Tips for Small Business Cash Flow Management

Jovan Johnson, MBA, CFP®, CPA/PFS

Numbers tell a deep and rich story. Growing a sustainable business requires understanding your business numbers. A common challenge small business owners face is determining the right amount to pay themselves. Designing an effective cash flow management system for your small business is key to paying yourself adequately and confidently. 

In this article, we will explore four essential tips for creating an effective small business cash flow management system. 

Tips for Small Business Cash Flow Management 

1.) Create Various Bank Accounts with a Purpose

For some entrepreneurs, running all their transactions through one business credit card and one business bank account is sufficient to manage their cash flow. However, establishing a more robust cash flow management system becomes essential as your business continues to grow and scale. One effective strategy is to create different bank accounts with specific purposes.

Set up four different business bank accounts in addition to a business credit card. These accounts include:

• Operating Expense Account: The main account where all account activity occurs.
• Tax Account: An account with funds earmarked for taxes.
• Savings Account: An account with funds earmarked for future business projects and business and an emergency fund.
• Payroll Account: An account where you allocate your salary from the business.

The profit you earn from your business is different from how much you can pay yourself. You must first consider putting money aside for taxes and future business projects. Additionally, building a business emergency fund is important. These various accounts are critical to the growth and sustainability of your business. 

Additionally, I recommend you maintain a rolling balance to cover potential unexpected expenses or delayed payments. 

2.) Design a Budget (Business and Personal)

Personal

A quiet small business killer is the lack of a personal budget. Without a personal budget, you may find yourself taking excessive distributions from your business randomly. To design an effective small business cash flow management system, you must first create a realistic and flexible personal budget. 

Your personal budget will determine how much you need as a salary from your business. This approach prevents you from taking too many distributions from your business, which could limit its growth potential or put you into debt. Start by paying yourself a salary large enough to cover your personal budget, then consider paying yourself a bonus at the end of the year. Additionally, try to pay yourself on a regular schedule (i.e. bi-weekly or monthly) that you are comfortable with. 

Business

Similar to your personal budget, creating a business budget is crucial. It is important to know where your money comes from and where it goes. Without a budget, it is easy to overspend on business expenses. A budget for your small business is essential to help you track cash flow and make informed decisions. Additionally, it enables you to allocate resources more effectively and set your business up for sustainable growth.

3.) Design an Effective Bookkeeping System

You can’t design an effective small business cash flow management system without a robust bookkeeping system. Bookkeeping enables you to keep track of your transactions and stay true to your budget. By being aware of your past transactions and spending habits, you can identify inefficiencies and make necessary changes. Additionally, proper bookkeeping allows you to take advantage of significant tax deductions. 

To make informed business decisions, you need to be aware of your business numbers. Whether you opt for user-friendly bookkeeping software or enlist the expertise of a professional, the benefits and savings are substantial.

4.) Perform Consistent Check-ins

Establishing an effective small business cash flow management system is essential, but maintaining its effectiveness requires regular check-ins. These check-ins can be done weekly, monthly, or quarterly. Do not wait until year-end to assess your progress or identify areas for improvement. Take control and seize the opportunity now.

Analyzing financial reports, such as the profit and loss statement or balance sheet, is key to evaluating your progress toward your business goals. By checking in regularly, you can make necessary adjustments to take your business to the next level. 

Final Thoughts

An effective small business cash flow management system is necessary for the success and sustainability of your business. 

Remember, managing your business’s cash flow is not a one-time task but an ongoing process. With these tips, you will not only pay yourself adequately but also ensure your business thrives.

Are you ready to partner with a financial advisor who can help you optimize your business and personal finances? If so, book a Free Consultation with us to see if we are the right fit for you and your business.

Disclosures

None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.