When starting a business, there are critical questions to consider and understand, but they all center on one theme: Cash is king. To succeed, you need to understand the ins-and-outs of business income and common cash flow problems.

So, ready to write your business plan? Let’s ponder these three questions:

• Where will my cash come from?

• How much cash do I need and how fast will I burn it?

• What do I need from the business?

Cashflow considerations

With these concerns in mind, let’s talk about how you plan to get the cash to operate your business and some of the issues you may have not considered. There are five scenarios to consider when it comes to new business income:

• I’m borrowing cash to get started. If so, what are the repayment terms? What is the collateral? How frequently do you need to service the debt?

• Instead of borrowing, I’m using my credit cards. This isn’t borrowing, right? Wrong. It is, because you are charged interest and have a minimum monthly payment.

• My cash is coming from invoicing clients. Great. Are they paying by credit card? Don’t forget to account for a 3% credit card processing fee and the float period from when you swipe a credit card to when the money is available for deposit.

• My clients will pay by check. Does your bank charge a per-deposit fee? Do they place five- to seven-day holds on checks over a certain dollar value? Do they have minimum balance before you get charged a monthly fee for the privilege of their holding your money?

• I am going to deal only in greenbacks — cold, hard cash. Not a problem, but keep receipts. If you need to purchase anything more than $10,000, the bank will be required to file a Form 8300 and report the deposit to the IRS.

All of these scenarios affect the timing of your cash flow and how much money you actually receive. For example, I recently was preparing the taxes for a nonprofit education organization that generated more than $1 million in fees and sales for a seminar event. The expenses were right at $990,000.

The organization was ecstatic. The event was a success and made money. But when the actual bills were paid, the cash in the checking account was short by more than $30,000. The board never took into account the processing fees for the credit cards or the monthly fees for processing refunds and the checking account. Even seasoned professionals can overlook small 1% or 3% charges here and there.

Cash burn rate

The next question to analyze is your cash burn rate. You know how fast you’re making money. So, how fast are you burning it? How much cash are you spending to operate your business? Seasonal businesses like CPA firms or landscapers have high expenditures for maybe four to five months of the year and then low expenditures for the rest.

But high expenses come with high revenue. Thus, it’s important to chart how your money will come in and go out. A landscaper purchases her equipment and gets everything ready in the winter — that’s a lot of cash out but no cash coming in. Then the busy season hits, and she starts paying employees on a weekly basis. But her customers are paying her 60 days after the service is performed. So, for three months, she has a lot of money going out, but very little coming in. Understanding how cash is burned will help you make sure that there is sufficient cash to survive the startup and have enough put back for the start of the next season.

What do you need?

Lastly, you did not start the business to support your employees: You did it for yourself and your family. Make sure that you are honest as to what you need in terms of cash to survive. Underestimating this will mean that you are always pulling money from your company, that it’s always cash strapped, and that you are stressed. If you cannot make the cash flow fund your living expenses and cover business operations, then don’t get started. This is probably the most important part. Make sure you know how much you need to charge to support you and your business.

Tab Burkhalter is a licensed CPA and attorney who owns a Maryville-based firm specializing in business startups and taxes.

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