7 Ways to Boost Cash Flow

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A successful business is all about the bottom line — are you profitable or are you losing money?

For many businesses, this can be tough at the start. Imagine starting a business, for example. Leasing a space, filling it with furniture, buying equipment and hiring staff all costs a lot of money. And cash doesn’t always come in the second you open the doors.

It’s a frustrating reality when you know you’re on the way to bringing in revenue down the line but you have to sustain your business until that happens. In fact, even established businesses can have cash flow issues.

There’s an answer to your problem — boosting cash flow

Having more cash on hand by using targeted strategies to boost cash flow helps keep a company afloat until it starts turning over more significant profits and paying for itself.

To increase cash flow, you have to find the right balance between spending, cost-cutting and other factors that contribute to the bottom line. PayPie understands that can be difficult to do without a little help or the right tools.

Seven proven methods to boost cash flow

These tactics have successfully helped others bring in cash in the past and can help secure your business’s future.

1. Know your options

Some ways to boost cash flow are intuitive, or they’re otherwise easy to discern on your own. If you’re a newbie, though, you might be better off with a helping hand as you endeavor to increase the liquid assets you have on hand. You can rely on a short-term lender or use software to highlight the areas in which you can cut spending.

For example, you might be able to take advantage of invoice factoring. This short-term lending option will have a factor pay you a percentage of an invoice. Then, they make it their mission to gather any outstanding payments. They keep a percentage, then give the remainder to you. Their initial payment provides you with the cash you need as does their follow-up on the initial invoice.

A cash flow forecasting tool helps you see the patterns in how the money is flowing in and out of your business. It highlights the areas that are draining your business’s cash flow and pinpoints where the cash is coming in — telling you where you can focus your efforts to increase your bottom line even more.

Learn More: How to Read a Cash Flow Statement.

2. Sell unused equipment and inventory

The trick to understanding how to boost cash flow is to be extremely critical with every aspect of your business. For starters, take a look at your inventory. Anything you have left over that won’t be used in the next year should be sold as soon as possible — that is, unless you won’t incur any costs from keeping it that long.

Equipment should also be scrutinized. Outdated machinery or technology you no longer use can bring in a good chunk of change. Plus, getting rid of something that’s taking up space can free up square footage for a more updated piece of machinery. This can serve to boost your business’s productivity. Selling the old model can also bring in the cash you need to buy a newer version.

3. Take bigger deposits

Chances are good your company already requires a deposit for custom orders, large orders or with new customers. Without that guarantee, the client could back out, leaving you with highly customized items or a surplus of products that you’ll have a hard time selling to others.

With that in mind, evaluate how much you require as a down payment before you begin working. You can justifiably ask for half the cost of the total project before you start — if you do not require that much now, hike your commission rate. Not only will it increase your cash flow, but it’ll also ensure clients are serious about paying you when the project’s complete. They will want a return on their investment, after all.

4. Lease — for now

It might seem counterintuitive to lease since you know leasing means you’ll end up paying more for your space or your supplies in the long run. However, you shouldn’t buy things outright when cash is tight. Instead, see if you can lease your workspace or the equipment you need to make your business a reality. That’ll give you more cash to use for day-to-day expenses and, once you’re running productively, you can invest more cash to buy the items you need.

Learn More: Cash Flow Basics — Key Concepts and Terms.

5. Scrutinize payment terms

You have money coming in and going out — how much time is there between these two events? Another way to boost cash flow is to evaluate the terms you share with your suppliers as well as your customers. If you’re required to pay the former within 20 days, but your customers have 30 days to pay for your services, then you have a considerable amount of time in which you’re reliant on your own cash.

You might want to reconsider the terms of payment with either end of your production process. Reaching out to new suppliers might help you find a bigger window for repayment. You might also see an even cheaper option that makes it easier for you to float between spending and receiving cash from customers.

Of course, your pre-existing supplier might be willing to negotiate with you, too. As long as they know you’re going to be a client for a considerable amount of time. Just make sure you’re smart about these discussions — take your time to find the right balance between your needs and your supplier’s needs. To that end, your clients might have to start paying for your services sooner to make the time between payments a bit easier on you.

6. Incentivize and penalize

In a similar vein, you might want to find ways to encourage customers to pay you ahead of schedule. On the one hand, you can come up with an incentive for them to pay early. A small discount is unlikely to hurt your bottom line, but it could make a big difference to clients. Knowing they’ll get this percentage off their bill will probably be enough to inspire them to get their payments in on time, thus putting cash in your pocket ASAP.

You might also consider implementing a penalty for customers who are routinely late with their payments. Adding interest to a standing debt, for example, will spur them to pay you back with haste. When they do, you’ll at least receive a little extra for your trouble.

7. Re-evaluate your prices

Selecting the proper price for your products is a delicate balance. Larger companies have their own tricks for doing it, but you might’ve gone with a simpler strategy — a number just enough to turn a profit, for example.

Unfortunately, undervaluing your products reduces the cash you receive per purchase, and it also makes your creation seem less valuable than it is. Customers and clients won’t take you seriously. If your number is too high, you won’t be considered, either. Instead, you’ll be lost in the fray to competitors who have chosen a better price for their products.

Don’t be afraid to adjust prices to boost cash flow. For example, slightly increasing prices won’t push customers away, but it will give you more money and add perceived value to your products.

Read More: Cash Flow Problems: 6 Top Causes.

Keep it flowing

No matter how great your business idea is, you need cash to keep it going. Implement any one of these tactics to boost cash flow and guide your business through any cash shortages.

You can also enlist the help of PayPie’s free cash flow forecasting to personalize your path to a healthy cash flow. No matter which avenue you choose, you, your customers and your investors will be glad you did.

PayPie currently integrates with QuickBooks Online to access the cash flow forecasting and risk scoring tools. Additional integrations are coming soon.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

Short-Term vs Long-Term Business Financing

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You need to find a solution for financing your small business. A momentary sense of panic hits. Whether it’s for a growth opportunity or a short-term cash infusion to cover expenses, it’s normal to feel overwhelmed or anxious as you approach the borrowing process.

Navigating the lending landscape can be daunting — but it doesn’t have to be this way. With a basic understanding — starting with the difference between short-term vs long-term business financing — you can move forward with greater confidence.

Short-term vs long-term business financing

As their names imply, the primary difference between short-term and long-term business financing is how long you have to pay back the loan. Typically, long-term lending options are paid back over a number of years, while short-term lending options are paid back over a period of months or as little as two years.

Your choice of short-term vs long-term financing will also be determined by:

  • The amount you need to borrow.
  • How quickly you need the funds.
  • The type of lender you’ll borrow from.
  • The type of collateral you’ll provide.
  • Your business’ overall financial health.

From 2015 - 2017, nearly 42 % of small businesses used short-term financing to borrow $10,000 - $50,000.

Short-term vs long-term business financing amounts

Short-term business financing options are for smaller amounts while long-term financing options are for larger amounts. Because short-term financing is for smaller amounts, you pay them back more quickly at a higher interest rate and there’s a shorter approval process. As long-term business financing options are for larger amounts, there’s a longer, more rigorous approval process and it takes more time to pay them back. However, the interest rate is lower than with a short-term loan.

The figures vary, but a rough estimate is that short-term lending amounts are less than $250,000. Long-term lending amounts are in the $500,000 range.

Learn More: How to Read a Cash Flow Statement.

