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Cash flow is a critical metric every small business needs to pay attention to. It reveals your company’s financial health in the immediate present by comparing money flowing in and expenses flowing out. While knowing your revenue is obviously important, cash flow shows you how much actual money is moving into and out of your bank accounts.

With some math and some informed conjecture, you can chart the expected cash flow of your business for the future.

Why Is Cash Flow Projection Important?

Cash flow projections, then, predict your cash flow in the future. A cash flow forecast can help you circumvent dreaded cash crunches, which is when your business needs to spend money but there isn’t enough cash on hand to cover the expense. Cash crunches are damaging to any business, and they can be ruinous for young or very small businesses.

Fortunately, with some preparations, you can project your future cash flow and determine how to focus on creating cash flow.

Cash Flow Forecast vs. Projection

No matter what you call your cash flow documents, you should prepare several based on different potential futures. It is a good idea to prepare one cash flow projection based on your present business, as well as a best-case cash flow projection and a worst-case cash flow projection.

How Do You Calculate Cash Flow Projections?

Accounts receivables includes money that is expected to flow into your business, such as sales and payments from client invoices. Grants, rebates, loans, and funding are all considered receivables, too.

Accounts payable is the other side of the equation. Payables include anything your business spends money on: your salary, payroll, inventory, overhead, rent, taxes, and all expenses.

A cash flow statement compares accounts receivables to accounts payable. A cash flow projection predicts your cash flow over time.

To create a cash flow projection, it can be wise to start with the past. Look at 12 months ago and record how much cash was in your bank account—this amount is your starting balance in this example. Break down the past 12 months in terms of receivables and payables. Try to categorize your income and expenses as much as possible to get a better sense of where your money is coming from and what you are spending it on.

For the first month, subtract the total amount of payables from your total receivables. This calculation gives you your cash flow for the month. If it is negative, subtract it from your starting balance. If it is positive, add it to your starting balance. This new balance is the starting balance for the following month.

Repeat these calculations for the entire 12-month span and you’ll have a cash flow chart for your business.

The Small Business Administration has several great templates you can use to make this easier, including a cash flow projection template.

To predict into the future, you can sometimes reuse a lot of the data from the previous 12 months if your business stays stable in that regard. If you know of the specific revenues, funding, and costs that your business will incur in the future, you can use that data, although you should include some contingency spending.

If you are less sure about the future, start with what you know, like rent payments and clients who pay you a specified amount on a repeating basis. Then make educated guesses about what your cash inflows and outflows will be over the next few months. Here is where it makes sense to create several different cash flow projections for your status quo, best-case, and worst-case scenarios.

The time extent of your predictions is up to you, but you should think about your available data. If your company is well-established, you can create projections for many years into the future. If your company is very young, though, it might be more accurate to think in terms of a few months to a year out.

What Is a Cash Flow Projection Example?

Is Positive Cash Flow More Important Than Profit?

You should think about and create forecasts for both profit and cash flow.

The words “flexible” and “financing” don’t seem like they should be in a sentence together. When you think of financing, you may think of a stuffy banker stamping rejections on loan applications. Maybe you think about how your business is stalled in growth because you’ve reached the end of your credit line. It is not often that you think about financing options that are flexible to your needs. They do exist, however. Here are some flexible financing options for your small business.

Does your financing plan account for unexpected losses?

As we have all seen, life is unpredictable. Your business could be performing well, but then revenue may drop off a cliff for outside reasons. Here is where that flexibility will come in handy. The pandemic has been awful to small business owners, and it has also shed light on some huge holes in small business finances. Many small business owners turn to personal funds to keep their businesses afloat because they lack cash reserves. If you want to avoid this scenario in the future, have a financing plan that is flexible and can accommodate unforeseen challenges.

Flexible financing options.

Many business owners found they were at risk of breaching their banking covenants with the sudden revenue loss. Some business owners were struggling to meet payroll. Others had to close altogether. To keep the lights on for your business, you either need a large cash reserve or flexibility in your financing. If you have maxed out a bank line of credit, do you have access to working capital from somewhere else? Is your bank willing to extend your credit limit?

Equipment financing

It is worth considering some supplemental financing options to round out your financing plan. Equipment financing is a great option that can unlock working capital to support your business growth. Equipment financing is a loan that you can use for specific reasons, like buying manufacturing gear or any other equipment you need for your business. If you are looking to upgrade your cybersecurity and tools because you have moved mostly remote, equipment financing can cover those costs. This type of financing will be a loan that probably has strict repayment terms, but you can use the money pretty flexibly for your business’s needs. 

