Wednesday, July 2, 2014

Improving your cash flow: Part VI

We have been discussing ways to manage and improve cash flow for small business owners.  Accounts Receivable need to be collected, inventory needs to be managed, accounts payable should be extended as far as possible, loan terms should be considered carefully and the cash needs of the owner should be budgeted for.  What is left?  Taxes.

Income taxes are handled differently for small business owners than for employees.  If the business is structured as an LLC, the owner(s) isn't eligible for a true paycheck and thus income taxes are not withheld from the money that is taken from the business.  Small business owners must send in estimated tax payments quarterly to cover their anticipated income tax.

These estimated tax payments do not show up on the P&L (assuming the owner pulls the money from the business) but are draws which are part of the equity portion of the Balance Sheet.  Cash flow is reduced by the payment of the estimated taxes and thus is part of our discussion on how to manage cash flow for a small business.  Some people find it helpful to transfer money into a savings account monthly so it is available when it is time to make the quarterly payments to the government.  The biggest part of cash flow management is making sure the money is available for all the different needs of the business: paying for inventory, paying employees, paying rent and other bills, paying taxes and providing income for the owner(s).

We hope this series has been helpful.

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