Short-term vs long-term business financing sources

As you’d expect, brick-and-mortar banks are the most common source for long-term business financing. If you’re looking for a traditional short-term “term loan” where you complete a detailed application, including documentation to prove that you repay that amount, you can also go through a large or small bank. (Think sitting across from someone in a business suit.)

However, the market for short-term financial lending has grown rapidly. As a result, businesses can choose from a range of short-term lending options. Again, this doesn’t exclude banks. It simply expands your range of options to include online lenders, with quick approval times and other short-term financing options you may not be aware of. (Plus, no business suits.)  

According to a recent study, from 2015 to 2017 the amount of small business online lending activity increased 50% — representing $10 billion in financing. The same study found that approximately 42 % of small businesses borrowed between $10,000 and $50,000 with the average being $55,498.

online business financing infographic
(PRNewsfoto/ETA)

Traditional short-term business financing options

If you’re not sure you want a traditional term loan, you can also look into a business line of credit as a short-term financing option. A line of credit is different than a loan as it sets up a pre-determined amount that you can draw from whenever you need. A business credit card is also another more traditional short-term business financing option.

Because loans, lines of credit and credit cards are the road more traveled, they also require a more in-depth application process and proof of a stable payment and financial history. In other words, your business has to have a solid credit history and financial track record.

Your payment history for loans, lines of credit and credit cards will also be recorded in your credit history. As will any applications for these forms of financing.

Read More: What’s a Business Credit Report?

Not-so-traditional short-term business financing options

While invoice factoring and invoice financing have both been around since the first bazaars opened in ancient Mesopotamia, many businesses owners don’t even know these options exist.

Invoice factoring and financing let businesses who have incoming cash flow tied up in outstanding invoices use these invoices to access short-term funding quickly and easily. While banks don’t offer this type of asset-based financing, online lenders do. In fact, this type of lending is now a multi-trillion-dollar industry.

Similar to invoice-based lending, there are similarly structured short-term financing options that let businesses use their inventory or retail sales as collateral. (A little research can take you a long way in identifying your options.)

Benefits of online short-term business financing

With online financing, such as invoice factoring, businesses don’t have to go through a lengthy application process as they would with a traditional lender. The primary criteria are the invoice, the customer’s payment history and the business’ risk profile.

As a result, the approval process is much quicker and once the business has established a relationship with the lender, the turnaround times can be even faster.

What’s the Difference: Invoice Factoring vs Invoice Financing.

Online lenders and asset-based financing

Online lenders are also more familiar with small businesses. They understand that there are ups and downs with a business’ cash flow and are more willing to work with newer businesses and businesses experiencing cash flow crisis.

Unlike traditional loans, lines of credit and credit cards, when you use asset-based lending, there’s no impact on your business credit history. Online lenders don’t use the traditional credit rating bureaus, nor do they report to them. The relationship you form is with your lender only.

A short-term vs long-term business financing must-know:
How technology can help you manage your cash flow

At PayPie we’re laying the groundwork to bring small to medium-sized enterprises (SMEs) access to affordable funding. First, we’ve developed insightful tools like our free cash flow forecasting that includes a proprietary risk score.

Each report gives a business insights and analysis into how its cash is flowing in and out of their business. In turn, the risk score is an assessment of how other businesses and lenders view your business in terms of establishing financial relationships.

This service is available — free of charge – for any QuickBooks Online user. All you have to do is create a PayPie account, connect your QBO account and run your report. (Integrations with other accounting applications are coming soon.)

We’re working with regulatory authorities to ensure that our invoice factoring will meet all legal and business standards. To find out when this service will be available, register here.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

Invoice Factoring vs Invoice Financing

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Invoice factoring vs invoice financing. What’s the difference and why do these lending options exist in the first place? But, first, does this story sound familiar?

At your business, orders are coming in at a consistent pace and you expect payment on a large invoice from one of your most reliable customers in a week or two. Your customer is a little bit late paying you, but you can trust them. The problem is, you have to pay your employees in a few days and you’re a little low on cash.

Thanks to technology and innovators, like PayPie, who’ve realized the inherent need for better short-term lending options for small businesses, your outstanding invoices are assets that can be used to get the funding you so desperately need.

24% of SMEs now turn to alternative small business financing, like invoice factoring and invoice financing

Read More: Why You Should Separate Business and Personal Finances. 

It’s hard for SMEs to find short-term business financing

According to the 2017 Small Business Credit Survey, some of the most common financial challenges many small businesses face are funding short-term operational costs, like wages, buying the materials needed to fill a large purchase order or just paying the bills.

The problem: Traditional brick-and-mortar banks aren’t really set up to handle this kind of short-term lending designed to solve a cash flow crunch. Bank are averse to risk and lower collateral levels, requiring more than the promise of a paid invoice. The approval process slower and less certain, which is also why less than half of all SMEs seek business financing from either large or small banks.

The solution: 24% of SMEs now turn to alternative small business financing, like invoice factoring and invoice financing, from online lenders who offer these options. For many of these businesses, these options are the answer to their cash flow crisis.

Invoice factoring vs invoice financing? They are both good options when you’re in a pinch and you need cash to meet your day-to-day responsibilities.

How SMEs are turning unpaid invoices into cash more quickly

Manufacturers, wholesalers, retailers, distributors and service-based businesses often have a lot of operational cash flow tied up in unpaid invoices (accounts receivables).

Either through payment terms, timing, lateness or other factors, the cycle of cash coming into the company gets out of sync with the timing of expenses, like payroll, rent, utilities and the cost of materials.

Both invoice factoring and invoice financing were developed as solutions these kinds of short-term cash flow problems.

Many SMEs need better short-term options to fund wages, purchase materials or just pay the bills

Invoice factoring vs invoice financing: What they are  

Invoice factoring and financing are two forms of asset-based lending. In both cases, the assets you’re leveraging are your unpaid invoices. The main difference is who collects the final payment from the customer.

With invoice factoring (accounts receivable factoring), the lender (factor) purchases your invoice by paying you a percentage of the outstanding amount (invoice discounting). The factor then handles the process of collecting the invoice payment. Once the customer pays the factor, the remaining amount is factored back to you — minus any fees and a set percentage for the transaction.

With invoice financing, your invoice is the collateral and the lender pays you a percentage of the invoice. In this case, you handle getting payment from your customer. Once your customer pays you, you pay the lender back — with fees and interest included. Depending on your arrangement with the lender, you may receive a final cash sum once you pass along your repayment.

The factoring industry, including both invoice factoring and invoice financing, is a $3 trillion business

Read More: Cash Flow 101. 

How the fees and percentages are determined for invoice factoring and invoice financing

When you research choosing invoice factoring vs invoice financing, you’ll see a range of percentages and rates for processing fees.

The lender sets the processing fee. The percentage you’ll receive from your invoice is a function of the size of the invoice and how the lender views your business and your customer’s business in terms of risk.

The better your business’ financial health and risk profile, the higher percentage you’ll receive when either factoring or financing your invoices.

Invoice factoring vs invoice financing: How the difference affects your business

Because the factor takes over the burden of collecting payment, invoice factoring can really help small businesses that simply don’t have the time to chase down outstanding invoices.

The counterpoint is that your customers may find out that you’re using a factoring service when they’re contacted for collections.

If you prefer to keep control over your collections processes, you may opt for invoice financing over invoice factoring.

Invoice factoring vs invoice financing: How do you choose?

The choice always comes back to what’s right for your business. It’s possible that your customers may not be bothered by invoice factoring if you take the time to communicate with them in advance of factoring the invoice.

