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.

Succession Planning and Taxes: What You Need to Know

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If you own a business, planning for future transitions and taxation should start now.

Key takeaways

  • Business structure matters for taxes, whether it’s a pass-through entity, S or C corporation, or another entity
  • The Tax Cuts and Jobs Act lowered the corporate tax rate, and it also created the qualified business income deduction for pass-through entities
  • The gift tax exemption was increased by the TCJA, but the increase sunsets in 2025

By now, you may have secured your estate plan and tax planning responsibilities. But what about your succession plan?

If you own a business and don’t put the right plan in place, you can leave it vulnerable to unnecessary taxes and possible conflict about who owns what. The brand, company reputation, and wealth you’ve built could be put in the balance long term. You’ve worked hard to create a successful business. So, why not ensure the company is valued and passed on properly once you’re out of the picture? 

Taxes are one of the most important factors that play a role in succession planning. Keep these considerations in mind when you’re working through your plan.

Business structure and taxation

The type of business structure you operate as matters a great deal for taxes. You want to ensure that your entity will set up your business for many years of success into the future. 

Of course, succession planning shouldn’t be the only thing to consider when deciding on the right structure, but it’s still an essential piece to the puzzle. The structure is a major factor that significantly impacts personal and business taxation when business ownership is being transferred.

Closely held businesses can be sole proprietorships, partnerships, LLCs, S corporations, and C corporations. Let’s walk through some considerations for each entity type.

Sole proprietorships (and default LLCs)

The sole proprietorship is for single business owners, and there is no separation of personal and business assets and liabilities. An LLC offers liability protection, but it is still taxed like a partnership unless the owner(s) elects to become a corporation. Sole proprietorships and some LLCs dissolve if the owner dies, but a succession plan can ensure that business assets pass to an intended inheritor.

Partnership

Partners within a general partnership have unlimited personal liability that can negatively impact personal assets. Those in a limited partnership have liability only as much as their investment. Sometimes, these reasons are enough to avoid the general partnership setup. 

However, the owner of a family limited partnership can help lower the tax burden when wealth is transferred to the next generation. Family limited partnerships help you reduce your tax burden because they minimize your taxable estate when you transfer some business value to your heirs. When you pass on limited partnership interests, they are eligible for the annual gift tax exclusion, so shares can legally be reduced when transferred. 

C corporation

Many businesses are C corporations, with an essential characteristic being that the business is a very distinct entity from the business owners. This means the liability is not on the owners, both financially and legally, so it’s a form of protection that sole proprietorships and partnerships don’t offer. For succession considerations, it can be more tax-efficient to have personal affairs completely separate from the business’s affairs.

S corporation

S corporations also offer that separate-entity protection like a C corporation. But they are taxed as a pass-through entity, meaning that the business doesn’t pay corporate taxes, and any income or losses are reported on the individual income returns of shareholders. Companies must not have more than 100 shareholders to convert to an S corporation. 

As a pass-through entity, there are several tax advantages when succession planning and transferring ownership. It’s easier to move funds from the business entity to a shareholder, and ownership transfer is easier with fewer tax and regulatory requirements. 

However, keep in mind that if an initial public offering (IPO) could be in a business’s future, the benefits of instead choosing a C corporation may outweigh these other succession considerations. 

Impacts of the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) of 2017 implemented a few changes that may affect a succession plan. The C corporation federal income tax rates were lowered from 35% to 21%, and the individual tax brackets were also reduced from between 10% to 39.6% to between 10% to 37%. You can use these new numbers and estimate personal income, business income, and dividends to see which structure would benefit you the most.

The TCJA also created a qualified business income (QBI) deduction, which allows qualifying pass-through entities to deduct 20% of qualified business income, but it includes phase-out limits. There are a few ways to lower income to stay below the phase-out limit, including retirement plan deductions. 

For example, you could set up a retirement plan like a SEP or 401(k) and contribute up to the plan’s limit, lowering income to qualify for the deduction. A defined benefit plan will allow you to make the biggest contributions while taking advantage of tax deferment and additional asset protection from creditors.

Gift and estate taxes

Creating a succession plan now keeps you ahead of the game for substantial taxes associated with the business, including estate and gift taxes. The right strategy for a transfer of ownership can help you reduce or even eliminate some of them.

If you decide to sell your business before you die, you may have to pay capital gains tax. However, no matter when you sell, proceeds could help cover your current lifestyle or future estate taxes. The gift tax won’t apply to the sale as long as the price is at least equal to the full fair market value.

There is currently an increased estate and gift tax exemption from the TCJA, now at $11.7 million per person or $23.4 million per couple for 2021. Transfers of interests made within a limited partnership are eligible for the gift tax exclusion, and the value of shares can be lowered when they’re transferred. This means your heirs will be able to reduce the taxes they have to pay. However, keep in mind that the increase is currently set to sunset on January 31, 2025.

