Tax and Cash Flow Tips for Small Business Owners: A Money Coach’s Guide
Navigating the financial side of a small business can feel like steering through stormy seas, especially for creative type business owners. That’s where Effie Gomulia, a seasoned tax specialist and money coach, comes in to share her practical insights. We were honoured to have Effie be a guest on our Designers Business Community podcast which you can listen to here. From demystifying taxes to streamlining cash flow, here are Effie’s top tips for small business owners to stay financially sound and stress-free.
Tax Tips: Understanding and Saving on Taxes
Taxes don’t have to be a dreaded expense. With a bit of planning, you can reduce your tax burden and increase your savings.
1. Claim Business Expenses
The best part of being in business for yourself is that small businesses can deduct a range of business-related expenses, such as home office costs, office rentals, and professional fees. This could mean that you can significantly reduce your tax burden. For those operating from home, claiming a home office deduction is a smart way to recoup part of your operational costs. If you would rather work in an office environment but your revenue is not yet consistent enough to sustain the expenses of a full-time office, then you can consider co-working spaces. These shared environments offer a professional setting on flexible terms, helping you cut down on long-term lease commitments while only paying for space as needed. If you are in the design and construction industry, you should definitely look into CoFunction Workspaces which is an industry specific event and coworking space.
For more on managing a construction business, explore How to Manage a Successful Construction Company.
2. Understand How Tax Works
Understanding taxes like GST (Goods and Services Tax) is vital. Many business owners mistakenly think GST collections are part of their income. However, GST collected on sales actually belongs to the government. Your job is to act as an agent, collecting and then remitting it. You’ll only pay the net amount after offsetting GST paid on your expenses. Remember, GST is never the business’s money, so keep it separate and avoid spending it on operational expenses so that you don’t run into cashflow problems.
For additional strategies to optimize your business’s financial health, check out Avoid Having a Single Point of Failure in Your Business .
3. Manage Advanced Payments Carefully
It can be tempting to treat money received in advance as immediate income, but these funds are often earmarked for future services. Similarly, some business owners don’t budget for the tax obligations which is imminent at the end of the year. Just the like the above tip, set aside these money and do not use it in advance. To take advantage of the funds while it’s in your possession, you can consider parking these funds in a Tax-Free Savings Account (TFSA) or a high-yield savings account. This lets you earn interest tax-free while keeping the funds accessible for upcoming GST payments or other obligations. Just make sure it’s a fairly liquid type of investment so that you can easily pull it out when needed. Planning for these payments with a high-interest savings strategy will keep you covered when tax deadlines roll around.
4. Know Your Tax Obligations
Continuing on the topic of tax, small business owners often juggle multiple tax obligations. Unlike employees, business owners must manage their own contributions to Employment Insurance (EI) and the Canada Pension Plan (CPP). The tip is to set aside at least 30% of your income as a safe practice for covering both income tax and CPP, as you’ll be paying both the employee and employer portions. For successful businesses, it might be smart to save even more to account for higher tax brackets and unexpected tax liabilities. If you want to understand the full breakdown of why Effie recommends 30%, you can watch the full podcast here.
What is Cash Flow in a Business
Cash flow refers to the movement of money into and out of a business. For small business owners, understanding cash flow is critical for ensuring financial stability. It includes income from sales, loans, and investments, as well as expenses like payroll, rent, and supplies. Without proper cash flow management, even profitable businesses can struggle to meet their financial obligations.
Managing Small Business Cash Flow
Efficient cash flow management is key to avoiding debt and ensuring your business’s financial health. In fact, the number one reason for small businesses to fail is because they didn’t manage their cashflow. Here’s how to get a handle on it.
1. Budgeting for Stability
Unpredictable income can complicate your cash flow, especially when expenses are steady. Budgeting based on your lowest income month from the past one or two years gives you a conservative foundation. This method helps you prepare for lean months while avoiding overspending when income is high.
Learn more about aligning operations and planning in What is the Difference Between Strategic Planning and Business Planning.
2. Build an Emergency Fund
An emergency fund or a rainy day fund is a non-negotiable asset for any small business, acting as a buffer during low-income periods or sudden expenses. Much like personal finances, a business emergency fund keeps you steady during hard times and allows you to seize opportunities like bulk discounts which you may sometime encounter.
Discover how to prepare your business for success with Self-Sustaining Business Training: Find Out If It’s for You.
3. Prioritize Your Team
If you sometimes get into cash crunches, the recommendation is to prioritize paying out your employee salaries. Maintaining a well-paid, happy team is fundamental to any long term business. Therefore, ensuring your employees are paid on time, even if that means cutting costs in other areas is critical. Employee retention and morale will drive productivity, and happy employees contribute positively to your bottom line.
4. Consider Hiring Help
If numbers and finance aren’t your strong suit, consider delegating or hiring a professional to handle them. Keeping your finances in order is essential for a healthy business, even if it’s not your favorite task. By hiring a bookkeeper, you can ensure that financial tasks are done accurately while freeing yourself to focus on other critical areas of your business. A professional bookkeeper can help manage your finances, identify tax-saving opportunities, and streamline cash flow. This peace of mind allows you to focus on what you do best—running your business.
Cash Flow Statement Template for a Small Business
A cash flow statement is a vital tool for small business owners. It tracks the movement of money into and out of your business over a specific period, providing a clear picture of your financial health. This statement includes three main sections:
- Operating Activities: This section reflects cash flow from daily operations, such as sales and expenses.
- Investing Activities: This covers cash flow from investments, such as purchasing or selling assets.
- Financing Activities: This involves cash flow from borrowing, loan repayments, or raising equity.
Creating and maintaining a cash flow statement ensures you have a clear understanding of your financial position and can plan for the future more effectively.
Download your free Cash Flow Statement Template here
How Much Cash Flow Should a Small Business Have
Determining the right amount of cash flow for your business depends on several factors, including your industry, size, and operational expenses. A general rule of thumb is to have at least three to six months’ worth of operating expenses in cash reserves. This ensures you can weather unexpected challenges or take advantage of growth opportunities without risking your financial stability.
It’s also important to analyze your business’s cash conversion cycle, which measures how quickly you can convert investments in inventory and other resources into cash. By maintaining a healthy cash flow, you can confidently meet your obligations and invest in your business’s growth.
Small Steps, Big Impact
By mastering these tax and cash flow basics, you can take control of your finances and ensure your business thrives. Whether it’s understanding taxes, planning for unexpected costs, or getting expert help, these tips can save you money and reduce financial stress. Remember, smart financial management is more than just a skill—it’s a key driver of your business’s long-term success.
We really appreciate Effie Gomulia for sharing her expert knowledge. If you want to get a hold of Effie, you can find on social media at @prudentmoneycoach and learn more about her services or subscribe to her monthly tax tip newsletter, go to https://prudentmoneycoach.com
If you are want need help strengthening other parts of your business, then reach out for a free consultation.
