8 Cash Flow Management Tips for Entrepreneurs

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Entrepreneurs have to carefully balance the money coming in and out of their business. Here are a few tips to help you manage the bottom line.

Key takeaways:

  • Cash flow is the money that comes in and out of the business, culminating in net cash after expenses are paid.
  • 8 cash flow management tips for entrepreneurs:
    1. Plan expenses carefully
    2. Encourage rapid payment
    3. Account for fluctuations in projections
    4. Issue invoices quickly
    5. Know when to cut or control costs
    6. Take advantage of payment terms
    7. Plan for the worst
    8. Accept that there might be tight months

Cash flow management can make or break a small business. In fact, 82% of small businesses end up failing because of cash flow mismanagement. So, what does this mean for you? Get on top of cash flow before it becomes a major issue!

Fortunately, there are steps you can take to increase your chances of success.

Let’s walk through what cash flow is and eight tips to help you get on top of everything that’s coming in and going out to ensure a healthy bottom line.

What is cash flow?

Cash flow is how money moves in and out of your business. It represents the net amount of cash you have after it comes in (inflow) and expenses have been transferred out (outflow). The goal is to maintain a positive cash flow, meaning there’s always money left over after expenditures.

Cash coming in refers to income from your actual operations, investing, or business financing, like loans. Expenses will include bills, operating costs, employee wages, and the like. 

Small businesses get into trouble when they think they’ve balanced everything out, but surprises ensue. For example, say payment is due on a bill, but you haven’t received a timely payment from clients to cover it. This lag can significantly impact cash flow, and it’s often hard to get back on track.

8 cash flow management tips for entrepreneurs

Entrepreneurs face unique challenges when running a business. Success or failure is usually placed solely on your shoulders, and not all business owners are the best at financial management. However, there are proactive steps you can take to stay on top of cash flow and make sure you are managing your funds appropriately. 

1. Plan expenses carefully

It’s important to not only include an upcoming expense in the budget but the exact date that funds will be needed for that outlay. When will the money be spent, what will the total cost be, and what is the expense? 

Carefully record all this information, so there are no surprises, and you can plan out cash to cover these costs accordingly.

2. Encourage rapid payment

Consider offering an incentive or deal for customers or vendors who pay quickly. Perhaps you will allow for 15 days, but they’ll get 2% off their next order for paying within two. They’ll love getting a discount, and you’ll have the cash on hand faster. Similarly, stated penalties for late payment could also work—but be sure to check your state’s usury laws for the maximum percentage you can legally charge.

3. Account for fluctuations in projections

When planning out the months ahead, remember that many industries have seasonal fluctuations in sales. This is hard to predict if your business is new, but remember to plan for ups and downs instead of assuming that every month will be the same. 

4. Issue invoices quickly

One way to get paid faster is to send invoices promptly. This may mean putting a better billing system in place, including an automated system that generates and sends invoices for the business. Or invoice as soon as a transaction occurs so you won’t forget later. However you do it, make sure you’re not the cause of delayed payment.

5. Know when to cut or control costs

If you see that expenses are growing faster than revenue, it’s time to take a closer look at how to cut back. Examine everything you’re spending money on, and identify areas where you can hold off on a service or find a cheaper vendor. There is almost always something that can be eliminated or reduced to balance out cash flow when you notice it trending the wrong way.

6. Take advantage of payment terms

For bills or payments to creditors, take full advantage of the payment terms. Instead of paying early, waiting until payments are due can help retain cash as long as possible until more income is coming in. Just be sure you plan out these dates carefully, so everything aligns correctly.

7. Plan for the worst

Even if you don’t have a significant business savings account to help you in a pinch, you can set up something with your bank for the future. Arranging a line of credit up to a limit whenever you need it is one option that’s useful in an emergency. You may also be able to work something out with your vendors if you’ve built up a strong relationship with them. Many will want to help if you face a hardship, so they keep your business.

8. Accept that there might be tight months

Hard months happen, especially for new entrepreneurs. So, remember that it is common, and you can recover. Take another look at what went wrong and how to avoid it next time. 

Optimizing cash flow is not always easy for small business owners, but careful planning is the best solution. 

If you need assistance with business strategy and tax optimization, talk to the experts at Provident CPA and Business Advisors. Contact us to learn how we can help you create a successful long-term plan.