But, maybe you just prefer to be the one to control the collections. Or, maybe the lender you prefer only offers one or the other. In the end, it’s all about your personal comfort level.

The benefits of invoice factoring and financing

The approval process for both invoice factoring and invoice financing is faster and friendlier. This is especially helpful for new businesses with only a few years of financial history, businesses who need cash quickly and those who don’t want to gather every form of documentation since the stone age.

Unlike traditional loans that have multiple payments structured in regular intervals spread over several months or years, with invoice factoring and invoice financing you only pay the fees once per invoice. There are also only two payments: You get the bulk of your cash when the invoice is factored or financed and the remaining balance when the invoice is paid.

Learn More: How to Read a Cash Flow Statement.

How long have invoice factoring and invoice financing been around?

As long as there have been businesses supplying services, goods and materials, there have been businesses waiting to be paid.

In fact, asset-based financing dates back to early Mesopotamia during King Hammurabi’s time. This kind of short-term business lending helped fuel the textile industry during the industrial revolution. Asset-based lending continued to gain traction in modern economies as traditional lending models tightened.

Today, the factoring industry, including both invoice factoring and invoice financing, is a $3 trillion business.

What’s next for asset-based lending?

That’s where PayPie comes in. We will transform the way businesses and lenders connect by using blockchain technology to securely and easily trade information. A single ledger technology, blockchain is a way for businesses and lenders to share the same information in near real-time.

As we’re laying the groundwork for our business financing opportunities, we’re also providing sophisticated cash flow forecasting and risk assessment that gives each business a better idea of where they stand in terms of cash flow. (Click here to be notified when our financing solutions are available.)

Get your free cash flow forecast

Our insights and analysis are free. Your dynamic report will give you all the charts and graphs you need to understand the crucial elements affecting your cash flow. It will also contain a proprietary risk score showing how potential lenders might evaluate your business in comparison to others.

If you’re a QuickBooks Online user, all you have to do is sign up for PayPie then connect your account. (Future accounting platform integrations are coming soon.)


PayPie Cash Flow Forecast Example

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

 

Cash Flow Problems: 6 Top Causes

cash flow problems top causes

Many small businesses are only one late invoice away from a cash flow crisis. They face serious risks of losing everything they’ve worked so hard to build. One of the biggest reasons small businesses fail is due to cash flow problems.

Time and again, study after study shows that when a business fails, it’s due to poor cash flow. Twenty-two percent of small businesses say that cash flow is a challenge. That’s a pretty sobering thought.

Cash flow has the biggest impact out of almost anything else you can imagine. Fortunately, there are certain factors that lead to cash flow issues or a cash flow crisis. Knowing these factors lets you better protect your business.

This is the reason why PayPie wanted to provide you with six of the top causes of cash flow problems you’ll want to avoid.

Read More: Reporting, Cash Flow and Your Business’ Financial Health.

1. Lack of an Emergency Fund

No matter what type of business you run, there will be times when business booms. There will also be times when business stutters. When cash flows in, set some of the profit aside in an emergency fund.

You never know what life might throw your way, so having enough funds to cover a catastrophe is smart. If you’re one late invoice from failing — imagine the relief of having an emergency fund during to respond to unexpected cash flow problems.

Ideally, you should start your business with enough funds in place to cover emergencies, unexpected expenses and cash flow issues. However, if you’re already in business, you might not have planned for such a fund. In this case, throw every extra bit of money you can into your emergency fund until you have enough to cover any major issue.

2. Poor Invoicing Practices

Keep cash flowing into your business by invoicing on a schedule and following up on unpaid invoices. Most business people become so busy building their businesses they let paperwork fall behind, which can lead to cash flow problems.

If you don’t invoice your customers, they aren’t likely to pay you. Even if you have invoiced them, you may need to follow up. Remember they are busy, too.

You may also want to run a quick credit check on new clients. If they have poor credit, request at least a portion of the payment up front and as the work is completed. If you can’t keep up with invoicing, try investing in a virtual assistant to keep up on such matters for you. Online software also allows you to automate invoicing and reminders for unpaid invoices.

3. Unsynced Credit Terms

When setting up the credit terms for your customers, you also need to look at the credit terms from your suppliers. If your suppliers offer net-30 and you offer your customers net-60, you’ll likely encounter cash flow issues. Net-days can translate to nearly any number. Some suppliers only offer 15 days  (net-15), for example. Seek suppliers with the most generous net-days terms you can find.

Take the time to study your books and discover what terms each of your suppliers offer. Your terms to your customers should be less than the shortest payment time to your suppliers. This gives you some room in case your customer pays a bit late. The last thing you want is to owe your supplier well before your customer owes you.

A free cash flow forecast from PayPie will also give you insights into your accounts receivable cycle. Armed with this information, you can help anticipate and prevent a future cash flow crisis.

4. Growing Pains

Growing at a rapid pace is something every business owner dreams of. Then it happens, and you realize you don’t have the funds to supply that growth. Imagine a scenario where you’re mentioned by a social media influencer.

You suddenly have 100 new customers you didn’t have last month. Where does the money come from to buy the goods to supply those customers or pay the employees to provide a service?

When you gain an influx of new customers all at once, you then have to supply those customers. But, you haven’t been paid by them yet.

One way to avoid this is to change your terms before the growth hits. Ask for at least some payment up front before you send items to customers or begin work. Make sure it is enough to cover your expenses. When the customer pays the remainder of the invoice, you’ll get your profit. It’s easier to wait on profit than to hit negative numbers on the books.

Read More: Cash Flow Forecasting: What You Need to Know.

5. Not Monitoring Expenses

Over time, expenses creep in that you might not have budgeted for. Perhaps a supplier raises their prices, and you’re too busy to seek a new supplier. Perhaps your monthly rent goes up, and it’s too much work to move to a new location.

Whatever the cause of these creeping costs, if you don’t monitor them closely, the resulting cash flow problems can potentially overtake your business.

At least once per quarter, take the time to sit down and review your costs. Look at wages, supplier costs, rent and even things such as utilities. Where can you cut down on the costs or implement policies to reduce expenses?

6. Not Planning for Seasonal Fluctuations

Every business on the planet has slow seasons. For retail establishments, this is traditionally January and February. For other industries, it might be the winter months or the summer months or anything in between. Not planning for these fluctuations leaves you with unneeded inventory and lack of funding.

Don’t wait for the fluctuations to cause cash flow problems. Plan ahead. If you know that winter is slow for your business, then cut back on inventory the month or two before the slow season hits. Plan promotions ahead to up your income during these months, or use the time to travel to trade shows and drum up new business and clients.

Cash Flow Woes

Almost every business experiences cash flow problems at some point. Knowing the causes of cash flow issues allows you to avoid the inevitable pitfalls. With a little pre-planning and a lot of organization, your business will run like a well-oiled machine.

Instead of stunting your growth or killing your business entirely, overcoming a cash flow crisis gives a competitive edge by realizing the value of having plans in place.

Wondering just how much cash flow you need to keep your business healthy and thriving? PayPie offers cash flow forecasting.*

Get a free cash flow forecast today and get a handle on problem areas before they become a financial crisis.

We’d personally like to thank Sarah Landrum of Punched Clocks for contributing this post.

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Best Business Credit Cards in Canada [Checklist Included]

Best Business Credit Cards in Canada

This article details the best business credit cards in Canada. To see the best business credit cards in the United States, click here.