Another option of note is the grantor retained annuity trust (GRAT), which may allow you to transfer business assets to your children. They will still be able to earn income, and a GRAT may also make sure that your business isn’t subject to high taxes as its value appreciates. Just keep in mind that a GRAT must be held for a certain number of years, and you must outlive that term to receive all the estate tax benefits.

Working with a tax professional

All of these moving parts will impact how you approach succession planning. There is no one right strategy, and choosing one requires weighing multiple factors about your business structure, future plans, and family goals. 

Work with a tax professional who can help you customize a succession plan that will lower your tax burden and set up your company’s new stewards for success. You’ve worked long and hard to create your business—make sure things go smoothly when it’s time for you to step aside.

Contact Provident CPA and Business Advisors to talk with our team about succession planning and taxes. 

Should You Hire a W-2 Employee or a Contractor?

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There are pros and cons to hiring a regular employee versus an independent contractor. Consider your goals and priorities and find the right answer for your business.

Key takeaways

  • The pros of hiring a regular W-2 employee include team-building and more supervision and control.
  • The pros of hiring an independent contractor include cost savings and greater flexibility. 
  • There are legal implications for both, but regular employees require more attention to tax regulations and employment laws.
  • Ask the right questions about your business’s current position to determine which option is right for you.

As your business grows, you need additional people to get everything done. You may have carved out the budget for a full-time worker who will receive benefits and be an integral part of your team. But with the influx of workers in the gig economy, you have a lot more options to hire flexible help instead of solely onboarding W-2 employees.

How do you know which is right for you? This guide will walk through the pros and cons of hiring contractors versus regular employees to help you make the right call.

Hiring a regular employee

A “regular” employee means that they work part-time or full-time and receive a W-2 tax form. These individuals are on the standard payroll, and you withhold taxes from each of their paychecks. They often have regularly scheduled working hours and go through the typical hiring and onboarding process. 

Hiring W-2 employees has many benefits for your business and each employee. They will likely receive some kind of benefits, whether health insurance, paid time off, or retirement contributions. Providing people who work for you with these benefits can contribute to employee satisfaction and productivity and build a strong company culture that drives the business. 

Another benefit is that these workers provide more consistent work and will often become masters of the business’s processes and systems. A continuous, steady role means that they may be more confident in ensuring that workflows are smooth and successful. Teams of regular employees can be more synchronized at work.

There are, however, downsides to hiring regular employees. These include:

  • There are significant costs associated with benefits.
  • Salary expenses add up fast.
  • You may have to provide work equipment, like a computer.
  • Training and onboarding may be lengthy and costly.
  • Hiring a regular staff member is a bigger commitment, which can be a con if they don’t turn out to be suitable for the job.

Care should be taken when hiring a regular employee since they will likely become a crucial part of your team. 

Hiring an independent contractor

On the other hand, hiring an independent contractor can be a wise choice for many businesses. The two primary benefits of going this route are cost savings and flexibility:

  • Cost savings: When hiring a contractor, you don’t have to pay for benefits, a regular salary, work equipment, or training. 
  • Flexibility: It’s pretty enticing to businesses to be able to hire a professional on a project-by-project basis. You only have to pay for what you need, when you actually need it. 

Another benefit is that independent contractors are often experts in their field. These professionals can usually step in and take on a project without a lot of onboarding requirements. Their business runs on their contracts’ success, so many will be reliable, committed workers throughout the contract period.

There are still drawbacks to working with independent contractors, however. While you’ll likely save money and get more flexibility, you also may not have as much control over what they’re doing. You’re not really their boss or supervisor, and they will be more autonomous than a regular employee. They’re probably working with other businesses as well, which could mean your projects aren’t always top priority.

With independent contractors, you also don’t get those team-building benefits to support a strong company culture as you would with W-2 workers.

The legal and tax implications of who you hire

You will have tax reporting requirements for both regular employees and contractors. However, your obligations will be heftier for regular workers. The company will need a payroll process in place to stay compliant with payroll regulations and tax obligations. You must follow federal and state laws that regulate how they get paid, overtime, workers’ compensation, and workplace policies like anti-discrimination and anti-harassment guidelines. 

There are many more laws and regulations to follow with regular employees than there are with contractors.

With an independent contractor, you will usually gather a W-9 from them and issue a 1099-MISC that reports everything paid. You don’t have to worry about withholding FICA taxes or paying workers’ compensation insurance.

Which option is right for your business?