8 Useful Tax Tips for 2021

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Key takeaways:

  • 2020 taxes are done, and it’s time to start preparing for filing 2021 taxes
  • Top 8 tax tips:
    1. Get to know the new tax brackets
    2. Pay estimated taxes on time
    3. Keep records organized
    4. Master the home office deduction
    5. Prepare to file electronically
    6. Classify your business properly
    7. Deduct charitable contributions
    8. Get help from a tax expert

Now that 2020 taxes are complete, it’s time to focus on what’s next for your business. As the global pandemic continues, there are still additional tax considerations regarding the relief provided by the government this year. In addition, there are changes to tax brackets to be aware of and other laws to pay close attention to as you’re getting ready for the next tax season.

Here are a few facts about paying 2021 taxes and some important tax tips this year.

Paying taxes for 2021: What to know

First, let’s cover a few details about paying taxes for the year 2021:

  • Taxes will probably be due April 15, 2022, unless the IRS extends the deadline again (in 2021, the 2020 tax deadline was pushed to May 17).
  • The standard increased in 2021: $12,550 for single filers, $25,100 for joint filers, and $18,800 for heads of household. These increases may mean that it makes sense for you to take the standard deduction rather than itemize. Figure out if your business expenses are greater than these amounts. Most Americans take the standard deduction.
  • Because there was another stimulus package passed in early 2021—known as the American Rescue Plan—next year’s tax season will still be impacted by pandemic-related legislation, including stimulus payments and related credits.

To keep up with what’s happening in 2021 and to stay prepared, here are eight tax tips:

1. Get to know the 2021 tax brackets

The seven tax bracket percentages are the same for 2021: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the taxable income thresholds have increased. 

For example, income up to $9,950 is taxed at 10% for single filers, up from $9,875 in 2020, and married couples’ income from $81,051 to $172,750 is taxed at 22%, up from $80,251 and $171,050, respectively, in 2020. 

Check the full list of tax bracket changes before preparing your taxes. Remember, if you run your own business, you’ll have to pay an additional self-employment tax, which is 15.3%.

2. Pay estimated taxes on time

You may need to pay estimated taxes throughout 2021 and into early 2022 if you earn income as a sole proprietor, partner, S corporation shareholder, or corporation owner, in some cases. Estimated taxes are due April 15, June 15, September 15, and January 15 (of the following year) unless the IRS announces different deadlines. 

Note that you probably must pay both state and federal estimated taxes by these dates for each quarter, so be sure you know the procedures for paying your state. You’ll need to pay based on estimates of what you’ll make each year, which usually come in the form of vouchers for each upcoming year when you file your tax return. Always make sure to pay by the deadlines, so you don’t incur a penalty.

3. Keep records organized

One of the biggest mistakes some business owners make is not keeping the right records throughout the year. Start now by keeping all receipts and tax documents stored in one place. Create spreadsheets to track income and expenses, or use a tool like QuickBooks that will do a lot of the work for you. 

Make sure you know which tax forms will be coming your way from clients, if applicable, so you know when you’re ready to file next year.

4. Master the home office deduction

Remember, just because you worked from home this year doesn’t mean you’ll be able to take the home office deduction if you’re a regular W-2 employee. However, if you run your own business or are an independent contractor, you can claim this deduction as long as you have a dedicated workspace in your home, you use it regularly and exclusively for business, and it is your principal place of business. 

5. Prepare to file electronically

The IRS encourages taxpayers to file their tax returns electronically each year. Doing so expedites the process, meaning you can get your refund weeks earlier than if you filed via paper. Filing electronically also allows for better accuracy and completeness, along with confirmations that the IRS has received your return. If you haven’t been filing electronically, 2021 is the time to start.

On a similar note, remember to start using direct deposit, so you get your refund faster from the IRS and don’t have to wait for a check to come in the mail.

6. Classify your business properly

Classifying your business structure incorrectly can lead to paying too much in taxes. You may benefit from creating your business as a pass-through entity, such as a sole proprietorship, partnership, or S corporation, instead of a C corporation. Talk to a tax expert who can help you determine the best course of action. 

7. Deduct charitable contributions

Normally, you wouldn’t be able to deduct contributions to charities unless you itemize. But the government extended legislation into 2021 for a $300 charitable deduction for taxpayers who don’t itemize, and married couples can now deduct $600. 

If you do itemize deductions, you can deduct even more contributions from your income, lowering the tax burden. In this case, you can deduct cash donations up to 100% of your income thanks to the CARES Act and 50% for noncash contributions.