Looking for a credit card for your business? The research process for finding the best business credit cards in Canada can be a bit like one of those logic problems where the farmer plants a tree in a field, but you have to figure out how many apples are in the barn and which farmer owns a cow. (Don’t panic, we’re here to help. And we promise: There’s no quiz at the end.)

With higher limits than personal credit cards, business credit cards help small and medium-sized enterprises (SMEs) free up cash flow by delaying payment on day-to-day expenses until a set point each month. For the average business trying to make ends meet on operational cash flow alone, this is a fairly significant benefit.

Business credit cards also help build a business credit history and they streamline expense tracking. Depending on your business, the rewards programs can also provide added perks. But, how do you know which credit card is the right one for your business?

What are the best business credit cards in Canada?

At PayPie, we wanted to know, too. So, we started by visiting the three review pages that topped our search results for the best business credit cards in Canada:

We also asked our CEO, Nick Chandi for his thoughts on choosing the best business credit card. He said:

“Best is subjective. There’s no single make or break variable. Some business owners may want travel rewards. Others, like myself, prefer cash back. It’s a matter of what’s best for each business.”

(We knew you’d pick the money, Nick.)

Read more: The 10 best businesses for cash flow. 

The top three business credit card brands in Canada

After comparing the tables from each of the sites above, we found that brand-wise, the top three business credit card in Canada are American Express®, Mastercard® and Visa®. In most cases, American Express offers its cards directly, while Mastercard and Visa are available through several Canadian banks.

How do the best business credit cards in Canada compare against each other?

The best ways to show a comparison is to create a table, which is exactly what we did. We took the best business credit cards in Canada from each of the top comparison sites and compiled them into this table.

Table: The best business credit cards in Canada

Our table comparing the best business credit cards in Canada is organized alphabetically by brand. It includes links to each brand’s or issuer’s main website as well as links to details for each individual card.

There’s a lot to compare and consider when choosing a credit card for your business. This is why we’ve also created a checklist with questions to ask and variables to consider. You’ll find it right below the table.

American Express®

Business Gold Reward Card

Card Type: Charge card (Balance must be paid in full each month.)

Rewards: 1 point for every $1 in purchases and 1 extra point for every $1 in eligible purchases from your choice of 3 participating vendors.

Employee Cards: $50 each

Interest: 30% annual interest rate for balances not paid in full.

Annual Fee: $250

Welcome Offer: 30,000 points with $5,000 in purchases in the first 3 months.

Business Platinum Card

Card Type: Charge card (Balance must be paid in full each month.)

Rewards: 1.25 points for every $1 in purchases.

Employee Cards: $199 each

Interest: 30% annual interest rate for balances not paid in full. | 55-day grace period.

Annual Fee: $499

Welcome Offer: 40,000 points with $5,000 in purchases in the first 3 months.

AIR MILES® for Business

Card Type: Charge card (Balance must be paid in full each month.)

Rewards: Earn 1 mile for every $10 in purchases from participating vendors and 1 mile for every $15 in other purchases.

Employee Cards: $50 each

Interest: 30% annual interest rate for balances not paid in full.

Annual Fee: $180

Welcome Offer: 2,000 miles with $5,000 in purchases in the first 3 months.

AIR MILES® Gold

Card Type: Credit card

Rewards: 1 mile for every $15 in purchases from participating vendors and 1 mile for every $20 in other purchases.

Employee Cards: Free (Misuse protection not included.)

Interest: Purchases 19.99% | Advances 22.99% | Missed payments 23.99% and/or 26.99%.

Annual Fee: None

Welcome Offer: 150 miles with $1,000 in purchases in the first 3 months.

Mastercard®

BMO®

Rewards® Business Mastercard®

Card Type: Credit Card

Rewards: 3 points for every $1 you spend on gas, office supplies and cell phone/internet bill payments. Earn 1.5 points for other expenses.

Employee Cards: Free

Interest: Purchases 14.99% | Cash advances 22.99% | 25-day grace period.

Annual Fee: $120

Welcome Offer: 35,000 points after you spend $5,000 in the first 3 months. Plus, no annual fee for 1 year.

AIR MILES® Business Mastercard®

Card Type: Credit Card

Rewards: 1 mile for every $10 in purchases and 1.5 miles for every $1 spent at Shell®.

Employee Cards: Free

Interest: Purchases 19.99% | Cash advances 22.99% | 25-day grace period.

Annual Fee: $120

Welcome Offer: Up to 3,000 miles after you spend $5,000 in the first 3 months. Plus, no annual fee for 1 year.

CashBack® Business Mastercard®

Card Type: Credit Card

Rewards: 1.5% cash back on eligible gas stations, office supplies purchases and on your cell phone and internet recurring payments. | 1.75% cash back at Shell®. | .75% cash back on other purchases.

Employee Cards: Free

Interest: Purchases 19.99% | Cash advances 22.99%. | 25-day grace period.

Annual Fee: None

Welcome Offer: 6% cash back on gas, office supplies and cell phone/internet bills for 4 months.

AIR MILES® No-Fee Business Mastercard®

Card Type: Credit Card

Rewards: 1 mile for every $20 in purchases and 1.25 miles for every $1 spent at Shell®.

Employee Cards: Free

Interest: Purchases 19.99% | Cash advances 22.99% | 25-day grace period.

Annual Fee: None

Welcome Offer: 500 bonus miles after the first purchase.

RBC

Business Cash Back Mastercard®

Card Type: Credit Card

Rewards: 1% cash back on eligible purchases. | Save 3¢/L on fuel and earn 20% more Petro-Points at Petro-Canada locations.

Employee Cards: Free

Interest: Purchases 19.99%

Annual Fee: None

Welcome Bonus: 2% cash back on eligible purchases for the first 3 months.

Visa®

CIBC

bizline® VISA® Card

Card Type: Credit Card

Rewards: None | Selling Point: Up to $50,000 credit limit.

Employee Cards: Free

Interest: Between CIBC Prime Rate +1.5% and Prime Rate +13%.

Annual Fee: None

Welcome Offer: None

RBC

VISA® Business Card

Card Type: Credit Card

Rewards: None | Save 3¢/L on fuel and earn 20% more Petro-Points at Petro-Canada locations.

Employee Cards: $12

Interest Rate: Purchases 19.99%

Annual Fee: $12

Welcome Offer: None

Scotiabank

VISA® Business Card

Card Type: Credit Card

Rewards: 1% cash back on all eligible purchases.

Employee Cards: Free

Interest: Purchases 22.99% | Cash advances 22.99%

Annual Fee: Silver card $75 | Gold card $105

Welcome Offer: None

Read More: What’s a Business Credit Report?

Choosing the best business credit card

When you visit the comparison sites and the credit card sites themselves, you’ll find that you get bits and pieces of information on the best business credit cards in Canada.

Once you identify your best choices, contact the credit card company and get answers to all your questions. Make sure you know exactly what you’re committing to and if it’s the right fit for your business.

Getting your questions answered will also give you a chance to experience the provider’s level of customer service. And — as a final step — don’t forget to do the math.

While we’ve found some of the best business credit cards in Canada, what really matters is finding the one that’s best for your business.

Checklist: Choosing a business credit card in Canada

According to the Forbes Coaches Council, asking questions represents a growth mindset. And, seriously, how else are you going ensure you understand exactly how your business credit card works? As promised, here’s our checklist:

Read More: A real-life cash flow case study.

