Master the Art of Cash Flow Management

Your business cycles cash just like a river cycles water in and out of the ocean. Although a fisherman may not be able to be the master of the sea (forcing the water to do what he wants), he can master the science of predicting weather and fishing patterns and make a profitable business from it.
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1. Intro to Cash Flow Management

Common Terms

Before we begin, and in case accounting terms are not in your wheelhouse, below are a few that I will use often in this book.

  • Capital: Your business’s financial assets. Capital comes in four major types: Debt, Equity, Working, and Trading.

    • Debt Capital – acquired financial assets (usually Cash) through Debt Agreements (bank loans, private loans, etc…).

    • Equity Capital – acquired financial assets (usually Cash) through Equity Agreements (stock sales, ownership percentage points, etc…).

    • Trading and Investing Capital – refers to the amount of cash allocated for security investments, i.e. “trading” various types of securities in order to achieve optimal returns.

    • Working Capital – a financial ratio that reveals the company’s short-term Liquidity. It is derived by taking the current assets (cash and cash equivalents) and subtracting the current liabilities (due within a year). Working Capital shows a business owner if the company can pay its obligations in the short run without needing to acquire additional capital (in any form).

  • Assets: Resources that your business owns that will provide a future benefit, usually in the form of revenue. Cash, Accounts Receivables, Inventory, and Prepaid Expenses are all resources that will provide the business with a future economic benefit.

  • Liabilities: Legal obligations that the business will pay in the future. Businesses use assets to pay these obligations.

What is Cash Flow & Why Does it Need to be Managed?

Your business cycles cash just like a river cycles water in and out of the ocean. Although a fisherman may not be able to be the master of the sea (forcing the water to do what he wants), he can master the science of predicting weather and fishing patterns and make a profitable business from it.

Cash Flow in and of itself is just like the water in the ocean, it is the incoming and outgoing of cash in a business.

Cash Flow Management is a discipline that involves observing enough about your business, customers, sales, expenses, and internal/external environments to learn from.

From that point, you will be able to predict growth opportunities, threats and bottlenecks, and areas where your business can be the most profitable and meet its goals.

Accounting, Taxes & Choosing the Right Apps can make or break your business.


2. Accounting for Cash Flow – Budgets, Plans, and Goals, oh my!

As with the first step in any decision-making process, Planning is the first
step in Cash Flow Management. Taking a few days with your top leaders and managers to plan the next 12 months is crucial to Cash Flow Management.

After all, it is not Cash Flow Reporting, but Management. The difference is that the decision-makers of your business must be taking action before the Cash is spent and this begins with a plan.

Once the strategic goals and plans are established by the leaders of the company, budgets must be created in order to meet these goals.

Budgets are more than simply tracking expenses and there is more than one type of budget. If you have been in business for at least three years, taking the prior year’s data is a starting place for financial assumptions.

I say assumptions because there are always assumptions when dealing
with planning and projections.

The following describes the types of budgets in the order they should be

  1. Sales Budget – using expectations about sales and growth, taking into
    consideration of the direction of the company, and create a sales budget.

  2. Production Budgets – using the Sales Budget, you can assimilate how much volume is needed to produce in order to meet the sales goals (shown in units for manufacturing businesses or in estimated labor hours for service providers).

  3. If you are a manufacturer of goods, you will take the production budget to create the following supplemental budgets:

    1. Raw Materials Purchases Budget

    2. Direct Labor Budget

    3. Factory Overhead Budget

  4. Inventory Purchases Budget – this budget should be adjusted monthly or weekly and is always compared to the sales budget to actual and all upcoming orders.

  5. Expense Budgets – this is the budget most think of that do not have accounting experience. Use the sales budget and past costs (or using industry standards) to create an operating expense budget for each department.

  6. Capital Budgets – this is the budget that determines capital purchases.

  7. Cash Budget – Now it all comes together with Cash! The Cash Budget is the final budget prepared because it is the budget that pulls them all together, putting on paper the budget cash inflows and outflows. Business owners and advisors use this budget to determine if capital raising in some capacity is needed.


3. Cash Flow Taxation: Hire an Expert and Watch the 75%

Now that you have created a plan and budgets to support your goals, your CPA can readily provide tax projections and strategies.

Although I am a HUGE advocate for paying as little in taxes as possible, I also know that the average small business owner is also afraid to make a profit for fear that the IRS will take it all in taxes.

This fear inhibits growth and good business decisions. In the US, the highest tax bracket for an individual could be a combined 50% (if they maximize their investment portfolio), however, the majority of the individuals in the United States are in the 15-25% brackets.

Since most of the small businesses in the US are not corporations, but rather pass-through entities that pay tax at the individual level, your business tax burden (on average) is 25 cents for every dollar earned.

As a business owner, you should be concerned with planning how to allocate the 75 cents and grow a more profitable business over time. You can hire a CPA to create a plan to lower your tax burden and pay less in taxes, but you should focus on growth, not taxes.

If you want to read more, we wrote an article HERE on How Paying Zero Taxes Actually Hurts Your Business.


4. Apps to Manage Your Cash Flow

If your accounting platform is lacking in an area outside of collecting the raw financial transactional data, then you might need to add an app to your tech stack.

You will want to build an app ecosystem to remove at least 50% of current admin time, bottlenecks, and inefficiencies (i.e. Xero, Gusto, Workflow Max, Zapier, etc…)

There are hundreds, if not thousands of apps that exist today, and this number increases each year. We have seen that businesses have seen greater success by hiring a consultant to help create and implement the tech stack than by trying to make the decisions alone.

There are also countless apps that exist today to help you manage your cash flow.

All of the apps below have a component of cash flow reporting, forecasting, or budget analysis built in and all integrate with Xero in some capacity:


5. What’s Next?

After reading this, my hope for you is that you got one or two gold nuggets or action items for you to implement.

The goal is for you to know just enough so that when you hire someone, you know when they are bull$#**ting you – but definitely hire someone.

If you would like some tips on what to ask when interviewing a CPA, you can download our free questionnaire:
Questions to Ask When Hiring a CPA For Your Business


ProAdvisor CPA:

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This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.

This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.

This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.

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