8. Get help from a tax professional

Finally, consider getting help with your taxes this year. There are always changing tax laws and new deductions and credits, so you never want to miss anything. Tax experts can assist all year long to help ensure the right business practices maximize profits while reducing the amount you have to pay come tax time.

Contact the tax professionals at Provident CPA & Business Advisors

You may have numerous questions regarding a 2021 tax plan since we’re still in a pandemic, and a lot may have changed for your business. Get help with tax planning and preparation—along with strategic business assistance—from the experienced team at Provident CPA and Business Advisors. 

Contact us to learn more.

What to Know about Tax Brackets and How They May Change

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What are the income tax brackets and how do they work? Here is an overview.

Key takeaways:

  • There are seven tax brackets currently ranging from 10% to 37%
  • You don’t pay the same percentage on all your income; each portion of income is taxed at a different rate
  • The Biden Administration has said it wants to increase taxes for the wealthy, so it’s important to be prepared if this applies to you
  • You may be able to fit into a lower tax bracket by claiming credits and deductions

Paying taxes each year requires that you plan in advance for what you’ll owe, especially if you run your own business. A big part of a tax strategy is understanding the current tax brackets and how they may change in the future. These brackets mean that every American does not pay the same percentage of tax on their income each year; those who make less pay less, and those who make more pay more.

So, what are income tax brackets, and which one do you fall under? Here’s an overview of what tax brackets are, rates for 2021, what could change with the new Biden Administration, and how to get into a lower bracket. 

What are income tax brackets?

Tax brackets outline what percentage of income Americans have to pay based on their annual income. They were first created in 1913, when the top tax bracket was just 7 percent and the lowest was 1 percent. 

Today, there are seven total tax brackets. For tax year 2021, these range from 10% to 37%, according to the below guidelines, which have slightly higher income limits than 2020:

  • 10%: individual filers with income between $0 and $9,950; joint filers with income up to $19,900; and heads of household with income up to $14,200
  • 12%: individual filers from $9,951 to $40,525; joint filers between $19,901 to $81,050; and heads of household between $14,201 and $54,200
  • 22%: individual filers between $40,526 and $86,375; joint filers between $81,051 and $172,750; and heads of household between $54,201 and $86,350
  • 24%: individual filers between $86,376 and $164,925; joint filers between $172,751 and $329,850; and heads of household from $86,351 to $164,900
  • 32%: individual filers from $164,926 to $209,425; joint filers between $329,851 and $418,850; and heads of household between $164,901 and $209,400
  • 35%: individual filers between $209,426 and $523,600; joint filers from $418,851 to $628,300; and heads of household between $209,401 and $523,600
  • 37%: individual filers and heads of household making $523,601 or above and joint filers with $628,301 or more

This tax bracket system is a “progressive tax” approach, again meaning that people making more money pay more in federal income taxes. However, keep in mind that just because you fall into one of these tax brackets doesn’t mean that you are taxed that rate on every penny you make. Each portion of income is taxed at the corresponding rate.

For example, if someone makes $60,000 in 2021, the first $9,950 of that income is taxed at 10%, the portion from $9,951 to $40,525 is taxed at 12%, and the rest is taxed at 22%.

What could change under the new administration?

With each new U.S. administration comes potential new tax laws and priorities. The Biden Administration has indicated that it will implement higher taxes on wealthier Americans, so if you make over $400,000 in income each year, you may see an increased rate. This may mean that top rate could get a boost up to 39.6% from 37%.

This online tax calculator can help you plan for taxes if Biden’s plans go into effect in the near future.

The new administration has also proposed other tax changes outside of brackets, including an increase to the child tax credit (up to $3,000 from $2,000), and an increase in the child and dependent care credit (up to $8,000 from $3,000).

How to fit into a lower tax bracket

If you’re worried about paying a lot when tax season rolls around again, there are a few ways you can reduce your burden. First, deductions lower taxable income, so with enough of them, you may be able to get down into a lower bracket. Common deductions are charitable donations, medical expenses, mortgage interest, home office expenses, vehicles, and student loan interest, among others.

The other option is taking advantage of tax credits. These don’t impact which bracket you’re in, but they reduce the amount you must pay. Credits you may be eligible for include the child tax credit, the earned income tax credit, or the residential energy credit, though there are many others. 

You can potentially lower your tax burden significantly with these strategies. This is why it’s crucial to work with a tax professional who can help you claim all credits and deductions you’re eligible for.

Work with a tax professional to save more money

Each year, there are new laws and guidelines to know and implement while planning. Make sure you never miss anything by working with a tax professional who knows each new regulation or legislation, in addition to what might be coming next. 

