Bookkeeping for Cash Flow Management: Tools for Controlling Tax Debt
Falling behind in your taxes can be a little bit like shooting the albatross. Once done it’s done, and it weighs heavily. At least until the burden is lifted. Doing so requires dedication. You need to pay down the debt while ensuring that you’re setting sufficient funds aside so as not to fall further into debt come the next tax season.
The key to lightening the load, so-to-speak, lies in establishing a payment schedule that is feasible while managing your cash flow to accommodate. As the owner of a small business bookkeeping firm in Calgary, Legacy Advantage, I can tell you that, at some point or another, we almost always end up discussing cash flow improvements with our clients.
On its face, cash flow would appear to be a simple thing. It’s just the balance of cash flowing in to and out of your company, right? Sure. But it can be particularly tricky for businesses. Unlike an employee that gets one or two pay cheques a month, a company can have cash flowing in from multiple sources for a variety of services, and that income may also be divided amongst multiple currencies. Money can flow out of the company for similarly diverse reasons, everything from basic rent and utilities to vendor costs, cash flow, and overhead.
If the balance of your cash flow is tenuous at best, a large tax payment can be crushing. Here are some techniques you can use to improve your cash flow.
Know What’s Being Spent
If you don’t know what your money is up to on a daily, weekly or monthly basis, then you’ve probably got cash flow problems. After all, you can’t steer the ship while wearing a blindfold. Bookkeepers can help by giving you cash flow reports that illustrate how and where your money is being spent.
Collect Payments as Quickly as Possible
Ensure you’re getting deposits before performing any work and create a payment schedule that ensures you get paid in full BEFORE the full delivery of service. Your bookkeeper can help you by managing the invoicing and accounts receivable.
Avoid Interest Where Possible
If you’ve got a good relationship with your suppliers, ask them if you can extend terms without paying interest. They just might say yes. Your bookkeeper will ensure that these details are properly reflected in the bills you receive and payments you make.
Reduce Inventory
Large inventories cost more to maintain. Can you specialize, cross-purpose, or implement a Just In Time (JIT) system that allows you to order items only when needed? Your bookkeeper can help go through your inventory system to identify what items cost more, are moving faster than others, etc.
Use Package Pricing
The overhead for work in progress is costly, especially if you’re billing your client by the hour. Establish value package rates, billed bi-weekly or monthly, that ensure your costs are covered. Your bookkeeper can advise you on what your average minimum overhead costs are to help you set appropriate rates.
Pay Credit Cards on Time
Credit cards aren’t the devil, but they are a devil to master. Most have a 21-28 day, interest-free period. You can take advantage of this, so long as you pay it off on time each month. Your bookkeeper can help track these deadlines to ensure you don’t incur interest charges.
Reduce Expenses
Check your recurring subscriptions. If it’s not being used, get rid of it. Analyze your spending patterns for other potential savings. Chances are you’re expensing a few more things that are unnecessary. Your bookkeeper will probably have a more ruthless eye for this than you will, so get them to help.
Focus on What Makes Money
Evaluate the effectiveness of your campaigns (e.g. Google AdWords) and assess which of your projects are making or losing money. Then focus on the type of campaigns and projects that are most profitable. Your bookkeeper can provide your with profit and loss statements to help guide your decisions.
Plan Ahead
Nobody likes living pay cheque to pay cheque. To pay off your current debts and avoid future ones, you need to know what’s coming. Your bookkeeper can develop cash flow projections based on your current and prospective projects and sales, which can help you budget for your future needs.
Write a Budget and Stick to It
Cash flow projections tell you the likely scenario, but that’s not enough. You need to sit down with your bookkeeper and write a budget that covers all of your projected costs and tax debt payments with a little room to spare. Your bookkeeper can keep an eye on your budget and help you stay on track.