Cash is King, But Profits Generate Cash

What to Do If You Have Too Much Cash

This is obviously a good problem to have in your business and many people first ask where they should put the money. The answer is keep it highly liquid by putting it in a high yield savings account, money market account, or something similar so you can still pull that cash out when you need it and have no real tax consequence.

The next question is what should you spend the money on? We are currently in the middle of 2022 business planning and now is the perfect time to plan where you can spend extra cash in order to achieve your financial goals long-term. Start by considering how you can reinvest cash back into the business on initiatives that will improve your profitability. For example, it might be time to add more people to your sales team, restructure your sales commission plans, hire a new business development person, etc. to help on the sales side of profitability. Brainstorm whether you can invest in equipment or innovation that’s going to make your business more efficient to help lower the cost side of profitability. Ask yourself if this is an opportunity for you to purchase real estate with the SBA 504 loan program? Lastly, are there any research and development activities that you’re currently involved in because research and development activities also have an important tax credit related to them. There are a lot of different options for investing cash back into the business and we encourage you to  focus on the areas of your business that are going to improve your profitability.

What to Do If You Don’t Have Enough Cash

If you don’t have enough cash, you first need to know how to determine if you don’t have enough cash. It’s crucial to have complete and accurate financial statements to be able to make that determination. TGG’s rule of thumb is to look at your current ratio, a liquidity metric, and see if it drops below 1.5. Your current ratio looks at current assets, compared to what you must pay within the next year. If you don’t have enough cash, focus first on generating more cash for the business by increasing revenue or decreasing costs. The third option for increasing cash is financing through loans or additional equity. Before resorting to third party financing, you want to try to improve your cash through operational cashflow.

So how do I increase revenue? If you have not yet increased your prices, now is the time to do so. At TGG, we recommend reviewing your pricing strategy at least annually. Right now, it’s more important than ever to revisit your old pricing structure and calculate your target gross margin based on the increased costs you’re experiencing with inflation. Once you know your new cost structure, you can back into the price increase necessary to achieve your target gross profit margin.

You can also get creative with your revenue streams and consider where you can charge customers additional fees or add a service line. For example, if you’re a seasonal business and you have a lot of revenue for the end of the year, you might want to start offering some sort of subscription service for your customers to generate revenue during the non-busy time of the year. Get creative on the revenue side and brainstorm with all your departments.

Since labor costs are up significantly this year from last year, we recommend increasing the hourly wage rate for your employees to prevent turnover. You can take the increased cost in the short term for a longer-term benefit to avoid the turnover and overtime which have costly impacts.

Is Your Bank Account Lying to You?

Your bank account balance is not a good indicator of cash flow because there are transactions that have occurred and have not yet hit the bank yet. For example, let’s say you pay out a significant check of $20,000. The check will not show up on your bank account balance until the recipient cashes it.  Similarly, you might have deposits in transit that haven’t hit your bank account yet. There are also other factors that you want to look at when assessing cash that live on the balance sheet. Accounts Receivable and Accounts Payable, for example, are indicators of future inflows and outflows that you cannot see on the bank account balance. At TGG, we have our Cash Flow Forecasting Tool which we built so you can view your true cash position on a weekly basis, 13-weeks out, which covers a full quarter. This has helped our business owners plan better and make timely decisions.

Tax Credits Available Right Now

Employee Retention Credit (ERC): Up to $33,000 back in tax credits per employee from 2020 and 2021. The government will pay you for keeping people employed during the pandemic.

The Vaccine Tax Credit: A tax credit for any wages that you paid your employees while they were taking time off to get the COVID vaccine and recover.

The Paid Family and Sick Leave: A tax credit for wages you paid any employees that were out sick with COVID up to two weeks.

The Work Opportunity Tax Credit: Incentivizes employers to hire people who typically have experienced certain barriers to entry into the workforce. For example, veterans, ex-felons, people who receive public assistance, etc. The credits range between $2,400 to $9,600 per individual that you hire and depend on which category that they fit in.

The SBA EIDL Loan

The Small Business Administration recently increased the limits on the EIDL loan from $500,000 to $2 million. This loan is a 30-year term, loan payments are deferred for two years and the interest rate is 3.75%. This is an incredible opportunity and can be used to refinance or pay for other types of debt that you have as long as it’s not another SBA loan. For example, you can pay down a good portion of a line of credit or refinance debt with less favorable terms (e.g. Main Street Loan Program loans).