Choosing an independent contractor or regular employee has both short- and long-term implications. If you still aren’t sure after reviewing these pros and cons, ask yourself questions like the following to further help you decide:

  • Is your project ongoing, or is it a one-time or infrequent project? 
  • What kind of business budget do you currently have for extra help? 
  • Can you afford to pay for a new set of benefits?
  • Can you afford to pay a competitive salary for a W-2 employee?
  • Can you afford to pay a competitive hourly rate for a contractor?
  • How important is team building in your business’s current growth stage?
  • Do you need short-term results or ongoing, long-term assistance with a business function?
  • Who will be handling training and onboarding? 
  • Do you have time to train someone?
  • Are you prepared to follow all federal and state employment laws related to W-2 workers with policies and processes?
  • Is control over working hours and schedule important to you?
  • Do you need to supervise the work being done closely?

Sometimes, the best way to determine which type of worker to hire is to ask yourself which tasks are part of your business’s core services and values. The crucial functions may be performed best by a full-time employee, while less pivotal duties are taken on by independent contractors as needed.

Getting help from a business advisor

Hiring an employee or an independent contractor is a big step, no matter which direction you choose. Ensure you’re making the right choice by discussing your business needs and financial situation with business strategy and tax professionals. 

Contact Provident CPA and Business Advisors to create the right strategy and take the correct tax-planning approach. We will help you minimize your tax burden and set you on the path toward long-term growth by identifying your critical business drivers, helping you build teams, and more.

How Do PPP Loans Impact Business Taxes?

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Can businesses claim tax deductions for business expenses under the Payment Protection Program (PPP)? Is a PPP loan considered taxable income? Here are your tax questions, answered.

Key takeaways

  • Business expenses associated with PPP loan forgiveness are deductible
  • Forgiven PPP loans are not considered taxable income
  • Payroll taxes can be deferred, even after PPP loans are forgiven
  • Employers can take advantage of the Employee Retention Tax Credit and PPP loans

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was introduced in March 2020 to assist American businesses and individuals struggling financially. 

Part of the CARES Act was the creation of the Paycheck Protection Program (PPP), which provided businesses with loans that would be forgiven if they complied with all requirements, including using the loans for qualified business expenses. PPP loans are just one form of relief for businesses impacted by the pandemic, which has caused record closures, layoffs, and unemployment claims over the last year.

Since March 2020, there have been many questions circulating about PPP loans and what they mean for business expense deductions and taxes in general. As a new relief bill was passed at the end of 2020—the Consolidated Appropriations Act of 2021—some of these questions were answered, and common issues were clarified. 

Let’s walk through what you need to know about business expenses and whether they’re deductible, whether a forgiven PPP loan is considered taxable income, payroll taxes and PPP, and other important information about the program.

Business expense deductions

The CARES Act did not directly address whether business expenses covered as part of the loan-forgiveness process would be deductible. But in April 2020, the IRS said that no deduction would be allowable for expenditures that were otherwise deductible if the expense payment results in PPP loan forgiveness. 

In November, the IRS also said that a taxpayer calculating taxable income could not deduct eligible expenses in 2020 if they had reason to expect reimbursement in the form of loan forgiveness based on qualified business expenses paid during the period.

However, the second relief bill passed in late December 2020 clarified that deductions are allowable for the otherwise deductible business expenses paid with a forgiven PPP loan. It also explained that the tax basis and other attributes of the borrower’s assets would not be reduced because of loan forgiveness.

Another piece of good news is that this new clarifying provision is effective dating back to when the CARES Act was first enacted. The second round of PPP loans, which the new relief bill also authorized, will be treated similarly.

Not all business expenses are included as part of PPP loan forgiveness. Note that the PPP loan funds cannot be used to pay business taxes, for example. Eligible expenses include: 

  • Payroll costs
  • Rent 
  • Mortgage interest
  • Utilities payments
  • PPE and worker protection expenses
  • Business software and other operational expenses
  • Certain property damage costs
  • Supplier expenses

As long as at least 60% of the PPP loan was used for payroll expenses and the remaining 40% was used for these other qualified expenses, the loan will be eligible for complete forgiveness. 

PPP loan as taxable income

The CARES Act excluded PPP loan forgiveness from a borrower’s gross income, meaning that businesses didn’t have to pay taxes on the funds received. Lawmakers did not want to add an additional tax burden for companies that were already struggling.

The December 2020 bill reestablished that a forgiven PPP loan is not taxable income and is completely tax-exempt. 

Payroll taxes and PPP

Another vital thing to know is that employers can defer payroll taxes even after the PPP loan is forgiven. But half of the deferred payroll taxes from 2020 must be paid by the end of 2021, and half must be paid by the end of 2022.

The PPP Flexibility Act clarified these rules in June of 2020, in addition to changing the maturity period of the loans to a minimum of five years and extending other PPP-related deadlines.

Other PPP tax implications

The second relief bill included a provision that businesses taking out a PPP loan can also obtain the Employee Retention Tax Credit (ERTC) for both 2020 and 2021 tax years. So, a company can apply the ERTC for 2020 taxes. However, note that the ERTC and PPP loan cannot cover the same payroll expenses.

