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How Should You Allocate Cash?

As a business owner, knowing you have the funds to cover unexpected expenses will help you to sleep at night. Whether it’s a surprise tax bill, emergency repair, or unexpected revenue slowdown, it’s important to ensure your business can weather the storm. Having an understanding of the cash requirements within your business will help you plan and manage future obligations. Keep the following examples in mind when deciding how to use business profits:

Operating Expenses This is where most of your business income will go - bills, inventory, paying employees, etc. Do you know what your biggest expenses are? Gaining knowledge over your operating expenses and you’ll understand where your business cash is going. You’ll be better equipped to manage the cash flow cycle and identify areas in which you might be able to find savings.

Taxes While there are strategies you can use to reduce your tax liability, don’t get caught off guard by an unplanned tax bill. Taxes are never likely to be your favorite part of business ownership but they are part of business but remember this - when you pay tax on the profit earned in your business that means you are doing well. Make sure you are setting aside an appropriate amount of business income for taxes. Can you make quarterly payments? This can be a great way to help you manage this aspect of your business.

Emergency Fund Do you have enough funds socked away to cover several months of working capital in case your business experiences an unexpected dip in sales? Creating an emergency fund for the unexpected will give you some breathing room between your revenue and expenses. The nature of your business and your tolerance for risk will likely dictate the size of the emergency fund you maintain but at minimum, it should be able to cover a few months of working capital.

Owner’s Pay As a business owner, you need to get paid right? Perhaps you are in the early stages of your business and are not yet drawing a salary but at some point you’ll want to be able to do this. When it comes to paying yourself, be sure you understand how your business is set up. Are you an S-Corp? This would require you to be paying yourself a reasonable salary already (reported as W-2 income). Are you a sole proprietor? All the profit will flow straight to you as income for tax purposes. Be sure to speak with your tax advisor to ensure your compensation is set up to your best benefit.

It’s an exciting stage of business when you start to turn a profit. It likely took you a lot of hard work and sleepless nights, it’s important not to get complacent. Have a plan on how you’d like to allocate profits within your business and stick to that plan. Soon you’ll find yourself at a point where you can re-invest those profits back into the business!

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