“Why are we earning much more, but living paycheck to paycheck?” This statement and others like it plague many high earning Americans. I have heard it countless times from people when going over their personal tax return. A couple or individual is now earning well over six figures, but their bank account balances reveal that they have just enough to get by the next month or two. After taking a look at their change in lifestyle and spending habits, it becomes apparent why so many are making more yet struggling. Most have not created a budget or closely evaluated their spending, so they are baffled why they are in this predicament. Just tune into one episode of The Dave Ramsey Show.
However, many businesses face similar struggles. I was reminded of this when a business client of mine revealed, “we are busy and revenue is up, but we seem to have nothing to show for at the end of the month.” After all, the company had profits in the hundreds of thousands; shouldn’t the company’s bank statements reflect this? Like the high income individual, he was primarily focusing on his business’s P&L. After providing him a statement of cash flow, he was able to see his six figure profits alongside a statement showing a reduction of $70k in cash for 2017. In this case, the principal payments on his business loans were wiping out his operating cash flow.
There are a plethora of reasons why a business has cash flow issues. The important thing, though, is to figure out why. If you don’t know why there is a problem you can’t fix it. Thus, if your business is having cash flow issues, I highly recommend you begin doing the following three things, starting today.
1. Have financials prepared monthly and timely (5-10 days after month end), including a statement of cash flow. This will give you an idea of where you are now so that you can plan where you would like your business to be. Timely financials are important, because it will allow you to make timely decisions. If you are looking at last year’s financials just now it is near impossible to make meaningful change.
2. Create a rolling budget 12 months out. Closely evaluate how you would like to see resources shift. After the end of each month look at actual results vs. budgeted. Measuring whether you are over or under budget in important areas will allow you to take appropriate action.
3. Plan for income taxes at least quarterly. Income taxes often flow to a business owner’s personal return so there is no “one size fits all” approach. Therefore, it’s important to do this with a professional who is familiar with your personal situation. Also, everyone knows how easy it is to get behind, especially if you are reinvesting your profits back into your business. Having enough set aside and paid timely will allow you to be confident throughout the year and especially during tax time. Many are indignant of how they loaned the IRS money interest free by paying in too much too early, so it’s important to plan accordingly.
These are only beginning steps. Admittedly, it will be difficult to implement initially. However, when you begin to develop a clear understanding of your company’s cash flow issues and you have laser focus on improving things, you will be surprised how quickly your situation will change for the better.