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

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Virtual CFO | Understanding Cash Flow Versus Profit

Business owners often donít understand why they are running out of cash in their business when their statements show that they are making money says virtual CFO. 50% of all businesses close the doors to their business within five years, and 29% of these failed businesses say that running out of cash was the reason they had to close their business. Helping business owners understand some basics when it comes to business finances, that can help increase business owners chances of success business by helping them to avoid cash flow problems. As Warren Buffett the all-time great investor said, accounting is the language of business. Once business owners speak that language of business, they will be better prepared to operate their business.

Understanding the difference between cash flow and profit in a business, can help business owners understand why their income statements show that they are making money, but why they may not have the money in their bank. One concept to help them understand this says virtual CFO is helping business owners understand when revenue is added to their income statement. Revenue is added to their income statement as soon as it is in place to says virtual CF business owners need to understand that just because it is on the statement it doesnít mean that the business owner has received the money for it. By understanding this difference in statement and bank account, and help business owners understand the way it shows they have the profit that they might not have money.

Business owners also want to understand how I said increased in revenue place strain on their cash flow. Since the goal of many businesses is to sell more product and increase their business, and donít see a sudden increase in revenue as a problem says virtual CFO, but business owners need to be aware of what happens when their revenue goes up suddenly and be prepared for it. When the revenue dramatically goes up, so will the business ownerís expenses. And even though the business owner will get paid that increased revenue until much later, they will be expected to pay for those increased expenses right away. So this can contribute to a cash crunch in a business. By understanding that concept and being prepared when it happens business owner avoid running out of money.

Itís also very important for a business owner to get into the habit of prompt billing in their business. His business owners can get into a routine of billing their customers, and billing them as often as they can, they will be able to increase the cash they will start to receive in their business. What business owners should avoid says virtual CFO is billing a client. That means if the business owner did the work at the beginning of the month, and they built at the end of the month, and then there invoice has a 30 day term, that business owner is waiting up to two months before they see that money. Itís far more efficient to bill more often, in order to decrease the amount of time until the business owner gets that money.

50% of all businesses are out of business within the first five years says virtual CF, and 29% of those failed businesses will cite that they ran out of cash. Business owners often do not understand why they are making money in their business, but they are running out of cash. Since this is one of the biggest reasons for business failure in Canada today, my understanding how to avoid this cash will problem in their business, can help increase the business owners chance of success exponentially.

By understanding why cash flow problems occur, business owners can learn how to avoid those cash flow problems in their business in order to increase the success. The first thing that business owners can do their business to avoid cash flow problem is very simply with their payroll. If a business owner can lengthen the time between their payroll cut off and their pay day, they can often avoid a cash crunch. The reason for this is if there is a long processing period, then business owners will be able to collect money from their clients in order to use that on people. Virtual CFO says having a very short the processing period Can often force business owners to draw on their own cash in order to make the payroll because they donít have enough money to pay payroll, and they donít have enough time in order to collect more money, which is a situation that all business owners should avoid at all costs.

When business owners are arranging the financing for their business, understanding amortization periods can help them avoid cash flow problems in their business in the future. The reason for this is a longer loan amortization period reduces the strain on cash flow because the longer it takes a business owner to pay back that loan, means the lower the monthly payments are going to be. If they have lower monthly payments, theyíll be less likely to have cash flow problems. If they have a very short amortization period says virtual CFO, they have a higher risk of not being able to pay that high monthly payments, and may run out of cash in their business. Entrepreneurs often think that low interest rates are the only thing to take into consideration when they are arranging financing, but they also need to decide how much they will be able to pay on a monthly basis to avoid problems. It may also be in the business ownerís best interest to have a slightly higher interest rate if it will allow them to have a much longer amortization period. These are just some of the ways that business owners can not only avoid cash flow problems in their business but use those tools to , a grow their business and become successful as well as increase their chances of succeeding in their business.