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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 Income Statements

Business owners often have a poor understanding of why it shows they are making money in their business, but they are running out of cash says virtual CFO. Since one of the top three reasons why businesses in Canada fail is running out of cash, this is an extremely important issue for businesses to understand in order to succeed in business, and beat the odds.

There several financial issues myths that businesses can understand in order to be able to make better financial decisions, and run their businesses effectively says virtual CFO. By eliminating these myths, business owners are better equipped to operate successful businesses. The first myth that business owners can demystify is why the sudden increase in revenue places a strain on cash flow. Many business owners believe that a sudden increase in revenue should just increase the money in their bank. But the reason why this isnít true, is when the revenue in a business goes up, so do the expenses. And unlike the revenue which a business owner will see a month later, the expenses go up in the business right away. This creates a situation where the businesses seeing higher expenses than normal, and yet their cash will hasnít been increased yet. This can create problems business especially if they have no operating capital.

The second myth that businesses often believe is that shareholder loans and loan repayments show up on the income statement. Often business owners are confused when youíre looking at the income statement because the loan repayments, and diffidence do not show up on an income statement. This can sometimes lead to business owners forgetting to make the payment, or the owner miscalculated the amount of profit that the business paid that month because they missed calculating that loan payment. If business owners understand that loan payments diffidence do not show up statement, only the loan interest does, that could help businesses avoid running out of money and accounting for where other money is.

The third myth that business owners believe in business is that the most important things when considering the loan is low interest. Virtual CFO says this is a very common misconception because many people have been programmed to believe that local just rates are the most important thing, however something that business owners also need to take into consideration when considering their financing options is the longer the amortization period is, the easier it will be with that business owner to pay. Amortization period difference of only five years can in significant savings were business, trying to pay back the loan in a short amount of time can class a business owner to put into a cash flow problem, and may even cause a business owner to be unable to pay that back. A longer amortization period will allow that business to pay the money back for longer time, reducing your monthly payments, and helping the business owner of a cash crunch. A business owner should consider the longer amortization. Even if the interest rate is a tiny bit higher.

A significant problem with businesses is that 50% of all businesses close their doors within five years, and 29% of those failed businesses will cite that they ran out of cash says virtual CFO. Entrepreneurs often have poor understanding of why their business is making money, but they are running out of cash. Helping business owners demystify business finances can go a long way in helping businesses avoid financial problems and avoid the cash crunch, and increase their chances of success in business. As Warren Buffet, the great American investor says ìAccounting is the language of businessî. By helping business owners speak the language of business can help increase business success.

one of the biggest myths that business owners should learn is they believe that when the is cashed by assets, the assets will also show up on their profit and loss statement. Virtual FO says business owners need to understand that while there assets show up on a profit and loss statements, they show up very differently than they may be expecting. The cash they use to go towards those assets will show up, but they need to be aware of how these things are shown on the profit and loss statement.

Another myth that business owners need to learn when it comes to business finances says Virtual CFO, is that when revenue is added to the income statement, it is added as soon as it is invoiced, not when the money is received. Business owners should understand that invoices will appear on the income statement as soon as they are invoiced, which can sometimes show a discrepancy between the income statement and their bank account. because the income shows up statement but itís not necessarily in their bank account yet. When Business owners can understand this lag, they will be able to better understand why there statement shows as profit that their bank account does not.

The third myth that business owners can be aware of their learning about business financing, is having a short cut off and processing. Payroll is not beneficial. A lot of times business owners have an employee mentality when it comes to payroll, to get payroll paid as soon as itís cut off, however virtual CFO says that business owners should think a little bit differently and realized that a longer processing. Payroll can help them collect money from their clients in order to use that money for payroll rather than being money out of pocket to fund payroll. Business owners should avoid a cash crunch comes to pay their staff.

By helping business owners understand different misconceptions about business financing, help them not only make better business decisions, but also help them avoid cash cash in their business, which can help them avoid running out of money. Since this is one of the top three problems that businesses face in Canada, they can significantly increase their chance of success by minimizing these problems.