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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 The Difference Between Cash Flow And Profit

Entrepreneurs often do not understand why their income statement so that they are making money in their business, but they have no money in their bank account says virtual CFO. Industry Canada says that 50% of all businesses are out of business within five years, that 29% of those failed businesses say that the reason why they failed was because they ran out of money. Helping business owners understand basic business finances, business owners can better understand profit and cash flow in their business in order to avoid having cash problems in their business. By successfully avoiding cash flow problems of their business, is owners can exponentially increase their chances of succeeding in business.

Business owners should be able to understand how to relate their income statement, and understand when his revenue added to their income statement. Virtual CFO says business owners need to understand that revenue appears in the income statement as soon as it is invoiced. Business owners also need to understand that just because it appears on their income statement, doesnít mean they have received the money for it. This lack of understanding is the biggest reason why business owners donít understand why it looks like they are making money in their business and yet they donít have cash.

Another cash flow problem that business owners can understand in order to avoid it is how can a sudden increase in revenue place a strain on their cash flow. Since it is the goal of many business owners to increase their revenue, but donít of the big consideration what it must take from them in order to increase their revenue. When a business has an increased revenue, itís going to also increase their expenses says virtual CFO. By not being prepared to have increased expenses, can harm business. The reason for that is while there revenue is increased, they will not get paid revenue until much later however, they must pay for the expenses immediately. By not being prepared to pay the increased expenses, because the business to run out of money, or can cause them to not be able to buy the supplies they need to fulfil the order and still their business growth.

The thing that business owners can understand about their income statement, is that as soon as they receive the Bill, that Bill goes on the income statement, but it doesnít come out of their bank account until the business owner has money in the bank account to pay it. This can create another leg situation where their income statements doesnít manage their bank account. When business owners can understand how that money flows, they can be better prepared to pay for those bills in the way that cause them and their bank.

Once business owners can understand the difference between profit and cash, they will be better prepared in order to pay bills way that wonít hurt their bottom line as well as understand why income statement shows that they are profiting they have to money.

50% of all businesses closer is to the business within five years, and 29% of those failed businesses will cite that they ran out of cash says virtual CFO. Business owners often fail to understand why they are making money in their business, and yet they are running out of cash. Entrepreneurs need to understand the basics of the business finances in order to learn differences between cash flow and a profit as well as how to read income statements and profit and loss in order to make better business decisions and also avoid cash flow problems that caused so many businesses problems.

When ways that business owners can learn how to increase cash flow in their business is to Bill early and Bill often says virtual CFO. If a business owner can avoid invoicing only when the job is done, or only once a month, then a business owner can increase the cash in their business. If they are only invoicing their client once a month, than they are only receiving money once a month. If they can get into the habit of invoicing at the end of the job, whenever that is or even increasing the billing cycle to biweekly or even weekly, business owners can increase the frequency that money will flow into their business and thereby eliminating cash flow problems. Business owners should be billing their clients is often as those clients can tolerate.

In addition to increasing the billing cycle, business owners also try to decrease the terms on their invoices. Virtual CFO says the shorter the terms are on the invoice, the sooner business owner will be able to collect that money. As well business owners should also try to get a longer term on their suppliers. They can help create a buffer between when a business owner will receive the bills and when they will get paid for the job. If they can get paid the job before they receive the bills, that is essentially a business owner self financing the project. It can greatly help a business owner who has extremely tight budget for has no operating capital left in their business.

Another way that business owners can increase the cash flow in their business is by leveraging financing. Even if the business owner has cash in their business in order pay for hard assets says virtual CFO, they should avoid doing so and instead he is financing as a way to help increase cash flow in their business. How this works is a business owner will arrange for financing on the asset ensuring we have a long amortization period. The longer and amortization period, the easier it will be of the business owner to pay because the payments per month will be smaller. Smaller payments on a month-to-month basis is much easier to pay then if the amortization period was shorter. This can help the business owner use the cash that they have the business is operating capital instead of purchasing assets, as well as can help them increase cash flow by minimizing monthly payment.