By Eric R. Nelson, CPA MBT is the President of the Eden Prairie based accounting firm of Eric R. Nelson CPA, LLC.
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.
And with periodic cash flow analysis, you can identify which aspects of your business have the potential to cause cash flow gaps and head off those unpleasant financial glitches.
Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services. That’s hard to swallow, but 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. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business.
Tracking Your Key Components
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. To do this, you must have an accounting system capable of providing you with accurate accounts receivable, accounts payable and cash balance reporting tools, as well as a profit & loss, balance sheet and statement of cash flows.
Having a good accounting and reporting system will allow you to evaluate the health of your cash position. But keep in mind, profit is much different than cash flow.
Take a look at an example of how that’s possible:
Let’s say your retail business bought inventory of $1,000 and immediately sold it for $2,000. Your P & L shows you’ve made a $1,000 profit. But what if six months pass before you collect the money from the customer? 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.
A quality accounting system implemented to fit your business will help identify and give you the tools to avoid problems such as these. As long as the system is maintained, your accounting system will be invaluable. This is true for any business, but especially critical for start-up businesses during their formative years.
Managing Your Taxes
Whether it’s paying them, complying with the laws, or filling out forms, one thing is certain: Everyone hates taxes. However, for a business owner, they are a significant part of your operations and they demand attention. Taxes comprise a minimum of 30 percent of your bottom line. Therefore, they must be managed in order to keep your cash working for your business, instead of destroying it with surprises.
Having accurate accounting records is imperative to effective tax management. Many businesses are pass-through entities like an LLC or S-corporation. That means the profit earned by those types of entities is actually taxed on the owners’ individual income tax returns.
Because of this, business owners will need to calculate their individual tax liability, which includes the income from their LLC or S-Corporation on a quarterly basis and make estimated payments to the government.
Pay too much in estimates and you’ll drain your much needed cash from your business coffers. Get lazy and miss your estimates and you’ll get a nasty tax bill come April 15. Either situation can be devastating to cash flow.
No business owner has a crystal ball to see exactly what their profits are going to look like. In order to achieve these important calculations it is highly recommended that you work with your CPA on a quarterly basis to estimate your tax payments.
Exploiting Your Core Business
Before moving on to the next product or service line, careful analysis must be done in order to determine if the business has made their core business as efficient as possible. Are there systems or procedures that could be implemented to wring more profit out of the core? Can the production cycle or supply chain be shortened to gain efficiencies and avoid tying up cash into inventory? Cash-flow analysis will help here, too.
Create Your Board of Advisors
Every business that’s serious about staying in business needs a group of advisors that they meet with on a regular basis. At a minimum, you need a CPA who is well versed in small business taxation and has analytical experience to help identify and avoid problems in your business. An accountant who simply understands how to navigate through accounting software isn’t a guarantee that they can advise you on accounting and tax technical issues. A solid attorney with an emphasis on business law is essential for legal entity protection, contract review and employment issues. Finally, finding a banker with the skills and products to help you grow your business is crucial when you need money for expansion or upgrading.
Our firm has had much success in helping clients identify the metrics that drive their business and use them to reach even greater profitability in their core businesses. Once this has been achieved, then evaluating complementary products and services can be considered. Without your core business running smoothly and generating cash, you probably won’t have a business to run.
Eric R. Nelson, CPA MBT is the President of the Eden Prairie based accounting firm of Eric R. Nelson CPA, LLC. He has been a CPA for more than 22 years, working with startups, small business and Fortune 500 companies. His firm consistently saves businesses and individuals thousands of dollars in taxes through effective and cost efficient tax planning and by implementing carefully derived accounting systems. He can be reached at: