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Deline Tax & Books Accounting Blog

An ongoing series of accounting and tax tips

Managing Cashflow – Small Business Accounting

April 19, 2017

Good cashflow management is crucial to your business survival. Some profitable companies die a slow death because of their inability to maintain positive cash flow. Below are some tips on how you can maintain positive cashflow and increase your chance for success. 

Understand your cash flow

Update your books as soon as you issue an invoice and as soon as you receive payment.

Always keep an updated aging report or a list of client invoices along with the dates you expect to receive payments.

Always monitor updated cash balance, aging receivable, and aging payables (Balance Sheet Accounts). This will help you understand your ability to collect cash and pay off creditors.

Forecast your cash in and cash out flow three months into the future. This acts as a budget. It helps you see how much money you can collect and how much you will spend. Break it down by cash received and cash paid. You should breakout cash paid by categories to give you a better picture of where your cash is going (example; Operating, Payroll, Capital Expense.)

Speed up cash influx

Service companies should bill clients as soon as service is provided.

Ask for retainer or up-front payment if possible.

To ensure faster payment, separate consulting invoice from billable expense invoice. Service fees are usually agreed upon before service. However, billable expenses are usually scrutinized after the fact and it normally takes longer to approve billable expense invoices.

Give your clients an incentive to pay invoices early. Example, offer discount on total invoice if they pay early.

Accept credit card payments to help cut down receivables.

Consider setting up automated payment schedule for your clients. Payments are pre-approved to come out of your clients’ account on a predetermined date.

Develop a rapport and engage with your clients’ AP, to ensure bills are paid on time. Send friendly reminders.

Slow Cash outflow

Utilize payment terms issued to you by your suppliers. Do not pay invoices earlier than necessary.

Carefully plan capital expenditure. Do not spend all cash from profit on capital expenditures. Consider using credit or leasing options to pay for your capital expenditures.

Look into financing options for expensive insurance policies.

Manage the Cash you already have

If you don’t have an expansion plan for your left-over cash from profit, consider opening interest-bearing accounts linked to your cash account. Move your excess cash into interest bearing accounts. Talk to your banker to learn more about safe interest bearing accounts.

Create a dividend policy to help avoid overpaying dividends or profit distributions. Set dividends or distributions to a percentage of your profits. This can be adjusted year to year based on your business needs. Always make sure you have enough to reinvest into the business to help guard against downturns in your business cycle.

Consider using some of your leftover cash to help pay down long term debt. This will help reduce future obligations and burden when there is a slowdown in business.

Implementing the tips above will help your business run more efficiently. It will help reduce much of the stress that comes with running a business. Good cashflow management is key to running a successful business.

Feel free to reach out if you have any questions.

Eze Nwachukwu

Deline Tax & Books


Deline Tax & Books Top Ten Tax Tips

1. Maximize retirement plan contributions

If your employer offers a 401(k) or other type of deferred pension plan, make every effort to contribute the maximum amount allowable -- especially if your employer matches your contribution. Otherwise you are leaving money on the table that could benefit you in your retirement. Think of the employer match as an immediate 100 percent return on your money. Even if there is no match, all of the funds are tax-deferred and grow tax-free.

If your employer does not offer a retirement plan, then consider making a contribution to a traditional individual retirement account or a Roth IRA. The former potentially offers a tax deduction for the year the contribution is made, but both offer tax-deferred gains.

2. Adjust your withholding

Check your year-to-date withholding and consider changing the taxes withheld if you are expecting a large refund.

This is especially important if you are claiming the earned income tax credit, or EITC, or the additional child tax credit. Why? The IRS is now required by law to hold all refunds on those returns until Feb. 15. The new law was put into place to allow the agency additional time to detect and prevent tax fraud.

IRS Commissioner John Koskinen said in a statement: "It's a personal choice if you want to have extra money withheld to get a bigger tax refund, but you have options available if you prefer to have a smaller refund next year and more take-home money now." You will need to complete Form W-4, Employee's Withholding Allowance Certificate, to adjust the amount of taxes withheld and submit it to your employer.

3. Protect your identity

Speaking of tax fraud, if you received an Identity Protection PIN, or IP PIN, in the past, then you must provide this number on your tax return not only this year but on all future tax returns. An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent fraudulent returns from being filed under your Social Security number. Remember, the IP PIN is your friend in getting the IRS to accept your tax return. However, this is no ordinary IP PIN, as it changes every year. You read that correctly: every year! If you do not receive the notification in the mail, you will need to go to the IRS website to retrieve it.

4. Get what's yours

According to the IRS, one out of every five workers fails to claim the very valuable earned income tax credit. If you worked and earned less than $53,505 in 2016 (the limit will be $53,930 in 2017), then use the EITC Assistant tool to determine if you qualify for the credit. You must file a return in order to receive the credit. Don't miss out on this!

5. Declutter and reap a tax break

If one of your New Year's resolutions is to simplify and declutter your life, now is the time to get going. You can make money by donating all of those things you no longer need or want in your life. There are many charitable organizations that accept items other than cash such as clothing, books, electronics and other household items. The deduction is limited to the item's fair market value, and the items must be in good condition or better to be deductible. If the value of the noncash items is more than $500, then you must file Form 8283, Noncash Charitable Contributions, and fill it in with some details. But it is well worth the effort.

6. Cash in on scholarly tax breaks

If you, your spouse or dependents had higher education costs in 2016, there may be some tax savings for you. In fact there are multiple benefits available. The only difficult part is figuring out which one works best in your situation.

Basically there are three different benefits: the American opportunity credit, the lifetime learning credit and the tuition and fees deduction. There are various requirements that may limit the benefit, but the IRS once again offers a useful tool: the Interactive Tax Assistant tool to help you find your way through the maze. You should receive Form 1098-T, Tuition Statement, from your school with the information required by the IRS to complete Form 8863, Education Credits.

7. Get health coverage in order

Make sure you know what you need to report to the IRS on your health insurance. The shared responsibility provision requires that you and your family have minimum essential coverage or qualify for a health coverage exemption. Otherwise, you must make an individual shared responsibility payment for all months that you didn't have coverage or an exemption.

Most taxpayers just need to do one thing: Check the box that indicates you had health care coverage for all of 2016. If that is not the case or you received advance payments of the premium tax credit on the marketplace, then you may need to fill out Form 8965, Health Coverage Exemptions, and Form 8962, Premium Tax Credit, to complete your tax return. For more information, visit the IRS page on the Affordable Care Act.

8. Know the rules about foreign accounts

Have a foreign bank account? Was the balance in the account(s) greater than $10,000 total? If the answer is yes to both, then you need to file what's commonly referred to as an "FBAR," a foreign bank account reporting form. The new name is FinCEN Report 114, FinCEN being an acronym for Financial Crimes Enforcement Network. As the name has the word "crime" in it, that should light a fire under your seat to make sure you're in compliance as the penalties are very high for failing to report.

The requirements don't stop there. If you maintain very high balances in your foreign accounts, you'll have to file IRS Form 8938, Statement of Specified Foreign Financial Assets.

Also, if you meet certain thresholds of ownership in any foreign corporations or partnerships, or if you are the beneficiary of a foreign trust, you should be aware of the complex reporting requirements in those instances. Just a few of the pertinent forms are: Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. All are available at the IRS website.

9. Be generous without tax repercussions

Every so many years, the IRS changes the annual exclusion for gifts that you can give without having to file a gift tax return. If you gave more than $14,000 in cash, property or gifts to anyone, you must report the gift on Form 709. If you are married, you can give a combined $28,000 and remain under the radar.

Note that this applies to the person giving the gift; if you are receiving a gift, congratulations -- you don't have to do anything. That is, unless you receive a gift from a non-U.S. person. If you happen to receive such a gift that is greater than $100,000, you will have to report this on the IRS Form 3520.

10. Be smart when you file

When filing your return, the quickest and easiest way to receive your refund is to electronically file your return and use direct deposit. If you owe money, use IRS direct pay from your checking or savings account. And whatever else you do, please make sure you keep a copy of your filed tax return. Believe me, it saves so much trouble in so many ways in the event you do happen to need it.

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