Tax Preparation: Essential Business’s Cash Flow Management Strategy

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If I were forced to name one problem common to all business owners, it would be cash flow management and tax an important part of it. It impacts businesses of all sizes, but is particularly challenging for smaller companies and startups. It is the reason for 82% of business failures—clearly, this is something you cannot ignore. 

Even if you’ve been diligent in developing—and following—a strategy for managing cash flow in your growing business, an unexpectedly large tax bill can suddenly derail the work you’ve put in. If you haven’t already incorporated tax planning into your strategy, you are rolling the dice with your company’s success. Taxes are an essential, though sometimes overlooked component of your business’s cash flow.

Forecasting—the critical first step in cash flow planning

Managing cash flow in your business starts with understanding the term, so we’ll borrow a definition from Inc. Magazine: cash flow is simply “the movement of funds in and out of your business.” When you have more money coming in than going out, your business is cash flow positive, while the opposite situation is referred to as negative cash flow.

Effective planning begins with knowing when money is coming in, when it’s going out, and how much of each. Commonly referred to as cash flow projection or cash flow forecasting, your best results will come from analyzing these numbers on a regular basis—quarterly is common, though monthly is best for most companies.

Lean why a CPA is requirement of every small business

Predicting revenue and expenses

If yours is a business that relies on regular, recurring clients—like many service businesses—forecasting revenue can be fairly straightforward. You know how many clients you have now, and how much they pay you every month. There is still some estimating, though. Not every client pays their bill on time every month, and no matter how great you are at your business, you’ll occasionally lose clients. On the positive side, if you’re working to grow your business you’ll also need to estimate how much new business you anticipate each month. 

Look at your clients’ history and communicate with your sales team to make reasonable estimates of these numbers; keep in mind that salespeople like to project big numbers and avoid taking their projections as gospel. Your projections should become more accurate as you gain experience in your business, and it’s usually best to estimate conservatively in the early days.

Expenses, for most businesses, are easier to estimate. Still, unexpected expenses will occur, so it’s wise to add a bit of cushion in your payables. 

Taxes and cash flow forecasting

As in personal finance, some business expenses allow a bit of discretion while others are mandatory every month. Taxes fall into the latter category. While they may not be due on a monthly basis, treating them as if they were prevents potentially costly errors. When creating your forecast for the coming month, estimating your taxes will be your final step. You will estimate based on your expected profit.

Small business callenges in tax preparation and how to limit them.

Depending on how much your business is earning, estimating what you will owe might be fairly simple. Chances are, though, it will become a lot more complex as your company grows. There is a lot of software available to assist in making these estimates, and depending on your business, good accounting software might be sufficient for the task. Most companies find that hiring a good CPA is a worthwhile expense.

With your estimate complete, your most important step is to treat it as a monthly bill. Put that money into a separate account, not to be touched until it’s time to file your estimated taxes. 

Do you have unique issues or concerns not discussed in this blog then please contact us by email or phone. We are here to help.

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