Control cash flows to avoid pitfalls



Owners of small businesses struggle to maintain adequate cash flows for their businesses.

South Africans have a culture of spending freely in December, fuelled by the holiday season. This leaves consumers broke and makes it hard for entrepreneurs to cover the tough months of January to March.

Few buyers have much cash after the holidays, which hurts entrepreneurs in the pocket. Many businesses go under during these tough months.

Understanding and managing your company's cash flow properly will help you measure the amount of cash on hand and prepare for shortfalls in the future.

Here is a quick guide to managing cash flow.

l Do the mathematics. Cash flow is the movement of money in and out of a business. Cash inflow is the movement of money into your business, and most likely comes from the sale of goods or services to your customers.

Cash outflow is the movement of money out of your business, and is generally the result of paying expenses. By projecting the inflow and outflow of your business's cash, you can determine the amount of money that will be available in a designated period.

l Prepare a simple profit-and-loss statement. Your business plan should contain several financial statements. If you are just starting up business, base your estimates of cash inflow and outflow on the revenues and expenses listed in your profit-and-loss statements. Complete your profit-and-loss statement before completing your cash-flow statement. Over time, you will base cash inflows and outflows on historical data.

l Develop a cash-flow statement for your financial inflows and outflows. A cash-flow statement measures the flow of cash over time. During your first year in business you should include a month-by-month cash flow statement in your business plan. If you're seeking a loan, an important feature of your cash flow statement is that it will show the lender exactly how you intend to afford making loan payments.

l Selecting a business structure is one of the most important decisions business owners make, with wide implications for their financial success. Business structure affects the safety of personal assets, taxation and smooth continuation of the business if its ownership changes.

Many businesses start out as sole proprietorships, partnerships or closed corporations. These structures provide management flexibility.

The primary risk to sole proprietors or partners is personal liability for company debts. So many business owners opt to incorporate or form a limited liability company to protect their families and financial interests.

The business may change its structure at any time. Consider these five critical issues when selecting or reselecting your business structure.

l Protect your personal assets. Sole proprietors, partners or closed corporations face unlimited personal liability for business debts or lawsuits against their company. Creditors can attach homes, cars, savings or other personal assets.

l Incorporating or forming a limited liability company helps separate your personal identity from your business identity. A corporation's shareholders or limited liability company members can lose only the money they put into the company.

l Pass-through taxation is another issue that affects sole proprietors, partners and closed corporations. The company's profits and losses pass directly to their personal tax returns.

For corporations, profits are taxed, then the profits that are distributed to shareholders as dividends are taxed again on the personal level. This double taxation can be avoided while still enjoying the benefits of personal asset protection by forming a limited liability company or by electing to form an S corporation. S corporations and limited liability companies are taxed like partnerships.

l Tax-deductible employee benefits will also affect which business structure you choose. Incorporating or forming a limited liability company usually provides tax-deductible benefits for you and your employees, an advantage that sole proprietors and partners do not typically enjoy.

Even if you are the only shareholder or employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may now be deductible. Best of all, corporations and limited liability companies usually provide an increased tax shelter for qualified pensions or retirement plans.

l You should consider risks to running your business without interruption. Sole proprietorships, partnerships and closed corporations might automatically end or become legally entangled when one owner dies or retires.