Cash Flow Forecasting 101

     As every small-business owner knows, cash flow is so vitally important to the increased success of their company.  It allows the business to operate from day to day, paying vendors and employees to keep your service running smoothly.  It is also the key to growth.  Making investments at certain milestones in the life of your company cannot be done without cash.  There are loads of excuses for not getting handle on your cash flow, from time complaints to the forecast always being ‘inaccurate.’  But it remains, that the time you spend understanding your cash flow could be the most valuable investment of all.

     There is usually some degree of predictability based on industry norms.  Manage your cash flow based on these norms along the lines of your business model and prior operating history.  Making a forecast will help you be a better manager of the risks in growing your business.  This is can be especially tough for small-business owners, as they tend to not have as much cash “elbow room" on any given day.  You need to be able to predict expenses for the next 12 months, spot red flags in advance and have enough to stay afloat in financial storms.

     There is no one single plan, but rather 3 scenarios to outline when creating your cash flow forecast.  There are the (1)Best-case, (2)worst-case and (3)expected scenarios.  Identify the key factors that effect your business and their dynamics.  Sales cycles, competitors and reliability of products and services are a few of these variables.  You want to be proactive about handling any obstacles along the way, rather than constantly doing damage control.  You should be able to come up with a number for how much money your company will need in the next year to continue along your business plan, including when bills are due and when customers are expected to pay.

     Having a forecast will also help you achieve investment goals.  If you have major upcoming expenditures to grow your business, having a forecast will help you determine the best time to expand.  Your three scenarios should reflect three different bottom-line numbers.  You may not reach the exact goals, but creating these guidelines helps you make better decisions by understanding what you can and cannot afford. 

Accounting Advice from Big Business

     It’s hard doing everything for your small business, especially making time to sit down and do the books. Larger companies have an advantage in this area.  They have the capital to hire financial experts that manage their financial efficiency.  Here are 7 practices to borrow from bigger companies to manage your own business’s finances. 

1. Renegotiate your payment terms.  30 days is no longer the universal standard.  Extend your payment terms to 60 or 90 days.  Try to settle these terms beforehand, avoid breaking payment agreements.  However, if cash flow is a major issue, communicate with your vendor that you’re extending payment terms unilaterally by 15 days and stay within those terms.  Most vendors will be accepting of this.

2. Get paid upfront.  Larger companies aren’t known for extending credit to customers. As a small business owner, you deal with people on a more personal level in the day to day.  Just remember that credit is a privilege and extending it is risky for most everyone these days.  Make sure you accept credit cards, electronic transfers or electronic checks so there are no excuses for not making a payment up front. 

3. Follow up on invoices.  Larger companies most always have a follow-up plan after sending an invoice.  A call or an email to confirm your invoice was received and when payment is to be expected.  If the payment doesn’t arrive when scheduled, make another reminder call.  If you’re not necessarily good with keeping track of accounts, account apps can help with reminders for you.  Most people want to pay their bills on time, sometimes they can just get lost in the shuffle of everyday business.  Follow-up action almost always increases cash flow.

4. Extend your cash flow by paying with a credit card.  Paying an invoice with your company credit card when it is due (about 30 to 90 day) will give you an additional 30 days of cash flow.  This only works if the credit card bill is paid monthly and not used as a long-term loan.

5. Bill on time.  At minimum keep a monthly billing schedule.  This will help keep your cash flowing.  Don’t wait until the end of the month to bill, either.

6.  Move to a different state.  All states are not equal when it comes to corporate taxes.  Lots of larger companies move to states where these are the lowest.  The highest tax burdens are found in Tennessee, Arizona and Louisiana.

7. Careful accounting tricks.  With the advice of an accountant, you can learn some tax strategies that large corporations use.  

     — Treat certain operating costs as investments.

     — Change the depreciation policy.

     — Sell equipment like computers or machines (fixed assets) and recognize the income as normal sales.

     — Recognize the income of a long-term contract in one lump sum rather than when it will actually be realized. 