The team at Provident CPA and Business Advisors is ready to help you with everything tax-related. Contact us to learn more about our business growth and strategic tax services.

A Basic Guide to Depreciation for Small Businesses

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As a small business owner, you can deduct depreciation that your assets experience over time. Here’s what to know about depreciation and how to calculate it.

Key takeaways:

  • Depreciation is the loss of value an asset experiences over time
  • Small businesses can deduct depreciation from assets like cars, property, and equipment
  • There are three methods to calculate depreciation: straight-line, accelerated, and Section 179, all with pros and cons
  • Discuss your options with a tax expert at Provident CPA and Business Advisors

You have many concerns when you’re doing your taxes as a small business owner. You have to gather your expenses and records, report income properly, and ensure that you’re taking all the right credits and deductions. This is all on top of paying quarterly estimated taxes and managing your finances. 

Tracking depreciation is one way to significantly reduce a tax burden each year. It may sound like a confusing concept initially, but once you understand the essentials, it’s pretty straightforward. 

Here is a basic guide to depreciation as a small business owner:

What is depreciation?

When you purchase an asset, the value of that asset decreases over time. The amount of value lost is known as depreciation. 

This is important for business owners because you can write off depreciation on your annual tax return as a deduction, lowering taxable income and thus the amount you’re taxed. Even though an asset depreciates, it is not necessarily a negative, since it helps you save on taxes.

One of the most common uses of the term depreciation occurs in the auto world. When you purchase a new car, it loses value as soon as you drive it off the lot, aka depreciates. It is immediately considered a used car.

Depreciating assets that you may use in your business include expensive equipment or machinery, real estate, technology like computers, automobiles, and more. Some intangible assets can depreciate as well, including intellectual property. And in that case, the process is known as amortization.

Understanding and calculating depreciation

The next component to understand is how to actually calculate depreciation, which can be tricky when recording your deductions. 

First, a few rules:

  • Your asset must have been in use for more than one year.
  • You need to write off depreciation for the asset’s useful life.
  • Depreciation starts once it is being used and stops when the cost has been recovered or you stop using it for your business.
  • You must be the owner of the property or asset.

You also need to know how long you can write off the depreciation:

  • Assets like office equipment, electronics, automobiles, and appliances have up to five years to be deducted.
  • Furniture and fixtures have seven years.
  • Rental properties have 27.5 years for residential and 39 years for commercial or non-residential.

Next is how to get started with calculations. You have three methods for writing off the depreciation: straight-line, accelerated, and Section 179 methods.

  1. Straight-line method: In this technique, you deduct the same amount of depreciation each year on a given asset over its useful life. To find this amount, subtract the amount you could sell it for at the end of its useful life (the salvage value) from the asset’s cost, and then divide that number by the number of years it will be in use.
  2. Accelerated method: This one allows you to take bigger deductions early on and smaller deductions later. Many small business owners decide to use this method, and it takes less math on your part. You will use the percentages in IRS Publication 946, Appendix A, and the Modified Accelerated Cost Recovery System (MACRS) created by the IRS. This approach is beneficial for businesses in need of cash because it allows them to deduct more during the first few years after buying an asset.
  3. Section 179 Deductions: Section 179 deductions allow you to deduct the full cost of an asset the year you acquire it for business. The maximum deduction is $1,050,000, and the value of property purchased limit is $2,620,000 for 2021. This option provides a more immediate, huge tax break. The government started offering this option after the Tax Cuts and Jobs Act was passed in December 2017, as an incentive for small business owners to make purchases to grow their businesses. This deduction can be used for computers, business machinery, cars, and office equipment.

Various software options can help calculate depreciation and save asset information from year to year. But it’s always wise to talk to a tax professional about your options so you can land on the right method. Otherwise, you could be leaving money on the table that your small business needs now.

Working with a small business financial expert

Depreciation of business assets is not always easy to understand. But you always must be thorough when completing your tax return and deducting expenses. You never want to do something suspect that will attract the attention of the IRS.

Talk to a tax professional who will help you understand tax laws and best practices you should follow. Always make sure you’re taking advantage of all tax breaks available—and remember that sometimes these change from year to year.

The team at Provident CPA and Business Advisors is here to help. We assist in putting the right financial plans in place to grow small businesses and help them pay the least amount of tax legally possible. We make sure you don’t miss anything when preparing your taxes, including credits and deductions.

Contact us today to get started with an experienced tax professional.