Accounts receivable financing.

Accounts receivable financing can help you meet payroll while waiting to collect on your receivables. In simpler terms, the amount of capital you can access is based on the amount of capital you are waiting to collect from your customers. With accounts receivable financing, you can add to your team without the stress of adding to your overhead. Since it’s based on your outstanding invoices, it does not require a high credit score or lengthy time in business, which makes the approval requirements very flexible. This type of financing is similar to a line of credit, but the limit will not be as rigid. Typically, the higher your accounts receivable, the more capital you can access.

Line of credit.

A line of credit gives you some flexibility in drawing capital and repaying it. You don’t have to use all the money, and you only pay interest on the amount you use. Online lenders and traditional banks offer lines of credit, and it’s a great tool to have available if you want a more flexible financing plan.

Business cash advance.

A cash advance is basically a lump sum of cash that is repaid through daily or weekly withdrawals based on your future earnings. These are typically costly because the interest rates are high. Make sure you read your contract carefully before taking out a cash advance.

Which Flexible Funding Option Is Right for You?

Most of these financing options can work together to round out your financial plan. For example, you can use accounts receivable financing to cover your payroll and also take out an equipment loan to cover your production tools. You could use a cash advance alongside a line of credit. It is crucial to consider your business and your industry when signing up with a new lender. It’s best to choose a lender that knows your industry and can offer solutions to your unique financing challenges. Ultimately, your financing plan should include some flexibility to account for sudden gains or sudden losses.

Becoming an entrepreneur is an exciting venture that can often be the fulfillment of a life-long dream. But business owners also face a variety of challenges, and POC business owners face additional and unique challenges. New entrepreneurs wading into unchartered territory can often learn from the advice—and mistakes—of others. We asked a handful of POC business owners for their best advice to help fellow POC entrepreneurs entering the small business world.

1. Get a Minority-Owned Certification

As soon as you can, Mary Angela Munez, owner of GoLucky Studios, recommends working toward getting certified as a minority-owned business. “This makes you visible and able to accept government contracts that are set aside to provide opportunities to minority business owners,” she explains. “Right now, 5% of all federal money has been allocated to businesses that hold this designation.” State and city-level certifications can also provide access to bids on local contracts.

2. Plan for Success

You probably want to hit the ground running, but Elisabeth Jackson, a small business owner of 3 years with over 8 years of experience in the small business world, warns against rushing the process and says you should instead focus on getting your systems right. “Black women are the fastest-growing entrepreneurs but are significantly absent when it comes to long-term profitable businesses,” she notes.

“Document everything you do, and create procedures and systems that can replace your workload for you as you grow,” Jackson says. “Also, I recommend having a strong product suite that increases your client retention so you aren't relying on one product to make all your money.” In addition to not relying on one product, she advises against relying on one person—namely, yourself.  “Don't get caught up trying to do everything because that’s not sustainable in the long run.”

3. Hire Well

And since you can’t do everything yourself, Nerissa Zhang, CEO of The Bright App, recommends you hire help as soon as you can. However, she says it’s important to hire good people, and it’s equally as important to let those people go when it becomes clear that they’re not a good fit. “The reality is that there are many people in this world who will not respect the leadership of people of color, particularly if you’re also a woman,” Zhang explains. “As soon as you see any signs of disrespect from someone you’re paying, do not hesitate for a second—fire them immediately.”

4. Put Your Business Online

COVID-19 has severely hampered brick-and-mortar businesses. But even in a post-pandemic world, Ray Blakney, CEO and cofounder of LiveLingua.com, recommends putting your business online.  "In addition to the standard benefits of online business—such as lower startup costs and overhead, global reach, etc.—there are some unique benefits for POC.” 

For example, he says that since there aren’t a lot of online businesses run by POC (comparatively speaking), this is an opportunity to stand out.  “Not only can the unique point of view be shown on the website itself—it can also be used in marketing, as many journalists, podcast hosts, and websites are looking to include more voices from people of color, and they have a hard time finding people who can speak to this,” Blakney explains.

5. Be Yourself—and Be Sharp

To Tasha Booth, CEO and founder of The Launch Guild, being an entrepreneur is an opportunity to be your “authentic” self.  “Especially as a person of color, you will always be ‘too much,’ ‘too loud,’ or ‘too something’ for someone in whatever industry you’re in, and that’s okay.” But the beauty of being a small business owner is that you get to make the decisions and run the operation as you see fit. “Don’t think you have to fit a specific mold or cater to certain people to succeed and feel good about the business you’re building,” Booth says.   

