How you manage your business cash flow can have a significant impact on your taxes and the long-term health of your business. Managing your cash flow involves taking steps to ensure that there is no shortage of funds available when you need them.
Poor cash flow management is one of the major reasons for business failure. However, there are some simple steps that can help you manage cash better. Here are a few key things to consider when making decisions about cash flow—including when to consider incorporating your business.
1. Separate Your Cash Flow
Separate your personal and corporate cash flow. Then, determine how much money you need for each to stay healthy.
Your personal cash flow includes things like:
- Mortgage payments
- Cost of living
- Student loan debt
Your corporate cash flow includes things like:
- Net income
2. Put Your Tax Rates To Work
If your corporate cash flow is your personal cash flow, you will save or retain nothing, and there will be no tax benefit.
The benefit is the difference between the personal and corporate tax rates (e.g., 47.5% vs. 9%).
This is not the same as savings, but the tax deferral can be significant (e.g., 38.5%).
3. Consider Incorporating Your Business
Entrepreneurs often wonder when—or whether—to incorporate. Once a business makes more than an individual needs, there is a benefit and the gap is addressed by withdrawing funds from the corporation.
Keep in mind that corporations are more complex and expensive than sole proprietorships, so it’s wise to wait until you have compelling reasons to incorporate. If you’re unsure about the best way to manage your cash flow or want to learn if incorporating is right for you, talk to a Virtus Group Advisor.