Cash flow is the lifeblood of every small business but many business owners underestimate just how vital managing cash flow is to their business’s success. In fact, a healthy cash flow is more important than your business’s ability to deliver its goods and services.

While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, you are out of business.

What is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

A tax and accounting professional is the best person to help you learn how your cash flow statement works. He or she can prepare your cash flow statement and explain where the numbers come from. If you need help, don’t hesitate to call.

Cash Flow versus Profit

While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

Analyzing your Cash Flow

The sooner you learn how to manage your cash flow, the better your chances of survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.

The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the most important components to examine are:

• Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable balance sheet is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
• Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
• Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
• Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
• Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable at some point in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Need Help?

Without adequate funds to cover day-to-day expenses, your business could fail. Why take that chance? If you need help analyzing and managing your cash flow more effectively, please call and speak to a tax professional who can help.

A cash windfall is any amount of money that you didn’t expect to receive and is over your regular income. Most would consider it to be any amount over $1,000 – and quite often, the amount of money is much more than that. For example, you may have received a bonus at work, an inheritance, a legal settlement, a profit from selling a property or business, or won the lottery.

The first thing to remember is that it is never a good idea to rush into anything, such as going on that safari trip you’ve been dreaming about or buying an expensive sports car or diamond jewelry. There are also tax considerations, so discussing your financial situation with a tax and accounting professional is vital. You may owe a significant amount of taxes – or no tax at all, depending on your particular financial situation and how you handle your windfall.

Investing in a volatile stock market can be risky. Furthermore, with the current inflation rate hovering around 9 percent and the national interest rate for savings accounts averaging 0.11 percent (BankRate.com), holding money in a cash savings account means that you are losing money. With this in mind, if you’ve received a cash windfall recently, consider these three options:

1. Get Your Personal Finances in Order

If your personal finances aren’t in order, then now is the time to use your cash windfall to build an emergency fund, pay off high interest and credit card debt, and pay off a mortgage or put a down payment on a home or investment property (after due diligence, of course). While doing any of those is not as much fun as spending money on a fancy vacation, it will pay off in the long run.

Once your financial situation is in good standing, allocate 10 percent of any money left over toward something “fun.” If you have money left over after that – or already have your financial house in order, consider one of the next two options.

2. Invest in Tax-Efficient Investment Accounts
Tax-advantage investment accounts include 401(k) retirement plans, 529 education savings plans, health savings accounts (HSAs), and IRAs. Investing in these types of accounts could lower your tax bill now, but keep in mind that if you need the money sooner rather than later, you may need to pay penalties and taxes.

Which tax-efficient investment accounts to contribute to depends on your financial situation. If you are retired, you can no longer contribute to a 401(k), but if you have grandchildren, you can contribute to a 529 education plan. If you are still in the workforce and your employer offers a high-deductible health plan, consider maximizing your 401(k) contributions if you aren’t already doing so, as well as contributing to an HSA to help pay for healthcare-related expenses you might incur now or in the future.

3. Buy Treasury I-Bonds

I-Bonds are U.S. savings bonds issued by the United States Treasury. The interest rate is adjusted every six months, in May and November. Currently, I-Bonds purchased through November 2022 are paying 9.62% on an annual basis for the first six months they’re held. The interest rate will be adjusted in November based on inflation.

Individuals purchase I-Bonds from Treasury Direct. There is a maximum of $10,000 per person per year (each spouse can purchase $10,000 for a total of $20,000). The minimum age for purchasing these bonds is age 24, but parents can gift the bonds to their children (age 18 and under).

I-Bonds must be held for a minimum of one year; if redeemed before five years, three months of interest is forfeited. Interest income is exempt from state and local taxes but is subject to federal tax – unless the bonds are used to pay for qualified education expenses.

Help is Just a Phone Call Away

If you’ve received a substantial cash influx, take a deep breath, don’t make any quick decisions, then carefully consider your next steps. If you need assistance managing your cash windfall, don’t hesitate to contact the office and set up a consultation. You’ll be glad you did.

When creating a budget, it’s essential to estimate your spending as realistically as possible. Here are five budget-related errors commonly made by small businesses and some tips for avoiding them.

Not Setting Goals

It’s almost impossible to set spending priorities without clear goals for the coming year. It’s important to identify, in detail, your business and financial goals and what you want or need to achieve in your business.

Underestimating Costs

Every business has ancillary or incidental costs that don’t always make it into the budget – for whatever reason. A good example is buying a new piece of equipment or software. While you probably accounted for the cost of the equipment in your budget, you might not have remembered to budget the time and money needed to train staff or for equipment maintenance.

Forgetting about Tax Obligations

While your financial statements may seem adequate, don’t forget to set aside enough money for tax (e.g., sales and use tax, payroll tax) owed to state, local, and federal entities. Don’t make the mistake of thinking this is “money in the bank” and use it to pay for expenses you can’t afford or worse, including it in next year’s budget and later finding out that you don’t have the cash to pay for your tax obligations.

Assuming Revenue Equals Positive Cash Flow

Revenue on the books doesn’t always equate to cash in hand. Just because you’ve closed the deal, it may be a long time before you are paid for your services, and the money is in your bank account. Easier said than done, perhaps, but don’t spend money that you don’t have.

