4 Tips on Liquidity Planning for Small Business Owners

Natalia Autenrieth In her professional lives across the United States, Natalia Autenrieth, CPA has audited Fortune 500 clients as part of a Big 4 team, built an accounting department as a controller of a large hospital, and served as a CPA consultant to municipalities. Today, Natalia coaches in the financial industry and writes about business finance, financial technology, and personal money management. Her ghost-written articles have appeared in thought leadership and expert blogs, as well as Kiplinger and Accounting Today. Read more about Natalia and her practice at www.AutenriethAdvantage.com.

4 Tips on Liquidity Planning for Small Business Owners

Advice for managing your cash to survive and thrive

Cash is the fuel of a small business. It’s important to make smart choices with your cash that will allow you to weather tough stretches, support your family, protect your assets, and invest in growth.

Here are four best practices for cash management and liquidity planning for small business owners.

Keep a separate set of accounts for personal and business purposes

A small business is an extension of you — especially if you are running a service business. However, co-mingling your personal and business cash flows is a recipe for problems. Open a set of business accounts where you will deposit all business revenue, and from which you will pay business expenses. This arrangement will allow you to optimize your accounting, tax prep, and planning.

Keep up with your emergency savings

Your emergency savings account is your safety net. Life doesn’t press “pause” just because you have a business to run! Family members get sick, water heaters break, and emergency root canals can create a painful dent in a family budget. Emergency savings must come before anything else. Without them, you will have to dip into other savings accounts that trigger taxes and penalties — of rely on credit cards and pay their high interest rates.

There are many articles online that help you calculate the appropriate balance to keep in your emergency savings account. Most experts recommending 3-6 months’ worth of household expenses. Using that number as a baseline is a good start — but be sure to think through it based on your personal and family circumstances. And remember to re-assess it if your situation changes! You want the right amount of cash available in case of a financial emergency — but having too much could potentially slow down your ability to invest in your business and save for retirement.

Remember to pay yourself

If you are not paying yourself a fair salary, you risk exposing your business equity in the event of a divorce. Your spouse may argue that you “invested” household money into the business, which could potentially entitle them to a greater share of your business equity. No matter how secure you feel in your relationship, it’s a good idea to limit your risk exposure.

Understand your cash source options

In a perfect world, a business generates enough cash to sustain itself and pay you to support your family. Unfortunately, there are times when the economy or the need to grow results in a cash shortage. Do your research on this less-than-ideal case scenario, so that you know the hierarchy of your cash source options. Business loans, personal loans, personal savings, reaching out to friends and family — the list will vary from one business owner to the next. By doing this just-in-case planning before you need the money, you will create a concrete plan for yourself and move quicker and more accurately in a cash crisis.

Tips of liquidity planning for small business owners

Keeping an eye on cash is critically important for small business owners. Begin by setting up business bank accounts to separate your personal and business money flows. Make regular contributions to your emergency savings, pay yourself a fair salary, and do some research “in case” you needed an additional source of cash in a pinch.

In closing, one more piece of advice. Work with your accountant to understand your business cash flow statement. It’s easy to focus on the revenue and income numbers and ignore the cash flow statement, but that can lead to problems. Cash flow analysis can raise an early red flag, help you make important decisions, and confirm the sustainability of your current business model. Use it right, and it will become a valuable tool that will help your business thrive!