Do you need a business charge card or credit card?

While a charge card has no pre-set limit, it won’t let you carry a balance from one month to the next and the interest for unpaid balances is high.  Purchases are reviewed based on your spending and payment patterns. (It’s not a blank cheque.)

A credit card has a set limit, but it also gives you the flexibility to carry a balance when needed. However, you’ll pay interest on the outstanding amount.

Note: If you already know that you’re likely to carry a balance, consider the interest rate you’ll be paying. This might either lower or outweigh the value of the rewards.

Will you need employee cards?

All of the cards listed offer employee cards. The difference is whether or not there’s a fee for each card. Another question to ask is if the employee cards include misuse protection.

The information for the American Express® AIR MILES® Gold Card made specific note of this exclusion. There’s always a reason for this kind of thing. It doesn’t hurt to ask why.

Do you want a rewards program?

Air miles, cash back and reward points are the main choices available. If you don’t want a reward program at all, the CIBC Bizline® VISA® is your card.

It’s hard to beat cash as a reward. Just make sure you understand how the program works and if there are annual maximums for your main and employee accounts.

If travel is a regular requirement, air miles might be a good fit. Some providers will let you roll over your miles into other travel programs, so check if this is a possibility.

If simple reward points are your gig, make sure you know when and where you can redeem them If you have company vehicles, a few of the MasterCard® options had alliances with specific gas stations.

If you’re considering a cash back program, find out if you have to use a specific gas station or if any gas purchase qualifies as a business purchase.

Is there an annual fee?

Each of the top three brands of the best business credit cards in Canada has cards with and without annual fees. Find out if these fees ever increase and, if so, has this happened recently in the pasts few years?

Both BMO® Rewards® and AIR MILES® Business Mastercards® wave the annual fee for the first year through introductory offers.

Among the cards listed, there’s no clear correlation between the annual fee and the interest rate or reward program

One thing to consider — in most instances, your annual credit card fee can be claimed as a business tax deduction. Interest fees can be claimed as well, but why pay extra when you don’t need to? It’s a cost-benefit sort of thing.

What’s the interest rate?

Make sure you know and understand what interest rate you’ll pay. Verify if there are different rates for specific activities, like cash advances or late payments.

If you’re given an introductory rate, find out how long this rate will be valid and when it’ll change. Ask how often the rates change and how you’ll be notified of rate increases.

Where is your business credit card accepted or not accepted?

One of the main benefits of having a business credit card is so that you can charge all of your expenses to the same account. If your business makes regular purchases from retailers or wholesalers, make sure the brand of business card you choose is accepted at those establishments.

What information do you need to apply?

According to Ratehub, you’ll need to provide proof that your business is valid business through documents including your articles of incorporation, business license, tax assessments or financial statements.

How long is the application process?

If you’re applying for your business credit card in anticipation of making a large purchase or using it to boost cash flow, you need to know the timeline. All the business credit card sites promote a quick approval process. But, as you know all too well, there’s never a one-size-fits-all solution.

Read More: Separating Business and Personal Finances.

The final step: Doing the math

You asked your questions, you’ve got all the variables. Now you need to do the math to determine which of the best business credit cards in Canada is best for you. This example from the Financial Consumer Agency of Canada (FCAC) shows you how it’s done. (Note: It also assumes you don’t use your card again until the balance is paid.)

Step 1 — Calculate your average owing balance or for simplicity, pick a rounded number and estimate. For this example, we’ll use $4,000.

Step 2 — Take your top credit card choices and run the numbers.

Example # 1 — Comparing business credit cards based on interest rates

In this example, we’ll pick two basic credit cards with no rewards programs. All we’ll look at is interest. While one card has a fee and the other doesn’t, the difference in interest rates is enough to offset any discussion of an annual fee.

Card # 1 — CIBC bizline® VISA® Card — no annual fee or rewards

$4,000 X 14.99% = $599.60 in interest

(At the time of publishing this article, the CIBC prime rate is 3.7%. If you add 13%, you get 16.7%. As that’s a worst-case scenario, we picked the lowest interest rate on our table 14.99% for estimation.)

Card # 2 — RBC VISA® Business Card — $12 annual fee, no rewards

$4,000 X 19.99% = $799.60 in interest, even without the fee.

$799.60 + $12 = $811.60 with the fee.

The winner — CIBC bizline® VISA® Card based on interest rates alone.

Example #2— Factoring in rewards, annual fees and welcome offers  

In this example, we’ve picked two BMO® Mastercards® — each with the same interest rate. Because of this, the value of the rewards programs and the annual fee will be the determining factors. Additionally, both cards have welcome offers, which are also taken into consideration.

Card # 1 — BMO® AIR MILES® Business Mastercard® — $120 annual fee | rewards miles program

$4,000 X 19.99% = $799.60 in interest

Miles = 1 for every $10

Using their calculator, if you spent $4,000 each month, in a year you’d earn 7,800 points. This is enough for a trip from Yellowknife to Maui or a high-end coffee maker. (With the welcome offer, you get $3,000 miles, so maybe you can get a milk frother to go with the coffee maker or fly from Vancouver to Maui.)

During the first year with no annual fee: $799.60 in interest

After the first year with an annual fee: $799.60 + $120 annual fee = $919.60 in interest and fees

Card # 2 — BMO® CashBack® Business Mastercard® — No annual fee | cash back program

$4,000 X 19.99% = $799.60 in interest

Cash back = 1.5% on eligible purchases (6.0% for the first 4 months), 1.75% at Shell® and .75% on other purchases

($3,000 X 6.0%) + ($500 X 1.75%) + ($500 X .75%) = $180 + $8.75 + $3.75 = $57.50 cash back

(After the 6.0% intro offer expires, the rate resets to 1.5%, which equals $45 when you have $3,000 in eligible purchases.)

During the welcome offer: $799.60 – $192.50 = $607.10

After the welcome offer expires: $799.60 – $55.50 = $744.10

The winner — BMO® CashBack® Business Mastercard® hands down — even when the annual fee is waived for a year on the other card.

(Now we really know where Nick was coming from in choosing cash back.)

Our Pick: The Best Business Credit Card in Canada

Our verdict is [insert drumroll]… the BMO® CashBack Business Mastercard®. Of all the reward formats, cash is the most universal. After all, a dollar equals a dollar. Point-based rewards have to be redeemed at specific locations and saving up miles is its own ball of wax.

Of the three cash back cards on our list, this one beat out the others because it had the highest rate of return — 1.5% on eligible purchases. It had the best welcome offer along with no annual fee (ever) and it’s the only cash back card with a 25-day grace period (perfect for those months when your cash flow doesn’t flow quite as expected).

Purchases and expenses are only part of your cash flow story

While a business credit card is a tool that can help you control how you track purchases and when you pay for expenses, it’s really just one piece in the puzzle.

A credit card statement only tells you what you’ve spent, it doesn’t give you any information on when you’ve been paid. A cash flow forecast puts all the pieces together by looking at all the aspects of your business that affect the money flowing in and out of your business.

Businesses live and die by cash flow. This is why PayPie is dedicated to creating tools that help businesses take charge of their cash flow and focus on growth and financial health.

Are you a QuickBooks Online user? Get started managing your cash flow today.

This information does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. It is also not an advertisement or endorsement for any of the banks or credit cards name. The credit card details are valid as of the publishing of this post.