Failing to Adjust Your Budget

Don’t be afraid to update your forecasted expenditures whenever new circumstances affect your business. Several times a year, you should set aside time to compare budget estimates against the amount you spent and then adjust your budget accordingly.

Please contact the office if you have any questions or need assistance setting up a budget to meet your business financial goals.

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Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.

Taxable Income

Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Nontaxable Income

Here are some types of income that are usually not taxable:

• Gifts and inheritances
• Child support payments
• Welfare benefits
• Damage awards for physical injury or sickness
• Cash rebates from a dealer or manufacturer for an item you buy
• Reimbursements for qualified adoption expenses

Under the CARES Act, emergency financial aid grants made to students at a higher education institution because of an event related to the COVID-19 pandemic are not included in the student’s gross income.

In addition, some types of income are not taxable except under certain conditions, including:

• Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
• Income from a qualified scholarship is normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable.
• If you received a state or local income tax refund, the amount might be taxable. You should have received a 2021 Form 1099-G from the agency that made the payment to you. The agency might have provided the form electronically if you didn’t get it by mail. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.

If you have any questions about taxable and nontaxable income, don’t hesitate to contact the office today.

At some point, most small business owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants and how to approach them properly can mean the difference between getting a loan for expansion or scrambling to find cash from other sources.

Unfortunately, many business owners fall victim to several common, but potentially destructive myths regarding financing, such as:

• Lenders are eager to provide money to small businesses.
• Banks are willing sources of financing for start-up businesses.
• When it comes to seeking money, the company speaks for itself.
• A bank is a bank, is a bank, and all banks are the same.
• Banks, especially large ones, do not need and do not want the business of a small firm.

Understand the Basic Principles of Banking

It’s vital to present yourself as a trustworthy businessperson, dependable enough to repay borrowed money, and demonstrate that you understand the basic principles of banking. Your chances of receiving a loan will significantly improve if you can see your proposal through a banker’s eyes and appreciate the position that they are coming from.

Banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary to keep the depositors’ money safe, the banking regulators happy, and the community’s economic health growing.

Each Banking Institution is Different

Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and their attitude toward small business loans.

Selection of a bank is essentially limited to your choices from the local community. Typically, banks outside of your area of business are not as anxious to make loans to your firm because of the higher costs of checking credit and collecting the loan in the event of default.

Furthermore, a bank will typically not make business loans to any size business unless a checking account or money market account is maintained at that institution. Ultimately your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future.

If you need assistance deciding which bank best suits your needs and provides the greatest value for your business operation, don’t hesitate to call the office.

Build Rapport

Building a favorable climate for a loan request should begin long before the funds are needed. The worst possible time to approach a new bank is when your business is in the throes of a financial crisis. Devote time and effort to building a background of information and goodwill with the bank you choose and get to know the loan officer you will be dealing with early on.

Bankers are essentially conservative lenders with an overriding concern for minimizing risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust. One way to build rapport and establish trust is to take out small loans, repay them on schedule, and meet all loan agreement requirements in both letter and spirit. By doing so, you gain the banker’s trust and loyalty, and they will consider your business a valued customer and make it easier for you to obtain future financing.

Provide the Information Your Banker Needs to Lend You Money

Lending is the essence of the banking business and making mutually beneficial loans is as crucial to the bank’s success as it is to the small business. Understanding what information a loan officer seeks – and providing the evidence required to ease normal banking concerns – is the most effective approach to getting what is needed.

A sound loan proposal should contain information that expands on the following points:

• What is the specific purpose of the loan?
• Exactly how much money is required?
• What is the exact source of repayment for the loan?
• What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
• What alternative source of repayment is available if management’s plans fail?
• What business or personal assets, or both, are available to collateralize the loan?
• What evidence is available to substantiate the competence and ability of the management team?

Even a brief examination of these points suggests the need for you to do your homework before making a loan request because an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions or providing unacceptable answers is damaging evidence that you may not completely understand the business or are incapable of planning for your firm’s needs.

What to Do Before You Apply for a Loan

Write a Business Plan. . Your loan request should be based on and accompanied by a complete business plan. This document is the single most important planning activity that you can perform. A business plan is more than a device for getting financing; it is the vehicle that makes you examine, evaluate, and plan for all aspects of your business. A business plan’s existence proves to your banker that you are doing all the right activities. Once you’ve put the plan together, write a two-page executive summary. You’ll need it if you are asked to send “a quick write-up.”

Have an accountant prepare historical financial statements. You can’t talk about the future without accounting for your past. Internally generated statements are OK, but your bank wants the comfort of knowing an independent expert has verified the information. Also, you must understand your statement and explain how your operation works and how your finances stand up to industry norms and standards.

Line up references. Your banker may want to talk to your suppliers, customers, potential partners, or your team of professionals, among others. When a loan officer asks for permission to contact references, promptly answer with names and numbers; don’t leave them waiting for a week.

Seek Advice from an Experienced Tax and Accounting Professional

Walking into a bank and talking to a loan officer is stressful for just about anyone. Preparation for and a thorough understanding of this evaluation process is essential to minimize the stressful variables and optimize your potential to qualify for the funding you seek. If you’re thinking about taking out a small business loan, don’t hesitate to call with any questions or to request a consultation.