Michelle Diamond, CEO and founder of Elevate Diamond Strategy, agrees. “Understand the value and uniqueness you bring as a POC,” she says. “But at the same time, unless your small business is focused on your ethnicity or heritage, lead with your skill sets and the value of your products and services only.”

6. Embrace Those Who Embrace You

You may have a target audience, but Booth recommends embracing the community that embraces you.  “When I first started running Facebook ads for my business 2.5 years ago, I noticed that the women responding to the ads and signing up for my services were primarily Black women.”

Initially, she says she was bothered that non-POC were not responding and believed it was only because she was a Black woman.  “But now, I celebrate the fact that other Black women see my success and see what the possibility can be for them,” Booth says. “Rather than thinking of it as a detriment, I see it as one of my superpowers and something that sets me apart from all other entrepreneurs in the online business/virtual support industries, so embrace the people who are embracing you.”

7. Invest in Your Professional Development

Learning is a lifelong process – especially when you’re a small business owner. And according to LaKesha Womack, a leadership development specialist, it’s important to invest in your professional education. “No, I don't mean getting another graduate degree: however, working with a business coach or consultant to help you develop a plan for your business and to hold you accountable will be one of the best decisions that you can make.”

While many entrepreneurs are great at what they do – she says being a successful business owner entails more than providing a service or product. “Working with a professional who has experience with business operations, human resource management, branding, and marketing can help your business to not only survive, even in turbulent economic environments, but they can also help to prepare you for growth.” Mentors for POC can also provide valuable support and advice to take your business to the next level and perhaps point you toward funding sources for business owners of color. 

8. Focus on the Positives

Being a POC entering the small business world will involve challenges, but that shouldn’t be your focus. “Oftentimes, POC may assume that they will encounter racism or bias, and while that does happen sometimes, the truth is if you have that mindset, you will attract more of the same,” says Diamond. However, she believes that the majority of people care more about your ability to add value to their lives than the color of your skin. “Focus on succeeding and having a great business; there is no limit to the success you can achieve for yourself, family, and community."

How much money are you making?

This is a common and succinct question small business owners often receive, however crass it might seem. The question can feel like a dagger to the heart or a point of pride, depending on how you perceive your business is faring financially.

But how do you know how your business is doing? How do you know if your business is making money or not?

There are 2 main ways to understand the cash coming into your coffers: revenue and profit.

Revenue and profit are 2 systems of defining the money your business is making. Revenue is the top line, and profit is the bottom line.

Let’s explain these concepts, how they interact, and what they mean for your business.

What Is Revenue?

Revenue is the top line because it is all the money your company makes before subtracting any costs.

For many small businesses, especially new ones, revenue is critical. If your revenue is increasing over time, you know there is a demand for your product or services.

However, judging your business’ financial health based on revenue is a bad practice because revenue is too broad of a metric.

For example, suppose an auto dealership decided to severely undercut its competitors by selling new cars for less than it paid for them from the automakers. Revenue would likely skyrocket as consumers discover that its cars are much cheaper than anywhere else. However, the dealership would probably be in deep financial trouble because it would be losing money with every sale.

Still, there are no one-size-fits-all answers about whether revenue or profit should be your focus. In the above example, the dealership might decide the good PR gleaned from the happy customers will be worth more in future sales than the money lost during this price-cutting move.  

What Is Profit?

Revenue is your company’s top line. Then, in your ledger, you subtract various expenses to receive your profit—your bottom line.

Profit usually refers to a positive bottom line. You are then “in the black”—a reference to how accountants commonly color-code their books. If your expenses are greater than your revenues, your profit is negative, although you would probably refer to this figure as a “loss.” Your business would then be “in the red.”

What expenses do you subtract to figure out your profit? There are several methods of computing this number. Gross profit is when you subtract the cost of goods sold (COGS) from your revenue. COGS are the direct expenses associated with each good or service you sell (i.e., the cost of manufacturing or acquiring your goods). This does not include indirect costs, such as rent for your office.

Operating profit subtracts overhead expenses like office rent or marketing from revenue along with COGS. Because of this, it might be a more holistic approach to analyzing your financial situation. There are even more ways to define your profit, like pre-tax profit or net profit.

Your profit margin is how much profit (or loss) you earn (or lose) with each sale; profit margin displays how your profit increases off of your revenue. To determine profit margin, take a version of profit (like gross profit or operating profit) and divide it by your revenue. This will give you the decimal expression of your profit margin percentage.