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New Beta Sneak Peek: Cash Flow Forecasting

PayPie Beta Sneak Peek Binoculars

PayPie is extremely excited to announce that we’ll be releasing a substantial update to our beta in the coming weeks. One of the main focal points of the update is our beautiful and cutting-edge cash flow forecasting tool.

Sneak peek: Spectacular cash flow forecasting

Cash flow is the lifeblood of any small to medium-sized enterprise (SME). At PayPie, we want to give these businesses the tools they need to thrive. Our cash flow forecasting fulfills this promise brilliantly.

It gives business owners and/or the financial professional advising them a better way to visualize the financial indicators affecting the company’s cash flow. (Our proprietary risk score contained within the cash flow forecast is an extension of these metrics.)

In the long-term, the cash flow forecasting and risk score will be tied to our business financing capabilities. However, for the moment we’re focusing on the overall significance of cash flow forecasting in terms of best practices for business financial health and value-added services for the financial professionals serving these businesses.

PayPie Cash Flow Forecast Example

How SMEs can use cash flow forecasting

Through our QuickBooks Online integration, all that small to medium-sized businesses (SMEs) or the professionals representing them have to do to use the cash flow forecasting tool is sign up for PayPie and connect the company’s QBO account.* No tedious data or customization entry required.

Better yet, the cash flow forecasting tool is free! Businesses may also use it as often as they’d like to turn basic financial data into highly visual and informative reports.

Side note: We plan to begin formally reaching out to a range of QBO audiences this summer.

See the recently refreshed the PayPie website. 

Why data visualization matters

Have you ever tried to draw conclusions from simply reading spreadsheet or string of numbers? It can be done, but it’s not always the easiest or most intuitive way to go about it. The indicators, charts and graphs in our cash flow forecast bring this information to life — making it even more valuable for “connecting the dots.”

A company’s quick ratio, cash flow ratio, current ratio and debt-to-equity ratio are at the top, with the risk score taking center stage. A cash flow graph quickly shows the relationship between the money flowing in and out of the business. Plus, useful tabs let users drill down even further into receivables, payables and other areas.

Learn more about reading a cash flow statement, how cash flow forecasting works and basic cash flow concepts.

The benefits of cash flow forecasting

A cash flow forecast shows how money flows in and out of a business over a specific period of time by:

  • Comparing the overall flow of cash into the company against the flow of cash out of the company.
  • Identifying the times when the cash reserves are at their highest and lowest.
  • Pinpointing opportunities, like which invoices are overdue in terms of cash value and days past due date.

If a business has a lot of historical data in their QBO account, our algorithm uses this information to create a forecast. For new businesses (or businesses that have just started using accounting software), the insights from their forecasts will grow as their data grows. For all businesses, cash flow forecasting offers the information needed for strategic, data-backed decisions.

An opportunity for financial pros 

“Every annual financial cycle is an opportunity to sit down and set goals and project numbers forward with your significant clients. Looking forward is not only important, but often essential to identify and avoid any looming business issues or, more positively, for identifying new opportunities too.” — Richard Francis, Spotlight Reporting Founder, AccountingWeb

As artificial intelligence eliminates data entry, there’s more time for value-added services, such as cash flow forecasting. This also opens the doors to scenario planning, debt reviews and other related services.

Build long-term relationships with PayPie

We recognize the critical role that accountants and bookkeepers play as advocates to their SME clients. This is why PayPie is developing a suite of tools for start-to-finish cash flow forecasting and management. We’ve started with the cash flow forecasting tool, which includes risk scoring.

Once we bring our invoice factoring services online in the near future, we’ll be able to help financial professionals identify and solve cash flow problems — all in one platform.

In order to deepen our relationships with financial professionals, we’re also committed to creating strong partnership programs.

Accountants and bookkeepers can get started the same way an SME would, all you have to do is sign up.

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon. 

This article is for informational purposes only. To receive monthly email updates, click on “Get Newsletter” in the upper right-hand corner of the blog page.  

Image via Pexels.

Cash Flow Consulting in the Real World

cash flow stories Lucid and Groove

Technology is transforming the landscape of small business accounting. Empowered by the automation and innovation fueled by artificial intelligence (AI), the cloud and blockchain — now, more than ever, accountants are expanding their roles as business advocates and advisors.

It’s a trend backed by a 2016 study by the International Federation of Accountants (IFAC), which found that 41% of entrepreneurs believed accountants were their most trusted advisor — nearly double that of the 21% for other business consultants.

Many of the accountants advising the small to medium-sized businesses (SMEs) are small to medium-sized practices (SMPs) themselves. What kind of help do SMEs need? One of the main areas driving demand for advisory services is cash flow consulting.

Cash flow consulting in the real world

Here’s a real-world account of how SMP, Lucid Advisory & Finance, helped SaaS help desk software provider Groove find its rhythm with cash flow forecasting, budgeting and everything else.

Lucid Advisory & Finance

Lucid Advisory & Finance founding partner, Nick Bird, has discovered that helping businesses better understand the basics of cash flow and cash flow forecasting (through cash flow consulting) is having a huge impact on the startup, SaaS and crypto companies his firm serves.

“When we first meet with a client, we ask them, ‘Where do you want to be in five years?” he explains. It may seem like a broad question, but the answers are quite telling.

“If you don’t know where you want to go, it’s really hard to make a plan to get you there. Tracking your metrics, including cash flow, isn’t just an abstract chore, it’s a tool for better decision-making.”

In fact, his favorite part of his job is seeing his clients flourish, make well-informed decisions and grow their business.

Nick Bird Lucid Quote

How businesses benefit

According to Bird, once business businesses start looking at their cash flow and financial metrics more carefully, they also gain:

  1. Confidence — Through better, more informed decisions.
  2. Accountability — By comparing performance to projections.
  3. Peace of mind — Knowing that they’ve taken greater control of their financial health.
Read more: Cash flow 101 — the basics

How cash flow consulting works

As part of the cash flow consulting process, financial professionals like the team at Lucid will review a business’ cash flow statement on a routine basis. The time period, like holding monthly recaps, depends on the specific needs of each business.

If a business doesn’t have a cash flow statement, their advisors will either use accounting software to create a basic statement or take advantage of integrated solutions, like PayPie

By reviewing cash flow statements on a regular basis, companies are able to see how the cash flows in and out of their businesses in terms of day-to-day revenue and expenses, as well as capital investments and borrowing activities.

What businesses can learn 

Through this process, a business can pinpoint when most of their regular bills and responsibilities, like payroll, hit the books — in comparison to when the bursts of revenue come in. For example, for an SaaS company, this would be when the subscription fees are processed.

Knowing this cadence helps a business be more precise in knowing when their cash reserves are highest and lowest. Over time, these patterns are used to create cash flow forecasts that serve as performance benchmarks.

3 benefits of cash flow consulting

How cash flow informs decision-making

As metrics change and there’s a drop, the monitoring helps provide insight into where the problems may lie. Conversely, if things hold steady or improve, a business can take confidence in knowing they’re on the right track.

They can also use this information to plan their next steps. Is it time to hire new staff? Develop a new product? Raise prices? All of these decisions are affected by cash flow, which means the more you know, the better decisions you make.

More tips: How to read a cash flow statement 

Case study: helping Groove chart an even course

When Bird first met, Groove founder and CEO, Alex Turnbull in 2016, Turnbull was like most startup CEOs. He was hyper-focused on his product. Yes, he checked the business’ banking account. But, he didn’t track any key performance indicators (KPIs) and he certainly hadn’t been spending the few hours reserved for eating and sleeping for keeping the books.

