO asks the question of why will a business owner bill monthly when they can bill weekly? By getting their customers used to the weekly billing cycle, business owners can not only alleviate cash flow problems in their business, but create a situation where they are receiving cash on a weekly basis which can help drastically improve the financial situation of the business.

50% of all businesses run out of business within five years of opening, and 29% of those failed businesses will cite that running out of cash was the reason their business failed said virtual CFO. The reason for this is often business owners donít have a good understanding of why their business is making money, but they have no money in the bank. One of the best ways that business owners can help themselves and avoid running into this problem is by becoming more financially literate about their business finances. If business owners better understand not only how to increase cash flow in their business, but understanding profit and loss statements as well as income statements, it will be better able to avoid the problem that so many businesses run into and closer business because of.

Business owners need to understand that when they use cash to buy assets, their profit and loss statement is affected but not in the way that they would expect. This often confuses business owners says virtual CF because they see that there is less money in their bank, but it doesnít show up on the profit and loss statement the same way. So when a business owner makes an asset purchase in their business, they need to be ready for understanding why the hapless cash in the bank.

Something else that business owners should understand is what happens to their cash flow balance and they pay off payables and credit cards. Business owners often get into the habit of this is they get paid money, they put it towards their bills. This often shows a business owner that they have no money in the bank account says virtual CFO. But the reason why that is those bills hit the income statement earlier as in previous months, so that lag happens when invoices are received and then put on the income statement versus when money is paid towards that bill. Business owners can understand that lag., They will be better able to avoid running out of cash.

Business owners also should understand that when they are paying loans, the loan does not show up on their income statement. The only thing that shows up is the interest says virtual CFO. So a business owner needs to be aware of when they are paying a loan, and only the interest shows, why they will have less money in their bank then their income statement shows. They also need to be extra diligent to make sure that their business has profited by that amount so that they donít run into a cash flow problem if they donít make that money in order to pay back the loan. For example if a business has a $2000 loan payment in a month, and $300 is the interest, $300 will show up on their income statement, but it will look as though their bank is missing $1700. By understanding this, business owners can help avoid the cash crunch in their business.