Virtual CFO | Increasing Cash Flow
Entrepreneurs often donít understand why they appear to be making money in their business, but they have cash flow problems says virtual CFO. This is a problem that affects many businesses, 50% of all businesses are out of business in five years, and 29% of those failed businesses will cite that they ran out of cash. Helping business owners avoid cash flow problems through helping them understand business finances can go a long way in helping businesses succeed in business where many other businesses have not.
The first thing that businesses should understand in order to help them understand how cash flow works in their business is that revenue will appear on their income statement as soon as it is invoiced says virtual CFO. This owners just need to keep in mind that just because it appears on their income statement, doesnít mean they already received the money for it. This is why business owners often see a positive profit on their income statement, but not in their bank account. By taking this into consideration, business owners can avoid assuming they have money in their bank when they donít.
Business owners also need to understand how a sudden increase in revenue can place a strain on the business cash flow. Since increasing revenue is the main goal of businesses, many business owners do not understand how a sudden increase in revenue can effect their business is cash flow. The reason for this is virtual CFO is that when revenue in the business goes up, the expenses of that business will also go up. And while a business owner will be getting paid for that increased revenue it on other business, business owners will be expected to pay for those increased expenses sooner. So even though increased revenue is a goal of business, can contribute to unwanted cash crunch. Once a business owner understands this, he can make the changes in their business in order to avoid this cash crunch of the future.
Business owners also need to know how things will affect their income statement in terms of shareholder loans as well as being back loans. Virtual CFO says that business owners need to understand that shareholder dividends as well as loans will never show up on their income statement. So even though they will have to pay them and their bank account will take a hit, it will not appear on their income statement as payments. The only exception to that rule is when a business owner is paying the loan, the interest payment will show up on the income statement. But the principal of the loan will not. Business owners need to be very diligent in ensuring that you donít pay more in dividends and loan payments then what their business profits that month.
My understanding cash flow and profit as well as how to read their income statement, business owners can be better prepared to face cash flow problems in their business, or even avoid cash flow problems altogether says virtual CFO and that will increase their chances of succeeding in business.
Industry Canada says that 50% of all entrepreneurs close their business within five years, and that 29% of those entrepreneurs will say that the reason why they close their business is because they ran out of cash says virtual CFO. Entrepreneurs often donít understand why they are making money in their business, their bank says that they are running out of cash. Business owners who during the basic business finances such as profit versus cash flow and how to read income statements, can drastically improve their chances of succeeding businesses because they will know how to avoid cash flow problems.
There are several strategies that a business owner can use in order to avoid cash flow problems in their business says virtual CFO. One of those strategies is by changing their billing cycle in their business. If a business owner bills only monthly, they can be waiting well over 30 days in order to get paid for that job says virtual CFO, however if a business owner can get into the habit of billing biweekly or even weekly, then they can drastically improve their cash flow in their business. Other than getting all of their invoices paid at the end of the month, they will be able to increase the frequency of getting paid which can drastically improve their cash flow circumstances. A great rule of thumb business owners can use when building is built early and bill often.
Another strategy that business owners can use in order to increase cash flow in their business, especially when they needs to finance a large project and they either have extremely tight budgets or they are completely out of operating capital says virtual CFO is if they can shorten the term length on their invoices so they can get paid quicker, and then arrange longer terms with your suppliers, so that they have a longer time to pay those invoices, can help a business owner bridge the gap between getting paid for a job and having to pay the bills for that same job. By using this strategy, business owners who are on an extremely tight budget can still take on new projects and grow their business.
The third strategy that business owners can use in order to increase the cash flow in their business is to financing. By arranging for financing to pay for hard assets, business owners can keep cash in their business where itís needed to avoid cash flow problems says virtual CFO. And with choosing the right financing options, business owners can minimize the impact that that loan payment has on their monthly bottom line. How to do that, is business owners should aim have the longest amortization period they can find. Many business owners often believe that they should take the option that has the lowest interest rate, however the longer amortization period is, the lower their monthly payments will be, and the least impact to their cash flow it will end up being.