Tips To Ensure a Positive Cash Flow

One of the leading causes of business failure, particularly among small businesses, is poor cash flow planning.  It is imperative that a business have sufficient cash on hand to pay bills, meet emergencies and to invest back into the business to ensure growth.  Knowing that you will have lean months when sales are slow is an important aspect of planning in terms of putting money aside, but it isn’t the only thing you can do.  You can also:

1.         Aggressively collect accounts receivable.  If you have a customer who has not paid on time, you need to follow up and secure payment.   The longer you wait, the more difficult it will be to collect.  In fact, studies have shown that after 90 days, the chances of collecting an account drops to 72%, down from 94% after 30 days.

2.         Periodically review your pricing.  Ask yourself if you are charging too little or too much.  Research your competitors.  Do you offer more value?  A customer will pay any price for a product/service as long as they are convinced that they are receiving value. 

3.         Establish a line of credit.  Approach your bank and see if you can establish a line of credit to be used during times of emergency.  In the long run, a line of credit with a bank is a lot cheaper than credit cards should you find yourself in a cash crunch.

4.         Increase sales.  Sure, it’s always easier said than done, but it can be done.

5.         Open an interest bearing account and deposit daily.  Sweep accounts and interest bearing checking accounts may not produce a high yield, but 2 or 3 percent interest is better than nothing.

6.         Renegotiate your lease.  Most leases come up for renewal on an annual basis.  Approach your landlord with the idea of temporarily lowering rent payments during months when business is slow.  If vacancies are high in your area, your landlord may prefer a reduced rent payment to no rent payment.

7.         Hire more part-timers.  If you need support staff, consider hiring part-timers.  Unlike full-timers, you are not required to pay benefits, and they are generally more flexible in their work schedule hours.  Additionally, if you need to lay off staff in slow months, it is a lot easier to lay off a part-timer in comparison to a full-timer with benefits.

8.         Don’t overpay on quarterly taxes.  If you think your income will drop this year, do not pay taxes based on last year’s numbers.  Work with your accountant to ensure you have an accurate estimate.  If you’ve already overpaid on your quarterlies, ask for a quick refund (IRS Forms 4466 and 1138).

9.         Read the fine print in your equipment leasing contracts.  Get an option to cancel written into your equipment leases that allow for cancellation due to closure.  Don’t get suckered into contracts with an evergreen clause.  These are clauses that allow a contract to continue unless you give 30 day notice.  These are difficult to cancel and the expiration date is hard to track.

10.       Brainstorm with staff.  Your staff may have great suggestions for cutting additional expenses.  At your next staff meeting, ask for their input and ideas. 

Tracking Your Business Expenses

Effectively tracking your business income and expenses is a vital component of your business success.  While income can be easy to figure out, deciding what qualifies as a business-related expense is not always as cut and dry.  The IRS guidelines aren’t too helpful either in that they define a business expense as “ordinary and necessary” to your trade or profession.

The definition is very vague and sometimes it’s difficult for most people to determine what truly is a business related expense.  However, most expenses associated with starting up, organizing and operating your business are potentially tax deductible.  In fact, did you know that you can even write off up to $5,000 in startup and another $5,000 in organizational expenses in the year you start your business? (These deductions are reduced if you have more than $50,000 of either type of expense.)

Many sole proprietors are often confused as to what is and is not a business expense.  The best thing you can do if unsure, is to err on the side of caution.  Track all your expenses, even those in doubt, and then let your accountant or tax professional figure it out for you at the end of the year.

There are several great software programs that can assist you such as Quickbooks, Peachtree, Microsoft Accounting, Quicken and Microsoft Money.  Depending on your business needs, any of these feature-loaded softwares could get the job done for you.  Another option would be to keep a monthly Excel spreadsheet of your expenses.  Whichever method you use, consider setting up your expense categories to match those on the Schedule C (Profit or Loss from Business Form) of your tax return.  This will save you or your accountant time at the end of the year trying to figure out which expense goes where.

The IRS is strict about not mixing personal and professional write-offs on your taxes.  In other words, be careful if you are claiming expenses that are a mixture of both personal and professional expenses.  For example, you plan to attend a conference in Florida.  While there, you are going to drop in and visit Aunt Mary and Uncle Bob.  It’s okay to combine business and pleasure, but be careful when you claim those business expenses.

The conference must be geared to your business.  Furthermore, the conference also needs to last at least six hours a day, and you must attend a minimum of two-thirds of it in order for you to be able to consider it a business expense.  Also, be sure to extract any expenses related particularly to visiting Aunt Mary and Uncle Bob. 

Finally, hang on to your receipts and records.  The general recommendation is to retain that information for seven years.  The IRS has three years from your filing date to audit your return if it suspects good faith errors and has six years to challenge your return if it thinks you underreported your gross income by 25 percent or more.   And, if you failed to file, or filed a fraudulent return, there is no time limit.