Cash flow, as it relates to a small business environment, is the inflow and outflow of income. Cash flow Management is the process of allocating income outflows and inflows in a more efficient way than would otherwise happen naturally. The goal is to maximize cash flow; squeezing the most out of the inflows and reducing the cost of outflows so that more money ends up in your pocket.
Below I have outlined ten ways you can improve a box’s cash flow, some of which will be applicable to your personal finances as well!
1) Do not mix business and personal income and expenses
Establish a business credit card, checking, savings, and investment accounts from the very beginning. Use a/the business account for business transactions and personal accounts for personal use. Set up a paycheck system, such as paying yourself every two weeks or on the 15th and 30th of the month, even when you don’t have any income yet. Avoid the temptation of dipping into your business account for an impulse buy decision just because you can.
2) Anticipate and plan for fat and lean months
Most retail businesses are cyclical, and your CrossFit box is probably too. You will have fat months (think January/February) and lean months (June/July). Do not be so quick to distribute or reinvest the extra inflow in fat months. You may need it during the lean months or in case of an emergency. Which leads me to…
3) Establish and maintain an Emergency Fund
You’ve heard this before. Having an adequate emergency fund for personal and business use is a prudent financial planning technique. The purpose of an Emergency Fund is to provide capital in case of an emergency. Since emergencies typically don’t provide any forewarning, you should plan as if there is a 100% chance of an emergency. Avoid investing your Emergency Fund into high-risk vehicles such as the stock market.
4) Utilize high interest savings account for idle cash
Whether it’s your Emergency Fund or cash you have set aside to purchase five Assault Bikes next month, utilizing a high interest savings account can put some cash in your pocket. CIT Bank is currently offering 1.35% APY with $100 minimum deposit and will even give you a bonus of $100 if you qualify for the bonus. Synchrony Bank is offering 1.30% APY with no minimums. Since in today’s day and age it can take less than three days to transfer from your savings account to a checking account using Electronic Funds Transfer (EFT), it makes a lot of sense to utilize a high yield savings account as much as possible.
5) Anticipate and plan for Self-Employment Tax
Self-Employment Tax is your portion of Social Security and Medicare tax. When an individual is self-employed, she/he has to pay both the employer and employee portion of this tax since self-employed individuals are considered both. For 2017, the tax is 15.3%, consisting of 12.4% of Social Security tax (up to $127,200 of income) and 2.9% of Medicare an all income (no cap). Self-Employment Tax is due April 15th, June 15th, September 15th, and January 15th.
April is especially a heavy tax month since you may have Self-Employment tax due as well as prior year’s tax underpayment. Penalties for tax underpayment can be pretty steep. This is where a solid Emergency Fund may be very helpful.
6) Maximize your credit card rewards
Try to deliberately use credit cards that best match your business(give you cash-back, miles, etc.). Many times, you may have a choice of using cash or credit when paying for business expenses. Since paying with cash (or check) doesn’t give you any benefits, wisely utilizing credit cards can put some money back in your pocket.
For business use, I especially like credit cards that offer a competitive cash back feature. Currently, I like Barclays CashForward World Mastercard that offers unlimited 1.5% cash back, $200 bonus when you spend $1,000 within the first 90 days, no annual fee, and 5% cash rewards redemption bonus. I also like the Chase Freedom Unlimited that offers unlimited 1.5% cash back, no annual fee, and a $150 bonus after you spend $500 in the first 3 months.
As a general rule of thumb, the IRS considers credit card rewards to be a form of a discount and not income; so this extra money is tax-free. Keep in mind however, that for business use, any cash back you receive lowers your costs and therefore the amount you can deduct for business use.
7) Take advantage of Free Money
In addition to cash back rewards, credit cards offer another great feature: 0% financing. Let’s say you are trying to buy 5 Assault Bikes and have the option to pay for them with cash (maybe dipping into your emergency fund) or using a 0% for 12 months credit card. From a cash flow perspective, utilizing a 0% loan is the better alternative as long as you are disciplined enough to pay it off within the term. Not only is it easier to cash flow such an expenditure, but that cash you were going to spend is earning you interest in the high interest savings account you setup earlier. Currently, Citi Diamond Preferred and Citi Simplicity Card offer 21 month 0% introductory APR and no annual fee.
8) Create Incentives for prepaying
Most businesses utilize this tactic and you ought to consider it as well. There is a certain value that comes from when a client prepays for the next three, six, or twelve month period. Aside from the fact that getting a $1 today is more valuable than getting it a year from now, it helps you more accurately project your future cash flows, earn interest on that money, and provide money for equipment/expansion/etc.
It’s valuable to you so make it valuable to your community. You can offer a small cash discount, merchandise, or an additional service such as an hour of personal training. Make sure your community is well aware of any incentives that you offer.
9) Consider subscription based sales
When you buy a recurring product online such as protein or FitAid, they try to get you to sign up for a subscription(i.e. receive a case every month) and offer a small discount to entice you do so. They got it right. Not only does it commit the buyer for a longer term and in turn is more profitable, but it also helps with cash flow. Again, make sure your community is well aware of any offer your have made available to them.
10) Work with a professional
You may have already come to the realization that you cannot do everything. There is a whole lot of value that comes from outsourcing certain tasks. Time, knowledge, perspective, and expertise are some of the reasons why your clients hired you and they are some of the reasons you should consider working with someone. You may have heard that the biggest risk comes from not knowing what you don’t know... not from what you do know.
Ask yourself, what business are you in? If it's not a cash flow management business, than you probably shouldn’t be doing it.
I hope that you find this blog post valuable. If there are other topics that you would like me to write about, please send your suggestions to ivan@otbfinancialplanning.com.
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