Virtual CFO | Understanding Profit
Business owners often have a poor understanding of why it appears they are making money in their business, but they are running out of cash those virtual CFO. As Warren Buffett said, accounting is the language of business. 50% of all businesses close their business within five years, and 29% of those businesses say that running out of cash was the reason for their business failure. By helping businesses understand the language of business, they will be able to be better armed and making financial decisions about their business, allowing them to not only avoid running out of money, but succeeding in business.
By helping business owners understand certain financial misconceptions will in business, start to make more informed decisions within their business. The first question that can help businesses understand business finances is how does a long cut off period and processing period for Payroll help? Business owners often have to draw on their own cash to pay for payroll says virtual CFO. But a longer cut off allows for businesses to collect money from their clients in order to use it for payroll. A good cut off would be for business owners to have a lasting pay. Be on a Friday, and then the next pay day be the following Friday. That entire week of processing can help business owners collect clients is that instead of their own money to pay payroll.
Why should business owners want shorter payment terms from their customers, and longer terms from their suppliers? This is a great question for businesses who are on extremely tight budgets to understand says virtual CF. The reason for this is if businesses are able to collect from their customers in a shorter period of time and to get money paid back to them sooner, they can help them pay their invoices. If they get longer terms from their suppliers, then you donít have to pay back the bills that they receive until after they received payment from the customer on the same job. This can help business owners that are on and extremely tight budget, or or who health know operating capital left in their business finance projects.
The third situation that business owners can understand for business financing is why should profits be at least as high as shareholder draws and loan payments? The reason for this says virtual CFO is that because shareholder loans and loan payments do not show up on the income statement, business owners need to make at least as much in profit in the business as is going to come out of the business. If the business is that profit at least but is being taken out, the business owner will run into a cash flow problem.
My understanding these common business finance circumstances and situations, business owners can be prepared to make better financial decisions in the business as well as solve problems sooner in their business than they would have been able to before learning these things.
50% of all businesses close the doors to their business within five years, and 20% of those businesses will say that running out of cash was the reason why the close their doors says virtual CFO. Entrepreneurs sometimes have poor understanding of the finances of their business, leaving them confused as to why they are making money in their business, but there are running out of cash. Helping business owners understand business financing, business owners can avoid the most common business problems which is running out of cash. Business owners can avoid that problem, they can increase your chances of success in business.
First question that a business owner can ask in order to become educated and business finances is how can a longer loan amortization period reduce the strain on cash flow? Often many business owners believe that a low interest rate is the most important thing to consider when getting financing for loans says virtual CF. But business owners also need to be aware of how the length of the amortization period effects there ability to pay that loan back. The longer amortization period is, the easier it is for business owner to pay back. For example if the business owner has five years to pay back $20,000, that will put a higher strain on their business if they had 10 years to pay back that $20,000. Even with a slightly higher interest rate, the longer amortization period is much less financially taxing on the business, and in their best interest. By understanding that, business owners can make better decisions about it comes to financing their business that will be less likely to financially strain their business.
The second question that business owners can understand in order to understand their business finances better is why is it important to bill early and bill often? Virtual CFO says often business owners get stuck in the mindset of monthly billing cycles. However monthly billing cycles can be extremely long the work is done at the beginning of the month, and then the client also has terms on those bills like 30 or 45 days. Just increases the amount of time before business owner can get their money, which can really affect the cash flow in a business. Business owners should ask themselves why bill monthly when they can bill weekly? By billing more often, business owners significantly decrease the time and between getting paid. By adopting a weekly billing schedule, business owners can create a situation where they are receiving payments in on a weekly basis which can significantly minimize cash flow problems.
The third question that business owners understand in order to do better business financing in their business, is does the principal portion of loan repayments show up on the income statement? Business owners need to understand that principal payments do not show up on income statement, only the interest shows up. Virtual CFO says that needs a business owner needs to be very diligent when looking at their profit and loss statements in order to make sure that the business is making enough in a profit to pay off the principal of that loan.