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

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Virtual CFO | Increasing Cash Flow

Entrepreneurs often do not understand why they are making money in their business however they are running out of cash those virtual CFO. 50% of all entrepreneurs close the door their business within five years, and 29% of those failed businesses say that running out of money was the reason they had to close their door. Helping business owners understand business finances can help them avoid cash flow problems in their business increase their chances of succeeding in business.

Business owners should and how revenue affects their income statement in order to understand cash flow in their business says virtual CO. Revenue is added to the income statement at the time of invoice. Many business owners believe that it is added to the statement as soon as they get the money for it, but thatís not true. This can help business owners understand why there income statement shows profit, but there bank account does not.

Who the goal of business owner is to increase their business, so many business owners do not understand how a sudden increase in revenue in place a strain on the cash flow in the business. The reason for this is virtual CFO is because as revenue goes up so do expenses in the business. And even though a business will not get paid for the increased revenue until later, the increased expenses will have to get paid right away. This can contribute to a cash flow problem in businesses if they are not prepared for it. One of the strategies that they can implement in their business in order to avoid cash flow issues is getting their customers used to a shorter billing cycle as well as implementing shorter terms on their invoices.

Business owners also need to understand what happens to their cash balance in their bank when they pay off payables and credit cards. Virtual CFO says that any business owners often pay their bills as soon as they collect money from their clients, so there bank account often shows as having no money in their account. But those bills hit their income statement as soon as they were invoiced. So it shows that there is a lag when invoices are received and put on the income statement and when the money is paid towards that bill. By understanding that concept, business owners can be better prepared to avoid paying all the money in their bank account, and cash crunch.

The third thing that business owners can understand in order to avoid cash crunch business, is that dividends will never appear on their income statement. The reason why this is important is virtual CFO is because when it owner letís take money out of their business, they need to be sure that there are not take more money out then their business is profiting that month. By understanding that dividends will show up on income statement, business owners need to look at the profit and loss statements, income statements and business bank account on a regular basis in order to figure out how much profit they have made because it wonít be a statement. As they figure that out, they will be able to know how much money they can take out of their business every month, and avoid paying more money has coming in which will contribute to a cash flow problem.

An industry Canada statistic says that 50% of all businesses are out of business within five years, and that 29% of those businesses will say that the reason why they failed was that they ran out of business says virtual FO. And printers often have a poor understanding of why they are making money in their business, but they are running out of cash. Helping business owners understand cash flow in their business, can help them not only avoid cash flow problems in their business, but how to use those same strategies to become successful in business. As Warren Buffett the investor said, accounting is the language of business. Businesses should get very well acquainted with that language.

One of the first things that business owners should understand is what shows up on their income statements, and what does not says virtual CFO. When businesses get financing in order to buy assets, they should understand right away that the principal portion of their loan repayment will not show up on their income statement. Because of that, business owners need to be aware that even though it does not show up on the profit and loss statement, they will still be making a payment, therefore it will come out of their bank account. By understanding the have to make a payment that doesnít show up on income statement, itís owners can ensure that they have enough money in the bank account to make that payment and avoid cash flow problems.

By understanding but does not show up on the income statement, help business owners understand why profit need to be at least as high as shareholder draws and loan payments. The reason for this is virtual CFO is because since principles of the loans, capital leases and shareholder dividends donít show up on the income statement, business owners need to be prepared for making those payments. business owners should be watching their income statement, profit and loss statement as well as her bank account to calculate what their business is profiting on a monthly basis in order to avoid paying more than what they are bringing in monthly.

Once business owners can understand their income statement and profit and loss it once, it will be able to understand how much money they have in the bank, and what payments they need to be making in order to avoid running out of money in their bank. Once theyíve mastered this skill, business owners can avoid the reason that 29% of businesses say they failed – that ran out of cash in their business.