Follow Adam Linkedin Twitter Facebook
Email Adam Email
Financial
Jun 1, 2015

Why You Should Leave Cash In Your Business

Sponsored Content provided by Adam Shay - Managing Partner, Adam Shay CPA, PLLC

Starting and running a business can be tough because of the financial strain, hours and various associated stresses. However, it can also be very rewarding. One of the biggest challenges entrepreneurs face is getting used to the unpredictable nature of business cash flow and generating enough business income to replace income that was previously received or that is necessary to maintain the lifestyle of the entrepreneur. Some entrepreneurs take the approach of taking as much money out of the business as possible, but that is typically not the best approach.

Without enough working money left in the business (working capital) there can be several challenges. They include:

  • Additional stress and strain of worrying if you’ll have enough cash weekly (or daily) to pay vendors, employees, et cetera. This stress is no fun, especially if it ties in to being able to pay your employees.
  • If business owners are not paying bills and managing payables themselves, there can be additional costs associated with someone spending more time managing and juggling the tighter-than-necessary cash flow. There can also be the additional cost of bank charges for insufficient funds. These additional expenses can allow the cycle to perpetuate itself.
  • Challenges with raising funds. Lenders and equity investors don't like to see a business without owner equity in the business. If the owner continually drains the cash out of the business, he or she typically won't have any equity in the business and will have limited opportunities for traditional bank loans.
  • The business is always teetering on the edge. One bad week or month and the business can put itself in dire financial shape.
By now, you should realize that I believe that a lack of working capital is not a good thing for the business or entrepreneur. To solve the problem, you first must determine how much cash to keep in the business. Part of that answer will depend on the specifics of the business and how capital intensive it is. However, a general rule of thumb is three to six months of operating cash. That figure can sometimes be a challenge, so one to two months of operating cash is still better than struggling from week to week.

The next step in solving the problem is to thoroughly analyze both your cash inflow and cash outflow. Part of that equation would also be for the entrepreneur to evaluate his or her personal spending and whether there are cuts than need to be made. I find this is often the toughest area to get entrepreneurs to make changes, but it is often necessary. On the business side, it's a matter of determining ways to increase cash inflow and minimize outflow. On the inflow side that doesn't necessarily mean sales – it can often be helped by timely invoicing, billing and collection.

On the outflow side, a business should continually be reviewing expenses and looking for opportunities to save, reduce or eliminate unnecessary expenditures, et cetera. In general, taking time every week to evaluate the financials of the business, and not just operate the business, can reap great rewards in this area.

My goal today was to help you understand why business owners need to keep working capital in the business and to offer some steps to get there.

Adam Shay, CPA (NC License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at 910-256-3456.

 

Other Posts from Adam Shay

Adam shay blk 52015121549
Ico insights

INSIGHTS

SPONSORS' CONTENT
Carolinemontgomery4

PPP Forgiveness - What You Need To Know

Caroline Montgomery - Adam Shay CPA, PLLC
Headshot2 3182020512

How To Protect Your HVAC From Hurricanes

Chris Jones - Green Dot Heating & Air
Drewsmith copiersplus headshot

The Road Map To Secure And Economical Printing Practices

Drew Smith - Copiers Plus

Trending News

Downtown Wilmington Restaurant Closes Permanently

Jessica Maurer - Jun 3, 2020

Publisher’s Note: What Didn’t Happen Last Night

Rob Kaiser - Jun 1, 2020

Businesses, Law Enforcement Take Stock Of Protest Aftermath

Staff Reports - Jun 1, 2020

Friday Deadline For County's $10K Small Business Grants

Cece Nunn - Jun 1, 2020

Flying Machine Brewing Co. Expanding To Wrightsville Beach

Jessica Maurer - Jun 3, 2020

In The Current Issue

MADE: Spicing Up Local Markets

RAWsalsa is a local, independent maker and seller of smallbatch, fresh salsas. Products include signature fresh tomato and fresh pineapple s...


Education Leader Forges Way Forward

Burns was tapped as interim superintendent of NHCS in February, following the resignation of Tim Markley. Burns assumed his new role in Marc...


WorkTok Aids Communication

One new Wilmington startup is trying to address those current workforce trends and increase employee/ employer interaction through its app,...

Book On Business

The 2020 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2020 Leadership Accelerator: Virtual Workshops for Real Leaders
2019 Health Care Heroes
August 26, 2019 Power Breakfast: A Healthy Sale?
2019 WilmingtonBiz Expo Keynote Lunch - CEO, nCino, Pierre Naude`