Strategic Cash Flow Management
May 06, 2024![](https://kajabi-storefronts-production.kajabi-cdn.com/kajabi-storefronts-production/file-uploads/blogs/27798/images/b0abef5-2b1f-7b6-0d0a-b6028a2666ba_stratetic-cash-flow-mgmt-thumbnail.png)
Strategic cash flow management is vital for businesses aiming for long-term sustainability and growth. When it comes to divvying up profits, think of it as creating a roadmap for success. Start by taking care of tax obligations (think tax returns or tax debt), then clear any outstanding debts, set aside funds for emergencies, invest in business growth, and finally, distribute profits for your hard work. By following this cashflow management strategy, you can ensure financial stability, adhere to regulations, and foster growth while keeping everyone happy.
1. Tax Obligations
As the saying goes, "There are two things guaranteed in life, death and taxes." It is a good idea to set aside 20-20% of each dollar you earn in a separate business saving account for taxes at the end of the year. Striking the right balance is key—over-saving ties up capital unnecessarily, while under-saving can lead to financial strain when tax bills come due.
- Top Priority: Taxes should be paid first to avoid penalties and financial distress.
- Strategy: Take charge with proactive tax planning. By understanding your tax situation and setting aside funds monthly, you ensure you're well-prepared when tax season rolls around.
Even if you over-save for taxes, it can serve as a buffer, allowing you to build up reserves (more on this later). While it's better to have more than you need for taxes than less, be mindful of tying up excess funds unnecessarily. Aim for a sweet spot where you're adequately covered without hindering your business's cash flow. Finding the right balance ensures you're prepared for tax obligations while still having resources available for other business needs and opportunities.
2. Managing Debt
It's important to make sure that business debt is registered under the business name. Keeping personal and business finances separate not only simplifies your accounting but also protects you.
- Second Priority: After ensuring taxes are handled, your next priority should be to reducing debt.
- Strategy: Ensure that debt repayments that are in the business name are paid through profits.
If possible, open a line of credit that you only use for emergencies. This will help cover your operating costs when cash flow is down, just make sure to pay this off as soon as possible.
3. Building Reserves
Once taxes and debts are under control, fortify your business's future by building a cash reserve. This not only fosters a healthier business but also alleviates stress and anxiety.
- Third Priority: After managing taxes and debts, start building up a cash reserve which can serve as a safety net in case of emergencies or allow you take advantage of opportunities.
- Strategy: Determine an appropriate cash reserve level, which is typically 3-6 months' worth of operating expenses. Adapt your reserve targets as economic landscapes evolve. Prioritize building reserves after-tax and debt management.
In the world of business, think of your enterprise as a vehicle and cash as its fuel. Just as a car needs fuel to keep moving forward, your business needs cash to operate efficiently and reach its destination. Without sufficient cash flow, your business can stall, just like a car running out of fuel. By managing cash flow effectively, you ensure that your business stays on track, powering through challenges and driving toward success.
4. Investing in Growth
Effectively managing your finances and fostering growth are integral for cultivating a thriving business.
- Fourth Priority: After addressing taxes, debts, and cash reserves, you can allocate capital for growth or any future plans that you may have (i.e. equipment purchases, locations, etc.).
- Strategy: Strategically plan and budget for growth, considering their costs and potential returns. Funding these initiatives should precede distributions, ensuring sustainable business expansion.
By maintaining a solid grip on your financial health and strategically investing in growth opportunities, you lay the foundation for long-term success. This proactive approach not only enhances profitability but also strengthens your business's resilience and competitiveness in the marketplace.
5. Distributing Profits
Lasty, only after addressing taxes, debit, cash reserves, and growth, should profits be distributed to owners, shareholders, and other stakeholders.
- Last Priority: Only after addressing prior obligations should profits be distributed.
- Strategy: Establish a sustainable distribution plan, aligning with short and long-term business goals. You can link distribution levels to profitability, ensuring sufficient earnings to support ongoing operations and future growth.
You could allocate a percentage of net income to distribute while directing the remainder towards various areas such as reserves, savings, and growth initiatives. By setting aside a portion of profits for distribution, owners will receive their fair share of returns on their investment in the business. Meanwhile, allocating the remaining funds strategically ensures financial stability and supports long-term growth.
Managing your Profit Allocation Strategy
Achieving small business success demands a well-rounded strategy:
- Financial Planning: Having regular financial planning sessions ensure alignment with your personal and business goals. If you can't measure it, you can't manage it.
- Communication: Clearly communicating your profit allocation strategy to stakeholders—shareholders, employees, and creditors—cultivating trust and alignment.
- Monitoring and Adjustment: Continuously monitor your financial performance and adjust the the strategy as needed to respond to any changes and business goals.
This disciplined approach ensures financial health, regulatory compliance, and sets the stage for sustainable growth and satisfaction. For assistance in realigning your profit allocation strategy, reach out to us today.
If you want to improve your business situation, get assistance now. Schedule your free consultation today or give us a call at (218) 491-4002. We're here to help!
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