Is Profit More Important Than Revenue?

“When it comes to investors, there’s a divide,” analyst Andrew Marder of software platform Capterra explains. “In the tech startup world, revenue is often seen as the end-all, be-all of finance. Venture capitalists look for companies that can ramp up revenue regardless of cost, hoping to figure that bit out later on down the line.”

Famously, Amazon, Uber, Zillow, and many other unicorns that define our modern life took decades to turn a profit—some still have yet to be out of the red.

But the circumstances are vastly different between an app startup and a small business in retail, hospitality, or professional services. In most cases, profit is a much more accurate indicator of a company’s financial health.

“In the world of more classic, Warren Buffett-style investing, revenue is almost meaningless,” Marder continued. “These investors—which may also include your business banker—want to see money making it all the way to the bottom of the earnings statement.”

The safest position is to pay continual attention to both revenue and profit—you can’t have any profit without revenue, after all, but you probably want to be spending less money than you are bringing in through sales.

How Do You Gauge Your Business’s Financial Health?

“Looking at your bank account is a bad way to manage your business,” suggests CPA Shabir Ladha. “Many entrepreneurs do it because that’s the only piece of information they have. Having the right bookkeeping or the right information is vital for business health.”

When thinking about your company’s financial wellbeing, you also need to consider expenses, cash flow, and less tangible factors like branding or public perception.

How Do You Increase Profits and Revenue?

Easier said than done! But that is the task of running a small business. With planning and research, you can best chart a path to thrive financially. 

UPDATE: The PPP loan application period ended May 31, 2021. Apply for the Employee Retention Credit today through Lendio.

Lendio strives to provide you with the most current information as it relates to the Paycheck Protection Program, related SBA programs, and relevant regulations. The rules and regulations governing these programs are being regularly clarified by the SBA, and other agencies. In some cases, the provided guidance may directly conflict with other competing guidance, laws, rules, or regulations. Due to these changes, Lendio cannot guarantee that the information contained in this page reflects new changes or updates.

Lendio advises you to review the SBA guidelines and regulations on your own and determine your Company’s best approach to receiving SBA loans. Lendio urges you to consult your own attorneys, lawyers, and consultants to make the best decision possible. The information contained herein should not be construed as legal or tax advice, and should not be relied upon as such.

Many solo entrepreneurs and freelancers keep their personal and professional finances combined when they first start out. Any paycheck goes right into their personal bank accounts, and any expenses are charged to their personal credit cards. 

In the beginning, this is understandable. You might not know if your business is going to succeed—or you might start your business as a side hustle, so you don’t think you need a lot of infrastructure. 

However, as soon as your business is established, it’s important to separate your business and professional accounts. Here are a few reasons why—and how to do it. 

You Can File Your Taxes More Easily

Your business can deduct a variety of expenses throughout the year, but you need to keep track of these costs and ensure that they’re separate from your personal accounts. An easy way to do this: open a dedicated business account. You can charge expenses to a business credit card or write out checks that pull from your professional funds.

Once tax season comes along, you won’t have to remember what professional expenses you had. You can simply download your transactions from this account and determine which costs are tax-deductible. This simplifies and speeds up the process. 

You Can Create a Cushion to Keep Paying Yourself

Many freelancers or sole proprietors use their business bank accounts to stabilize their income throughout the year. They deposit all of their income into the business bank account and then withdraw a flat salary each month. 

For example, a contractor might make $7,000 in January and $3,000 in February. By pulling a flat salary, he can afford to pay himself $5,000 monthly (or $4,500 monthly with a cushion saved for later). 

Some people enjoy the stability of knowing they’ll get paid the same amount no matter what they earn. If the business account starts to get too big, these freelancers can award themselves end-of-quarter or end-of-year bonuses and enjoy the extra cash. 

You Can Budget Better

Not only can you enjoy a flat salary with separate personal and professional accounts, but you can also budget your expenses. You can easily see which charges are related to your business and plan for fluctuations throughout the year. 

A common example of these kinds of expenses is professional software subscriptions. A business owner might use a software tool as part of their workflow and pay an annual fee to license it. If the cost of this service is charged each February, the business owner can budget for it and ensure they have enough funds in the bank to prevent overdraft fees. 

You Can Develop Business Credit

If your business begins to do well, you’ll likely want to scale—which will probably require additional funding. To secure this working capital, especially from a lender, you’ll want to have established business credit.

