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The following information is taken from a seminar
handout by STEELE MARTIN JONES & BORGOGNONI. This information is
NOT complete; the facts of your circumstances may change the advice
given. If you have questions about the information below or would
like to schedule a SMA seminar for your group, please contact Tom Jones.
Basic
Cash Flow Ideas
by Tom Carson Jones,
CPA
1. Starting out a new business . . . you will have very little
sales money coming in but many expenses going out. Expect sales to be
lower than budget and expenses to be higher!
2. "Cash in Bank" does not equal profit. Just
because you wrote a check for it does not mean it is an expense; just
because money came in does not mean it is income. Examples:
a.
Receiving a loan is not income; paying it back is not an expense.
b. Note
Payment is part interest (expense) and part principle (non-deductible).
c.
Equipment purchases may or may not be currently deductible.
3. Your cash flow will vary from month to month; sales may be
seasonal; and once a year expenses will surprise you!
4. Yes, there is such a thing as "two sets of
books." The IRS allows a small business (under $5 million in
sales with no inventory or $1 million in sales with inventory) to be on a cash
basis. Yet, an "accrual" method (recognize receivables and
payables) may be a more accurate picture of your business.
5. Businesses should plan to take advantage of any
opportunities for cash flow they may have. Examples:
a. A
supplier gives you terms of net 30, and you sell it for cash in the
first
week; you will have a few weeks to hold the cash.
b. Likewise,
if you sell it a week after you get the item and you give your
customer
terms of net 30, you need to find the cash for a week.
c. Sales
tax is assessed at the time of the sales, not upon collection. A cash
sale may mean you hold the money for a few weeks; a sale on account
means the seller must come up with the money before you are paid!
d. Although
it means you are paying your bills earlier, using the vendor's early
payment discount (like 2/10, net 30) usually is a good deal.
6. The sole proprietor of a business takes out cash for
personal expenses that is, in effect, the income of the business. You
could be barely getting by but have a taxable profit. If a business
made $10,000 (tax basis) for a year (which we would all agree is not enough
to live on!), you still likely have self-employment tax due.
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