It’s a scenario that’s all too normal. It’s not a criticism of entrepreneurs. Starting your own business is HARD. Unless you’ve been through it before — most businesses, even the high-tech ones, don’t always realize how vitally important cash flow management and cash flow consulting really are.

A breakthrough in the form of a trusted advisor

Because they’re busy getting their businesses off the ground, concepts like working capital or debt-to-equity ratio aren’t always top of mind for business owners. While everyone wants to avoid a cash flow crisis, no one is building a damn or even watching the water to see if there’s impending doom.

“Alex is a bootstrapper. He’d put a ton of sweat equity into his business. He’s also an amazing marketer and the Groove blog is one of the best SaaS startup blogs I’ve ever read. But, he wasn’t an accountant and there’s nothing wrong with that.” says Bird.

cash flow story Alex Turnbull Groove Quote

Baby steps…

Once Bird and Turnbull discussed Groove’s needs and goals, Lucid got things rolling by creating a one-year budget and, in time, a three-year budget.

In conjunction with the long-term forecasts, Bird and Turnbull meet monthly to go over Groove’s financials. A typical agenda, looks a little something like this, with reviews of:

  • Previous action items
  • Overall performance
  • Trends
  • Variances
  • Projections
  • Staffing

Grown-up questions

By answering questions, like the ones below, Lucid helps Groove make more precise, data-driven decisions.

  • How quickly do you want to reach this goal? (“Now” is an acceptable answer. The question after that is, “Is this realistic?”)
  • What resources do you have right now — and what will you have in a few months?
  • What level of cash in the bank are you comfortable with?
  • How is the business performing compared to this time last year?
  • What options are available if the detestable Mr. Murphy and his famous law make an appearance?

Big picture thinking

“The awesome part of doing this is that we were able to help Groove manage their cash flow so efficiently, they could hire as quickly as needed to get the next update up as quickly as possible,” says Bird, genuinely excited about the results. (There’s really something to be said about having a passion for what you do.)

Turnbull concludes, “I’ll admit. I approached asking for help with cash flow and financial management with about as much enthusiasm as dental work. Thankfully, I met the right team. Now, when Nick gets me to open my mouth, it’s always for the greater good of my business. The only pain is a few really bad jokes now and then.”

“In all seriousness, the process has been transformative. There’s truth to the adage that says it’s better to work smarter than harder. I sleep better at night knowing there are no financial monsters hiding in my closet.”

Real-life cash flow stories matter

At PayPie, we believe that businesses should be empowered with the best tools to give them insights into their cash flow and manage their overall financial health. It’s also why we offer our cash flow forecasting and risk scoring free of charge.

Whether it’s the businesses themselves or the accountants and bookkeepers who serve them, we make it easy to look at your finances, without looking away in frustration.

Want your cash flow story to be told? Tell us here. We’re looking for real-world cash flow management and funding stories from businesses and the professionals who advise them. 

Thank you

In closing, we’d like to personally thank Lucid and Groove for sharing their cash flow consulting story. Their experience truly shows how an openness from both sides yields a much greater good.

Bonus content:
The untold stories of Nick Bird and Alex Turnbull

When everyone has their professional hats on, it’s easy to forget the human side of what we do. Here’s a little about Nick Bird that most people may not know: He’s one of seven children. He lived in Brazil and speaks Portuguese and is a single father to two children.

When Alex Turnbull isn’t building startups, he’s probably on a surfboard somewhere along the coast of Rhode Island. Alex and his wife have a dog named Honey Badger. There’s no word on whether or not the pup can surf.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This story is being shared on an informational basis only. Every accounting firm and business has their own unique needs. Be your own success story by taking the time to find the right fit.

Image via Pexels.

The Golden Rule: Separating Business and Personal Finances

separating business and personal finances lifestyle image

You’re at the warehouse store. In your cart that’s roughly the size of a compact car, you’ve got a printer, a few boxes of paper, some ink and a year’s supply of pens for your business. But, for home, there’s also cereal, milk, a closet organizer and a brand-name sweater that’s just a steal. (Besides, you’re getting the organizer.)

When you get to the register, do you do the right thing and ask for separate receipts? Or, desperately try to save five minutes by putting it all on one bill. (You’ll sort it out later, right?)

You know that separating business and personal finances is the right thing to do. But, sometimes you let it slide, just a little. You’re not alone. Nearly one out of every five business owners don’t have separate personal or business bank accounts.

Nearly 1 out of 5 business owners don’t have separate personal or business bank accounts.

Because committed to helping businesses build better financial health, we want to give you an overview of one of the 10 commandments of small business accounting — keeping your business and personal finances separate. We try not to get preachy, but in this case, it’s warranted. (Read on and you’ll see.)

Is separating business and personal finances really a big deal?

Yes. Your business is your business and personal finance is something entirely different. If you’re the owner or founder, the two are inextricably linked. However, as a best practice, you want to have things set up so that the two are separate from the start and that they stay that way.

Don’t be afraid, but separating business and personal finances means you kind of have to learn to think like an accountant. Or, work with one and you’ll quickly learn why most independent business owners value their relationships with their accountant and/or bookkeeper so much. (If you behave yourself, they’ll let you keep your warehouse membership, too.)

Read more: Cash flow 101 — the basics. 

What is commingling and how does it relate to business and personal finances?

Aside from sounding a little naughty, commingling is the formal term for mixing business and personal finances. Depending on your background and beliefs, it’s akin to living together before marriage.

Separating business and personal finances isn’t just a stigma thing. There are serious legal and financial consequences to getting this wrong, including:

    • Liability — Whether an entity or individual can make claims against you and your business. Depending on how your business is structured or the nature of the claim, your personal assets could be at risk as well.
    • Penalties and fines — If you make a mistake on your business or personal taxes because you’ve commingled your business and personal finances, it can result in penalties and fines. Most of which also accrue compound interest, regardless of whether they apply to your business or personal income.
    • Risk — Anyone evaluating the financial health of your business will see a lack of separation as a potential concern. This includes lenders, credit bureaus, vendors, investors or anyone interested in developing a professional and/or financial relationship with your business.

When you separate your business and personal finances through routine and processes, you’ll see the following benefits:

    • Accuracy and transparency — Your personal accounts will reflect personal expenses and your business accounts will reflect business expenses.
    • Better cash flow management — When things aren’t mixed, you’ll have a clear picture of the factors involved in your business and personal cash flows.
    • Easier tax filings — Proper management and tracking of business and personal income makes it simpler to file taxes and claim deductions. Better processes and recordkeeping also means fewer mistake and that you’ll be more prepared if you’re asked to provide documentation.
Read more: Understanding cash flow statements. 

Where do I start when it comes to separating business and personal finances?

Believe it or not, the first thing you should consider is your business structure. If you’re starting your own business, you need to know the legal and financial implications of whether or not you choose to incorporate.

A discussion of business structures can get very complicated very quickly. For the sake of simplicity, we’re going to stick with the difference between incorporated and unincorporated businesses in this post.

Sole proprietorships — separating business and personal finances and cash flow

The most common type of unincorporated business structure is a sole proprietorship. In fact, the term unincorporated business is almost synonymous with being a sole proprietor.

While sole proprietorship is the simplest business structure, it can also be a bit of a bugaboo when it comes to separating business and personal finances. As a sole proprietor, you’re entitled to all the profits from the business. This also ties you to all the responsibilities as well.

