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Ten Cash Flow Tips

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1. Know your business’ balance sheet thoroughly.

This may sound obvious, but, as your accountant can confirm, many business people don’t know how cash flow works and its significance to keeping their operation afloat. Many owners focus on their business’ profit and loss statement alone. It’s a potentially fatal mistake because healthy profits can mask an impending cash flow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cash flow projection. For that, you’re going to need a structured balance sheet that includes all the influencing factors including debts, interest payments, inventory and so on. This is the basis for your cash flow projection which represents an “educated guess” at the likely incomings and outgoings over the period of time you have selected to map out.

You're Fired!

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and then go on with their day. But sometimes they try a little "self help." So now let's look at what one auditor did when she wanted to minimize her taxes.

Jacynthia Quinn spent 20 years as an IRS auditor in El Monte, California. The IRS audited her and her husband for 2006 (when she claimed $23,549 in charitable deductions and $22,217 in medical expenses) and 2007 (when she claimed $24,567 in charitable deductions and $25,325 in medical expenses). The Service disallowed those charitable and medical deductions, among other write-offs, and the case wound up in Tax Court.

You'd think an IRS auditor would be the first to know how to avoid an audit! So, how did Quinn do on the other end of the hot seat? Well, let's look at those charitable contributions first:

Show Me the Money!

The week before last, while most of America was still digesting news of the Supreme Court's decision on healthcare reform, more news hit the wires. That's right, Hollywood A-listers Tom Cruise and Katie Holmes, better known as "TomKat," are calling it quits after nearly six years of marriage. Of course, Tom has been down this road twice before. But this split has already spawned far and away the biggest headlines, and tinsel town gossips are working overtime. How long has Katie planned her escape? What role does Cruise's association with the controversial Church of Scientology really play? Were Tom's lawyers really letting Katie "play the media" while they readied his reply?

News of the split came at nearly the same time as Forbes naming Cruise the world's top-earning actor. His latest blockbuster, #4 in the Mission: Impossible franchise, pulled in a whopping $700 million, powering Cruise to a $75 million year. So naturally, we want to know what the divorce means for the IRS!

The Cost of Reform

By now, of course, you've heard the news that the U.S. Supreme Court upheld the Affordable Care Act, also known as "Obamacare." Ironically, the Court ruled that the controversial individual mandate is constitutional under the government's power to tax, rather than its power to regulate commerce.

We're not here to debate the merits of the Court's decision. If that's what you want, turn on any cable news network and you'll find various assorted bloviators from both sides, bloviating right now. (Try it. It's fun!)

What we are here to discuss is how the Court's decision affects your tax bill. That's because the original legislation that the Court upheld makes care affordable in part by imposing several new taxes -- in addition to the "tax" or "penalty" imposed by the individual mandate -- that will now go into effect as already scheduled:

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Less Rich. Less Famous. Less Tax.

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Last week, we brought you a story from those party animals at the IRS Statistics of Income Division about an annual report on the 400 highest incomes in America. It turns out they're a very successful bunch — for 2009, they earned an average of $202.4 million and paid an average of $40.9 million in tax. This week, we're going to talk about a different group of taxpayers. Less rich, less famous, but maybe more successful in their own way.

Back in 1969, Treasury Secretary Joseph Barr was shocked to discover that 155 Americans had earned over $200,000 that year, yet paid nothing in tax. Zip. Zilch. Nada. ($200,000 isn't bad money now — back then, it had about the same buying power as $1.2 million today.) Washington huffed and puffed, then passed the "Alternative Minimum Tax," or AMT. In 1970, the new tax surprised 18,464 unhappy taxpayers. No one could have foreseen it growing into a complete "parallel" tax system, a many-headed Hydra that millions every year.

Fast-forward to today. With the AMT firmly in place, the IRS has just released a 61-page report revealing that in 2009, 20,752 taxpayers earned over $200,000 and paid — you guessed it — zero tax.

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Cash Flow Quickeners

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Cash flow is often called "the lifeblood of a business," and for several good reasons. But the flow of cash into most businesses is uneven and there can be times when a constrained cash flow creates serious problems, even if the long term situation is positive.

There are, however, ways to improve the cash flow of any small business and remove some of the worries about bills not being paid or not having enough on hand to pay wages. These mainly involve no more than adjustments to what you're already doing and so aren't difficult to implement.

Keep inventories as low as possible

Inventories are expensive in many ways. There's the interest paid on money borrowed to acquire items that are awaiting sale. There are also the costs for storage space and handling, as well as insurance expenses and the "opportunity cost" of what money spent on inventory could be earning elsewhere. In some cases, inventories are so badly managed that much of the material becomes obsolete before it can be sold.