When your personal and business finances are intertwined, you make it difficult to identify your business income and expenses, which are used to assess your business credit. By separating the 2, you can paint a clear picture of the financial health of your business—making it easier to determine your likelihood of defaulting on a loan.

3 Steps to Separate Your Business and Personal Finances

There are multiple ways to prove that your personal and professional finances are separate from each other. Many of these steps are free or affordable for small business owners. 

1. Establish a limited liability corporation (LLC), S-corp, or C-corp. This will give you an employer identification number (EIN) from the IRS to separate your personal and professional business dealings. Most states charge application fees to operate LLCs and require annual reports and payments to stay in operation. Learn what your state charges and budget for it. 
2. Open a business checking account. Once you have your corporation established and EIN generated, you can visit your bank or credit union to open a business checking account. If you already have an existing relationship with the bank, they may be able to waive any opening fees or monthly charges to operate the account. Some banks, however, set limits for how much you need to keep in the account to stay active and above the fee limit.  
3. Take out a business credit card. While you’re at the bank, ask about opening a business credit card attached to the account—some banks offer this as a perk for opening an account with them. You’ll only use this card for business purposes in order to keep your professional and personal costs completely separate. As an alternative for getting your bank’s credit card, look into business cards that offer competitive rewards systems, like cash back or airline miles.  

Once you have your business credit card, you can start to build up your business credit score. This shows that your business can stick to a budget and repay its liabilities in a timely manner.

As mentioned above, most lenders look at business credit when issuing loans, so you may qualify for more favorable terms if you take the time to build up your credit when just starting out. If you lack business credit, then lenders might look at your personal credit scores as well to determine how risky it is to loan money to you. 

Like personal credit, it takes time to build up business credit, so the earlier you start, the better.  

Take Steps to Separate Your Personal and Professional Finances

Even if your business is brand-new, there are steps you can take to keep your personal and professional accounts separate. Start with good documentation and budgeting and then establish a specific bank account and credit process for your business. 

Finally, look into bookkeeping software to invoice customers and record income as it comes in. At Lendio, we offer a free self-service tool for small business owners. This is a great place to set up your ledgers and prepare your business for growth.

The IRS distinguishes different business entities (or statuses) for companies of various sizes and types. The smallest of these entities is the sole proprietorship or a company that is only run by a single person. Learn more about sole proprietorship by reading below.

What Constitutes a Sole Proprietorship? 

A sole proprietorship refers to a person who earns money throughout the year that doesn’t come from investments or income from working at a traditional company. Sole proprietors can also call themselves solopreneurs, self-employed individuals, contractors, and freelancers. 

Do You Have to Fill Out Paperwork to Become a Sole Proprietor?

No. Anyone can start a business as a sole proprietor without registering with the state they live in. However, this does not exempt them from other licensing and education requirements to operate the business. For example, a hairstylist could work as a sole proprietor but would still need a license to cut hair in the state. 

How Do Sole Proprietors Pay Taxes?  

Traditional employers take out a portion of your income to cover federal taxes like Medicare and Social Security. The employee pays half of the required amount, and the employer covers the second half. However, sole proprietors need to pay their taxes on their own. They can directly pay the IRS through quarterly estimated taxes by writing a check or paying online. 

Sole proprietors are responsible for paying both the employer and employee side of federal taxes. However, they can then deduct this income from their taxes when they file each year. 

What Are the Risks of Sole Proprietorship?

There are a few risks with opting for a sole proprietorship over an LLC (limited liability company). The main risk is that your personal and professional accounts can be linked. 

This means if a customer or vendor sues you, they can go after your personal assets like your home and car. An LLC can protect you, but you need to apply for the status and pay annual fees to your state.  

What Are the Benefits of a Sole Proprietorship?

Sole proprietorships are one of the most flexible business entity options out there. You do not have to file paperwork to become an LLC, and you don’t have to answer to shareholders and other owners like a corporation or partnership. Furthermore, all of the profits are yours. 

However, all of the risks and decisions also fall on you. You will need to secure funding, acquire clients, and do the work (except for outside contractors that you work with). If this burden seems too much, consider forming a partnership with another person instead. 

Start Your Business With Organized Books

If you have an exciting business idea, consider becoming a sole proprietor where you can take on a few customers and grow your brand over time. Starting as a sole proprietor can help you decide how to develop your career. 

In the meantime, check out the free tools offered by Lendio to better organize your invoices, expenses, and other ledger items for good bookkeeping within your business.