In the eyes of the tax authorities, a sole proprietor’s business and personal income are one and the same.

As such, a sole proprietor files their business taxes as part of filing their personal income taxes.

    • Because a sole proprietor’s business and personal finances are so closely linked, sole proprietors are also the most likely not to follow the golden rule of separating business and personal finances.
    • The result: Sole proprietors are more likely to be audited than any other type of business.

When a business owner fails to keep business and personal finances separate, it’s more difficult to provide the proper documentation to validate legitimate business expenses.

If the business owner hasn’t kept their business and personal finances separate, the audit process will take longer. Hint: Grumpy tax agents aren’t a good thing. (Ever tried getting out of the warehouse store without a receipt and your membership card?)

The good news is that with a few simple measures, like having a separate business banking account and credit card, it’s easier to track business expenses separately from personal ones.

Sole proprietors who work from their home are also able to claim the home office deduction, writing off a percentage of home-related costs as business expenses. Again, this has to be done the right way and when it’s done well it can deliver significant savings.

Two other considerations for sole proprietors are liability and employment taxes.

One of the main reasons businesses incorporate is to make the business its own legal entity. This greater separation means fewer implications for the owner’s personal assets in the event of any legal or corrective action. It’s also key if a creditor comes knocking at the door.

Another tax-time surprise that most self-employed sole proprietors encounter is self-employment taxes. If you’ve ever worked as an employee for another business, your employer would have deducted and or paid part of your employment taxes (income tax and taxes for pensions and social programs) throughout the year.

The hammer drops when the employer and employee are one in the same.

This is why sole proprietors have to pay these mandatory taxes — making both the employer and employee contributions. If you’re unprepared for this, it can be a major hit to your tax bill and your cash flow.

Separating business and personal finances improves...

Incorporated businesses — business versus personal finances and cash flow

When a business formally incorporates by becoming a corporation, the process of separating business and personal finances tends to be more formalized. For instance, most corporations will have their own banking accounts and tax identification numbers (tax IDs) right from the start.

Corporations are taxed as separate entities.

This means that in a legal sense, a corporation’s assets are more clearly differentiated from an individual’s personal assets — even if the individual is the CEO. This separation is often called the “corporate veil.”

If an incorporated business defaults on a loan or faces any other corrective action, in most cases, only the corporation can be held accountable. Note: It is possible to “pierce the corporate veil” — meaning incorporated businesses need to be aware of the liability laws in the geographic and regulatory areas in which they operate. A loss or penalty in this area can definitely hinder cash flow.

Corporations are responsible for following the applicable tax timelines and reporting guidelines.

This includes payroll taxes with required employer contributions, payment and reporting guidelines. Employers in the United States often have to manage employment taxes on a federal, state and local level. Mistakes at any stage of this process can be costly.

Mixing business and personal finance increases

Five ways to keep your business and personal finances separate

As stated above, corporations often have systems in place, simply by the nature of what they are. Sole proprietors, partnerships, cooperatives and the startups of the world are the ones who really struggle with separating business and personal finances. If you resemble these remarks, these tips are for you:

1. Open business banking accounts.

When you use your business banking accounts for business all the transactions relate only to your business — as they should. It’s easier to reconcile with your accounting software and it’s a must-have if you’re going to use a payroll service or apply for financing. The bottom line: It makes your business look and act like a business.

2. If a credit card makes sense for your business, get one.

Just like having a business banking account, using your business credit card just for business expenses is a better way to separate business and personal finances. You can also take advantage of rewards programs. Note: Make sure that you’re able to pay off the monthly balance. Otherwise, the interest charges could outweigh the benefits. A credit card is best for short-term purchases. If you need to fund a large, long-term business expense, make sure you know all your options ranging from a line to credit to small business loans.

3. Pay yourself a salary.

Even if you’re the only employee, paying yourself a set amount each month is another best practice for separating business and personal income. First, it gives you a consistent income. Second, you also set a consistent expense for the company. It’s a boost for both your personal and business cash flow. You’ll know how much you have to live off each month and you’ll be able to track how and when this comes out of the company’s books as well.

If you set this up formally, a salary for a self-employed sole proprietor is called a draw. If you use payroll software, you’ll automate the process of moving the money from your business to your personal account. It will also help you manage your employment taxes and when business and personal income tax time comes around, you’ll have the right records and documentation.

4. Know the difference between business and personal expenses.

In order to claim an expense as a deduction for either business or personal income taxes, the expense has to be properly classified and documented.

A business expense relates to the running of a business.

Tax deductions for the costs of owning or leasing office or retail space are examples of legitimate business expense. A personal expense is just that — it relates to your private life and has nothing to do with the operation of your business. In other words, grabbing a quick lunch during the work day is not a legitimate business expense. In fact, it’s not even considered a legitimate personal expense for tax purposes.

Gray areas include the use of personal assets for business purposes along with travel and entertainment expenses.

Having a home office, running a business from your home or using your personal vehicle for business are examples of using personal assets for business purposes.

Wherever you do business, there are specific rules for the definition of business use and the number of expenses you can claim. For instance, if you plan to claim home office expenses, you need to know which expenses qualify and how you need to track them throughout the year. The same is true for tracking business mileage, maintenance and other vehicle expenses.

Travel and entertainment expenses also have to be directly related to business functions.

If you bring your family on a business trip, in most cases, you can only deduct the costs of your travel expenses. (Unless your 5-year-old is an employee.) Bringing a spouse along on a business dinner will likely be accepted as a business expense. But, if you and your spouse go out to dinner because you’re too tired to cook, it probably won’t be covered. (Unless you’re both employed by the company and you were working on a deadline. See? Gray area.)

5. Develop systems for tracking business and personal expenses.

Once you know which business and personal expenses you need to keep records for you can then create systems for tracking them — all while keeping your business and personal finances separate.

Businesses can track expenses in their accounting software.

A process that’s made easier with the use of expense tracking tools, like SlickPie. (The best way to find these tools is to look in the app store for the accounting software you use. If you have an accountant, he or she will probably recommend a tool like this.)

Apps for tracking personal expenses, like Mint or You Need a Budget (YNAB), fall under budgeting and personal finance.

Remember personal tax deductions are a lot more limited and specific. Think child -and health-related costs or improvements to your home to make it more accessible or energy efficient.

Circling back to the previous bullet, the key is knowing which expenses business and which ones are personal. If you know this in advance, you know whether it applies to your business or personal finances. Business expenses should flow through the business using business banking accounts and/or credit cards. In turn, personal expenses should pass through personal banking accounts and/or credit cards.

Read more: The 10 Best Businesses for Cash Flow. 

The moral of this post…

Some historians believe the nursery rhyme Baa Baa Black Sheep dates back to a medieval wool tax imposed in the 13th century England.

The golden rule of separating business and personal finances also has its origins in the real world.

Separating business and personal finances makes it easier to monitor a company’s cash flow. It also makes this process more accurate when un-related, personal expenses or income aren’t there to cause confusion. In the same vein, personal financial management and budgeting are easier to when you don’t commingle cash flows.

Tax time is a million times easier if you’ve kept your business and personal finances separate. So is building a credit history for your business or yourself. Both your business and personal risk profile will be stronger if you’ve followed the rules.

More money rules to follow

Monitoring business cash flow and knowing your risk profile is another mark of good financial behavior. This is why PayPie is making it easier to understand these concepts by offering these tools free of change. Got a QuickBooks Online account?* Get started today.

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

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