The ERTC is available to businesses with under 500 employees that either had to suspend or partially suspend operations because of a COVID-19-related court order or had a 20% decline in gross receipts when compared with the same period the year before.

The tax credit was 50% of up to $10,000 in wages for 2020, but the new bill expanded the ERTC from a maximum of $5,000 per employee to $14,000 per employee beginning January 1, 2021, and through June 30, 2021. 

Receiving a PPP loan also does not get in the way of the business receiving family and sick leave tax credits under the Families First Coronavirus Response Act (FFCRA). Companies cannot use the loan funds to pay for the sick and family leave wages, however, if they expect to get the tax credit.

Work with a tax expert for additional assistance

If you still have questions about how PPP loans could impact your taxes this year, contact a tax professional who can help you make sense of the changing laws and regulations. You never want to make a mistake on your tax return or leave money on the table. The professionals at Provident CPA & Business Advisors specialize in tax minimization, and we work with a variety of individuals and business owners.

Contact Provident to meet with an expert about PPP loan implications and how best to prepare your taxes.

How to Avoid Overpaying Tax on Mutual Funds

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Mutual funds can be taxefficient investments – that is, as long as you are aware of the strategies necessary to avoid overpaying the IRS

Investing in mutual funds is a way for investors to pool security ownership with other investors. But when you’re considering taking advantage of the benefits of mutual funds, make sure you don’t overpay in taxes. Here are certain funds to consider and behavior strategies to follow that will ensure you maintain tax-efficient investments:

Tax-efficient funds

First, let’s look at index funds. This type of mutual fund passively matches or tracks a market fund, such as the S&P 500. But unlike actively managed funds, therules and selections don’t change based on what the market does. Not investing directly in the market has many benefits, such as low operating costs and low portfolio turnover. Because of this low turnover, these investments are tax efficient and less expensive to manage than actively managed funds, which investors frequently buy and sell. Plus, index funds are diverse, so your funds are spread out and betterprotected from big losses.

An exchange-traded fund (ETF) is a type of index fund which trades on a major stock market, like the New York Stock Exchange. ETFs are generally investments with lower risk and lower costs, and are bought and sold throughout the day like stocks, meaning investors can place different types of orders. (Mutual funds, on the other hand, settle when the market closes.) Costs are lower because there’s no sales load, though you will pay commissions. But the better tax efficiency comes from investors being able to control when the capital gains tax is paid.

Another type of tax-efficient mutual fund is a tax-managed fund. These funds help reduce the amount of capital gains tax you pay by harvesting losses to offset gains. You see capital gains either by selling shares or by receiving embedded gains, which happen when the fund sees a gain from the sale of a share and that gain is passed to you as share holder. Tax-managed funds aim to reduce that second type of gain that you’ll have to pay tax on, whether by harvesting losses (mentioned above), avoiding turnover, or selling certain shares to minimize taxable gains.

Basically, you control when you realize your capital gains. And in some instances, thesefunds may have early-redemption fees that deter withdrawals which could forcemanagers to sell and thus see capital gains.

The last type of investment worth mentioning is a separately managed account (SMA). These accounts differ from mutual funds in that you have an account manager who directs securities that you own on your behalf. SMAs can help you avoid turnover and you may see opportunities to take advantage of tax swaps. Just keep in mind that the fees on SMAs could be a bit higher than mutual funds.

Tax-efficient behavior

You want to ensure that your investment behavior actually takes advantage of the tax benefits you can see from the above types of funds. Many investors don’t fully understand the tax implications of mutual funds, The New York Times notes.

First, try to avoid large lump-sum distributions. For tax-deferred accounts, like retirement accounts, you’ll see a big tax bill if you opt for one large lump-sum withdrawal. Instead, try rolling the money over or spreading out the distributions over several years.

Also try to limit the amount of turnover on your mutual funds. When you trade frequently, the capital gains you see may be subjected to high income-tax rates, instead of better long-term capital gains tax rates.

When applicable, try tax loss harvesting, or tax swaps. This strategy allows you to use capital losses (when you sell a fund for less than you bought it) to offset any capital gains. This can help you reduce or manage your tax bill from capital gains.

Keeping dividend payout timing in mind is another important strategy to manage taxes. The capital gains you accrue throughout the year are paid out as the end of the year is nearing. Avoid buying shares right before that happens, since you’ll have to pay taxes on gains before you may see any profit from the shares. In contrast, selling shares before the dividend date can help you avoid overpaying on tax by avoiding higher ordinary income tax rates versus capital gains tax rates.

When you’re ready to look at your investment portfolio with an experienced financial professional, Provident CPA andBusiness Advisors is here to help. We ensure you pay the least tax legally possible and help you create a diverse and balanced investment portfolio. Get in touch with our team today to learn about how we help our clients create investment strategies that work.