Jan/Feb. Cash flow

[Tom Fuhrman]

I am interested if anyone has come up with any solutions to the following problem. I, like many others am on a cash basis accounting system. We all know that we try to deplete the checking account by years end to suppress the amount of taxes we will owe. (any thing left at the end of the year over and above what you started with is taxable income.) How do you keep cash flow at a reasonable level thru the months of Jan/Feb. when business is usually not that brisk anyway and shows are only happenings in Ca. and Fl.? I've tried to schedule insurance premiums and other yearly and semi-yearly expenditures to other months but fixed costs continue to roll in. I've considered going to an accrual type accounting sysytem, but it seems like such a hassle in bookkeeping. Anyone have a secret formula that they've discovered. It would be nice if the wholesale shows were in Dec. and we could work off those orders and ship in Jan and Feb. Tenn. Tom

[rosanna gusler]

i wish i knew. the only thing i do is be careful about deposits in nov/dec. spend down in dec. then on jan 2 cash those checks i have been hoarding fron dec. which is probably stupid because i do the same thing every year so no income truly 'goes away'. of course you have to be fairly goofy to be self employed anyhow. goofy in nc. rosanna

[Dennis Brady]

Three possible solutions:

1. Find some wholesale accounts that operate on the opposite season. For example Australia and Hawaii - and to lesser degree CA & FL. My Hawaiian accounts don't order anything until Xmas. Australian season starts mid Nov.

2. Learn to operate like a farmer. Use the winter season to prepare for the next harvest. Accept that there's no income in the winter so ensure you've saved enough of your last harvest to carry you through until the next. Use the lull time to increase stock.

3. Take out a credit-line account. With interest rates to borrow now as low as 5%, there's no reason you can't use a credit-line account to carry you thru the low income periods.

[Sara]

1. Incorporate and elect to . . .

2. Have your fiscal year end March 31.

3. Do two BIG shows in February to sell down inventory and generate cash flow.

[Tom Fuhrman]

Sara: I am incorporated but you still have to file corporate taxes by March 15th and changing of the the corporate fiscal year just makes for a lot more bookkeeping and problems becaause of being out of sinc with everything else. or am I missing something? The wholesale shows don't really come until the end of Feb. and by then I'm usually past the desperation point. I have been able to pick up some good commission work that always comes in Jan. but one never knows when that may dry up. Thanks for the advice. Tenn. Tom

[Sara]

Sara: I am incorporated but you still have to file corporate taxes by March 15th and changing of the the corporate fiscal year just makes for a lot more bookkeeping and problems becaause of being out of sinc with everything else. or am I missing something? The wholesale shows don't really come until the end of Feb. and by then I'm usually past the desperation point. I have been able to pick up some good commission work that always comes in Jan. but one never knows when that may dry up. Thanks for the advice. Tenn. Tom

Tom,

Interestingly I didn't change the fiscal year to change finance movement. The totals seem to remain the same regardless of what year they fall in, or am I missing something? I changed my fiscal year 'cause we're extremely busy in January and February and it seemed easier to not think about this til after that busy time. My year ends March 31. It's only thing outta sinc is that my 2003 still keeps ticking until then and I do confuse easily . . . whaaaa???? I'm still in 2003????? I do 2 wholesale shows, one the beginning of Feburary, mostly cash and carry and the second mid February with most orders shipping between the end of Februrary and the middle of April and most customers are on net 30 so I rarely get monies until after April Fools Day.

I've not found it makes any difference where the cut off is. if I run Quicken reports as calendar year they are about the same as if I run as a fiscal year, maybe 10% difference either way.

I'd be more concerned with cash flow and desperation point. hopefully it sounds more bleak when typed than it is in real life. I treat any month like another and don't 'surpress' cash. . . . heck my checking account and cash flow is always low I'd talk to your CPA and have him give suggestions.

Good luck,

Sara

[Brad Walker]

Regarding changing fiscal year ends, according to the IRS if you do this with an existing corporation you must agree to deposit money with the IRS equal to the tax benefit of the change. So I wouldn't change just to reduce your taxes -- most fiscal year end changes occur because of mergers or similar activities, and the IRS frowns on changes for tax-saving reasons (as, I suspect, do tax authorities in countries other than the US).

I would agree with Dennis's suggestions: find new customers, plan better for the slow time, and/or get a low interest bridge loan.

I could be really slow this morning (wouldn't be the first time), but I'm really having trouble seeing how this is a big issue. Borrowing $10,000, for instance, at 5% for three months will cost you only $125.00 in tax-deductible interest (less than $100 after tax) -- is the cash flow problem significantly larger than that?

[Dani]

And finally, when all is said and done, some of the wisest words from a CPA who was my boss in a prior life: You can spend too much time trying to keep from paying taxes. Pay your tax and then use the time saved to make more money. And for those who operate on a less sophisticated level, a good money tactic is to put all your earnings into a savings account immediately, then take a monthly budget amount to operate. Towards the end of the year, you can look at what's in savings and decide what needs to happen to that money to maximize your tax benefit, your business situation, your life even.