Small Business Checklist: 15 Accounting Tasks

     As the end of the year arrives, business owners should be thinking about their strategies for the upcoming year.  As your business grows from year to year it is important to track your finances to keep its growth successful and healthy!  Making a routine of tracking your finances can help you make more business savvy decisions when you have to make them, like where to cut costs or when to finally invest in that big money item.  Here's how to start making your accounting tasks part of your business routine.

Daily

1. Check cash position— Cash is the lifeblood of your company, keep it pumping so your business thrives.  Begin the day with an overlook of how much you have.  How much you expect in payments and how much you expect to spend is useful to keep in mind for the future as well.

Weekly

2. Record Transactions— Every one of them.

3. Document and file receipts— Best if scanned to a computer that sorts them automatically. Keep your statements, invoices and vendor files organized.

4. Review unpaid bills— Keep an “unpaid” folder to track of what you still owe.  If there are discounts to take advantage of for early payment and you have the cash on hand, do it.

5. Pay vendors— This is where technology becomes helpful.  Get reminders for upcoming payments due to avoid late fees, make automatic payments and keep copies of invoices.

6. Send invoices— Include payment terms (generally give a 30-day grace period).  If you don’t specify your due date, other businesses won’t prioritize paying you.

7. Review projected cash flow— So critical.  A realistic forecast of how much cash you need in the upcoming months will help you plan and maker better business decision on how to spend.

Monthly

8. Balance your checkbook.—  Reconcile your business' checking account.  It helps you discover inaccuracies and oversights by either you or the bank, so you can correct them quickly.

9. Review past due receivables— Separate “open” invoices with “overdue” ones.  Send outstanding reminders at the beginning of the month and to anyone else who owes money.  Keeping this column will help you determine what to send to collections or what to write off at the end of the year.

10. Review current monthly balance sheet vs. previous month— Determine whether or not there is significant up or down activity in managing your assets and liabilities.  Then set out to understand why.  Are you up because of increased sales or down because of unpaid invoices?  Determining the cause will light the way to resolving any problems.

Quarterly

11. Review payroll reports and make payments— You’ve been withholding income tax, social security, Medicare and disability taxes from your employee’s paychecks (usually semi-monthly).  The IRS and most states require quarterly estimated filing and payments.

12. Calculate estimated income tax and make payments— Review your year-to-date P&L statement to determine if your business is required to make estimated quarterly tax payments.  Your tax accountant can help you determine your status.

Annually

13. Review your inventory— Calculate the value of items not sold if your business has an inventory.  Write-down of inventory translates to tax deductions at year’s end.  Don’t pay additional taxes on unsellable inventory by overstating your inventory balance.

14. File taxes— Report the earnings of your full-time employees by filling out W-2 Forms.  Use 1099s for independent contractors you paid more than $600.  Mail out forms to your employees by the January 31 deadline.

15. Review and approve annual financial reports and tax returns— When it comes to filing taxes, accuracy is your responsibility.  Review annual reports carefully, if you've been keeping up all year, this won't prove too difficult.  

While this is by no means a comprehensive list of everything that pertains to your business, it is a guideline to hold your bookkeeping at bay throughout the year rather than the insurmountable chore playing "catch-up" can be.

Quarterly Tax Returns

     

     If you make quarterly tax payments, the due date for the 2nd quarter is fast approaching; June 15. There are a few possibilities that mean you are required to make quarterly tax returns.

1. Self-Employed sole proprietor filing Schedule C.  As part of your personal return, you may be required to make quarterly estimated income tax payments.  Use Form 1040-ES.  Your payments will be in compliance with the federal “pay as you go” system and will save you from any underpayment penalties that you may incur even if you pay the full balance by April 15.  These payments include federal income taxes as well as self-employment taxes.

2. Payroll taxes.  You must issue and withhold taxes from any employee paychecks.  You are given a certain timeframe to pay, usually using Form 941.  They must be paid one month after each quarter.  The next deadline coming up is July 31.

 

3. Some LLCs, S Corporations, partnerships.  If you’re performing services for your company, you are required to pay yourself “reasonable compensation.”  That means giving yourself a paycheck and filing payroll taxes.

     Make sure you’re in compliance before the next quarterly due date!