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

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Virtual CFO | Minimizing Cash Flow Problems

All too often, entrepreneurs often have a poor understanding of why they are making money in their business, but they are running out of cash says virtual CFO. Unfortunately 50% of all businesses run out of business in five years, and that 29% of those failed businesses say that they ran out of cash. Business owners need to become better financially literate in their business in order to avoid running into the problem that has affected so many businesses. As Warren Buffett has said, accounting is the language of business. Business owners should get well-versed in that language.

The first things that business owners should understand when it comes to invoicing in their business, is understanding that revenue is added to the income statement at the time of invoice. The reason why this is important to understand says virtual CF, is that it appears on the income statement well in advance of receiving the cash for it. If business owners can get used to that period of time where it shows up on the income statement, and when they get money for it, they can avoid thinking that they have that money when it hasnít arrived yet.

Another thing that can help businesses understand cash will problems in their business says virtual CFO is understanding how a sudden increase in revenue can place a strain on a business cash flow. This is often a difficult concept for entrepreneurs to grasp because they tend to believe that if they greatly increase the revenue, that theyíll have no problems. Even though increased revenue is a great thing, that also comes with the increased expenses to go along with it. The reason why this is a problem is even though a business owner will get paid for those jobs until usually about a month later, their suppliers will need to get paid immediately for those expenses. So this can contribute to a cash crunch. Depending on how much the revenue is increased, this may be difficult or impossible for a business owner to finance on their own.

One thing that can help businesses increase cash flow in their business and avoid problems, is getting into the habit of building early and billing often says virtual CFO. Since most businesses have 30 day terms there invoices, waiting until the end of the month to invoice customers can often create a huge cash flow problem as that can create a situation where they are getting paid almost 2 months after the work has been done. If the business owner can get into the habit of building early and billing often, they can greatly improve the cash for their business. Business owners may asked them the question why bill monthly when they can build weekly, that can greatly improve the cash flow in their business, and also create a situation where business owner is getting money in on a weekly basis, it can drastically improve their cash flow.

With 50% of all businesses that close their doors within five years, and 29% of those businesses will say that running out of money was the reason why they had to close their business says virtual CFO, helping business owners learn how to minimize cash problems in their business can go a long way in helping them avoid that crucial problem of running out of cash. Business owners often have a poor understanding of why they are making money in their business, but they are running out of cash. Increasing their financial literacy, business owners can avoid running out of cash, but help them become even more profitable in business.

In order to help minimize cash flow problems, business owners should learn where there is a cash crunch potential and eliminate that. When the examples of that is how long it takes a business owner to pay their staff. By increasing the length of time between payroll cut off and when it happens, business owners can avoid a cash crunch in their business. The reason for this is the longer amount of time between cut off and payroll, will allow the business owner to collect money from their clients in order to use that to pay for payroll. By having a really short processing time, business owners often end up drawing on their own cash in order to pay payroll.

Another way that business owners can avoid casual problem in their business is when they are seeking financing. Often business owners believe that a very low interest rate is the most important thing when it comes to business financing, however something that business owners should take into consideration says virtual CFO is a longer amortization period. The longer the amortization period is, the easier for business owners to pay because the payments will be lower. Therefore putting a minimal cash crunch on the business on monthly basis. The shorter that. This however cautions virtual CO and the more strain it puts on the monthly cash flow of the business. So something that business owners should keep in mind when they are arranging their financing, is that a low interest rate is important, but a longer amortization rate is often more important.

Business owners should be aware of on the cash for their business is that shareholder loans can greatly affect cash flow. The reason for this is because dividends never show up an income statement says virtual CFO. Because of this, business owners need to be very careful when theyíre taking money out of their business that the business should profit by at least not much. If they are to help more money in their business is profiting, then that can create a situation where there is a cash crunch in the business. A great way to avoid this is for business owners to look at their income statements on a regular basis to ensure that they are never taking out of the business more than their profiting.