Virtual CFO | Maximizing Cash Flow
Entrepreneurs often donít have a clear understanding of why their business is making money, while they are running out of cash says virtual CFO. 50% of all businesses close their doors to their business within five years, and 29% of those failed businesses will cite that they ran out of cash. Business owners can greatly increase their chances of success in business if they learn some basic business finances. By understanding profit versus cash flow in their business, will be better armed to avoid running out of money in their business which contributes to so many businesses having to close their doors.
The first thing that business owners can understand when it comes to profit versus cash flow is revenue is added to their income statement at the time of invoicing. Virtual CFO says that this is a common misunderstanding with businesses and contributes to businesses not understanding why their making money but they donít have cash in the bank. Business owners need to know that just because revenue appears on their income statement, doesnít mean they already received the money for it. Just by learning that, business owners can start to understand that they have positive profit in the business but not positive cash flow yet.
Something else that can help business owners understand the difference between profit and cash flow in their business is when they use cashed by assets, is there profit and loss statement affected. Business owners often want to see their assets on their profit and loss statement when they buy them, because they see the amount of money coming out of their bank accounts is virtual CFO. However they donít appear on the profit and loss statement the way business owners expected. Especially depending on what the assets are. If they are vehicles, they will show up on the profit and loss statement as fuel payments, maintenance payments etc. Letís business owners understand that, able to be better prepared for by their profit loss statement looks the way it does.
Business owners also needs to understand what will not appear on their statements is virtual CFO. Business owners often believe that dividends, capital leases and interest will show up on the statement however that is not true. Well dividends never stop on the statement, the interest of the loan will show up while the principal the loan will not. Once business owners understand business, they can better understand why the statement shows that it does, but their bank account shows as paying more money. Because of this, business owners need to always be diligent to be profiting more than they are paid out in dividends and loan payments. By looking at income statements, profit and loss statements as well as bank balances, business owners can know how much profit they are making in a month, and then avoid taking more than that out of the business each month.
Once business owners can understand these concepts, it will be better prepared to avoid running into cash flow problems in their business and increase their chances of success.
Industry Canada says that 50% of all entrepreneurs close the door their business within five years, and that 29% of those entrepreneurs will say that they ran out of cash, virtual CFO says that these are very sobering statistics. I understanding why businesses have failed, can help teach new business owners to avoid in order to making the same mistakes. Business owners often do not understand why their income statements show that they are making money in their business but their bank accounts show they are running out of cash. Helping business owners understand this can help them raise their chances of success in business.
Something that business owners can do to increase the cash flow business is to look for longer amortization periods when they are seeking out financing for their hard assets. The reason for this says virtual CFO is the longer a business owner has to be a the loan, means the smaller monthly payments a business owner has to pay. That smaller monthly payment can help the business owner avoid cash flow issues in their business. Business owners often that the best financing is the lowest interest rates is virtual CFO, however business owners should take into consideration that a much longer amortization period. It is more preferable even with a slightly higher interest rate. Once business owners can understand this, they can seek out financing options that will help them avoid cash flow problems in the future.
Another easy solution that business owners can use in order to avoid cash flow problems in their business is increasing the amount of time between they will cut off and payday. The reason for this is virtual CFO is if a business owner has a short process. For payroll, they often wonít have the time to collect money from clients in order to cover the cost of payroll. If that have been sent business owner will be drawing on their own cash in order to pay your staff. However, if the business owner has a longer processing period, then if they have not have enough money to cover payroll, and they have extra time in order to collect money from clients to cover payroll.
The third way that business owners can increase the cash flow in their business is by changing their billing cycle. If a business owner can get out of a monthly billing cycle and start billing the clients more often, they can help them increase the cash flow in their business very easily. Virtual CFO recommends billing once a week if an client can tolerate it, and even biweekly in order to help a business owner increase cash flow in their business. This can ensure that a business owner is getting payments throughout the month, instead of just at the end of the month that a monthly billing cycle would ensure. Business owners can drastically improve the cash flow in their business just by making these adjustments in their business.