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

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Virtual CFO | Managing Cash Flow Problems

Business owners often donít have any idea why their business shows that they are making money, and yet they are running out of cash says virtual CFO. The reason for that is business owners often lack the knowledge about business finances in order to allow them to avoid many problems in their business. By helping business owners understand business finances, they can avoid one of the biggest reasons why businesses fail in Canada today. As Warren Buffett said accounting is the language of business. Business needs to learn the language. Industry Canada says that 50% of all businesses are out of business within five years and that 29% of those failed businesses will say that running out of money was the reason why they failed. So by increasing financial literacy and businesses, businesses can avoid cash flow problems and succeed in growing their business.

One of the first things that business owners can learn in order to understand cash flow and profit in their business is how revenue is added to the income statement. Virtual CFO says many business owners do not understand this however revenue is added to the income statement as soon as it is invoiced. Business owners need to understand that just because it is listed on the income statement does not mean big update report. The common assumption of the business owners is if it is on their income statement it is also in their bank. This is a huge contributor to cash flow problems because businesses see the revenue on their income statement and assume that so much money they have in their bank.

The next thing that business owners can understand in order to help avoid cash flow problems their business says virtual CF is how a sudden increase in revenue can financially burden a business. Most business owners do not understand this and since it is a goal of almost all businesses to increase their business, the more businesses that understand this, the more businesses that can avoid this problem and stall their growth. The reason that a sudden increase in business can put a strain on a business, is that even though the revenue has gone up the expenses have also gone up. A business owner will never be able to increase revenue without increasing their expenses. The problem with this is while the business owner will collect on their revenue in about a month, the expenses will need to be collected sooner. The business owner does not have the money to pay for the increased expenses, they may risk either running out of money, or being unable to buy supplies needed to fulfil the order installing the business growth.

The third thing that business owners can learn in order to help them increase cash flow in their business says virtual CFO is understanding what items will appear on the income statement and what will not. Shareholder dividends as well as the principal the loan will not appear on the statement. The reason why this is important to note, is because while a business will have to make those payments, it will not show is a negative on their income statement. That is often why their income statement can show a profit, while they have less money in the bank than they expect.

50% of businesses close their business within five years says virtual CFO, and 29% of those failed businesses will say that the reason they close their business was because they ran out of money. Business owners often have a poor understanding of why they are making money in their business and yet there run out of cash in their bank. When business owners can understand the difference between profit and cash flow in their business begin avoid the problems that hurt so many other businesses.

There are several things that business owner can do in order to increase cash flow within their business says virtual CFO. And one of those things is to increase their billing cycle. Itís a very easy concept, whoever not a lot of businesses do this on a regular basis. If business owners can get into the habit of billing there customers on a regular basis, they can help increase cash flow. If the business owner can also decrease the amount of time between invoices, they can also increase cash flow because instead of receiving one payment at the end of the month, business owners can start receiving multiple payments throughout the month.

Nothing business owners can do in order to decrease casual problems in their business, is Ranger shorter terms on their invoices. Many businesses have their terms be 30 to 45 days, they can arrange a quicker payment on their invoices from customers, they will be able to get paid quicker. Virtual CF says that there then able to arrange longer terms on their invoices from suppliers, but this kind of their business is to help the business owner bridge the gap between getting the bills and getting paid on the job. This is especially important for businesses that have very little cash in their business or have a completely run out of operating capital. The possible for businesses to be able to finance their own projects this way and avoid cash flow problems altogether.

Electric that business owners can use art to increase cash flow in their business is simply by increasing the processing period f the reason for this is virtual CFOís if a business has a short processing period Between cut off and payday, if the business owner does not have enough money in their bank account payroll, they will have to pay for it out-of-pocket. However if businesses lengthen the time, if a business owner does not have the money in their bank account, they will have enough time to collect money from their clients in order to have enough money to pay their staffís payroll.