Cash Flow vs Profit: The Difference

businessman confused over cash flow vs profit

Butterflies and moths, crocodiles and alligators, speed and velocity. There are lots of things that seem like they’re the same but are actually quite different. In the business world, the topic of cash flow vs profit continues to confound.

As advocates of better cash flow knowledge and long-term financial health, we present this overview of the Batman and Robin of the finance universe — cash flow vs profit. A dynamic duo all their own, cash flow and profit are often part of the same discussion, but each has its own specific meaning and role.

The “textbook” definition of cash flow

Cash flow is the pattern and amounts of cash that move in and out of business over a set period of time.

  • Cash flowing into a company is called an inflow, while cash flowing out is an outflow.
  • It is primarily a measure of liquidity or a company’s ability to meet its short-term obligations, such as fulfilling orders, meeting payroll and other routine operational costs.
  • It is measured across operations, investment and financing activities — with the operational or day-to-day incomes and expenses, especially accounts receivables and accounts payable, taking center stage.

Cash flow = operational cash flow + investment cash flow + financing cash flow

The primary metrics for cash flow are recorded in a cash flow statement.

More on Cash Flow vs Profit: Cash Flow Basics — Key Concepts and Terms

The “textbook” definition of profit

Profit is literally revenue minus expenses. It’s the total amount of money that a company brings in, minus the total expenses.

It’s a measure that simply determines if the company is bringing in enough sales to cover the overall cost of running the business and generate a surplus.

The variables for profit are recorded in a profit & loss statement, also known as an income statement.

Calculating profit

Profitability is a factor of gross profit and net profit.

Gross profit = revenue – cost of goods sold (COGS)
Net profit = gross profit – operating expenses

As an example, here are the numbers for Joe’s Trucking:

Joe’s Trucking earned $30,000 in revenue one month, but its COGS was $10,000. On top of that, there was another $5,000 in operating expenses.

Gross profit = $30,000 (revenue) – $10,000 (COGS) = $20,000
Net profit = $20,000 (gross profit) – $5,000 (operating expenses) = $15,000

Cash flow vs profit — the different math

One difference between cash flow and profit is that cash flow only records income when it comes in, such as when an invoice is paid. Profit is recorded as it hits the books when an invoice is sent out, instead of when it’s paid.

For instance, if the $15,000 net income for Joe’s Trucking is only accounting for outflows stemming from COGS and operating costs. However, it doesn’t reflect the impact of unpaid invoices.

So, if Joe’s Trucking recorded $20,000 in invoices issued, but none of the invoices were paid, they’d actually have a negative cash flow of $5,000.

$15,000 (net profit) – $20,000 (accounts receivable outstanding) = -$5,000

This means that while Joe’s Trucking is profitable, it’s cash flow wasn’t as healthy.

cash flow vs profit

Cash flow vs profit — there’s no direct relationship

Cash flow tells you when money is going out and when it’s coming into your company, while profit doesn’t reflect the timing of inflows and outflows.

As a result, while cash flow and profit are related, they’re not directly correlated. If one is positive, the other won’t necessarily be positive and vice versa.

It’s also a reason why businesses can get frustrated come tax time as business income taxes are calculated based on profit rather than cash flow. If it looks like you’ve made money, you’ll have more taxes to pay, even if you don’t have the money to do so.

Things to Know: 10 Best Businesses for Cash Flow 

Cash flow vs profit — the four scenarios

1. How a business can be cash flow positive and profitable

This is the best-case scenario that every business targets — positive income growth coupled with positive cash flow. It means the business has healthy sales and that its cash flow cycle is balanced so that there’s always enough to meet regular expenses as they’re incurred.

7 Ways to Boost Cash Flow 

2. How a business can be profitable and cash flow negative

A business in a rapid growth phase might be highly profitable but have a shortage of cash due to the investment needed to meet demand, such as an equipment purchase. Or, it could be that their accounts receivable cycle is out of sync with their accounts payable. Money’s coming in, just not at the right time. This is why accounts receivable gets so much scrutiny as part of a cash flow analysis.

Fact: Small to medium-sized businesses are more likely to be “cash poor” because they use their operational cash flow as the main source of business funding. They simply don’t have the reserves of a Fortune 500 company.

Cash Flow Problems: 6 Top Causes

3. How a business can be cash flow positive with no profit

This scenario is most likely for new or early-stage businesses and startups. For example, if a startup has a cash influx due to investor funding while the product or service is under development. Or, it could be a business that just opened its doors. It has the reserves to get to a starting point but hasn’t begun to record income.

Another reason a business can be cash flow positive without a profit is when the owner has secured financing to solve a lumpy cash flow. If the terms of the loan aren’t favorable, this can also lead to further cash flow struggles.

How to Read a Cash Flow Statement 

4. How a business can be cash flow negative and have no profit

Actually, you can’t be a business for very long without cash flow or profit. This is the worst-case scenario – no sales and no reserves. There’s likely a fundamental flaw in the business plan, the product, pricing or all of the above. Hint: Nobody aims for this one.

Reporting, Cash Flow and Your Business’ Financial Health

Cash flow is a stronger indicator of success than profit

There’s a reason why Batman is always the hero and Robin is a sidekick. Conspiracy theories aside, once start studying up on cash flow, it’s impossible not to stumble across the expression, “Cash is king.” Because, in the business world, it’s true.

Of course, profit helps, but the thing that matters most is having enough money at the end of the day to pay your bills. If you’re not paying attention, cash flow can be a silent killer. (Only no one’s developed a foolproof alarm like there is for carbon dioxide. A bat signal isn’t particularly effective either.)

Cash Flow Forecasting: What You Need to Know

Avoiding a cash flow crisis

Another reason that cash flow is so crucial to small and medium-sized businesses is that it’s harder for them to find short-term lending options. Even credit cards are hard to come by if you’re business is new or your credit rating has taken a hit. And traditional loans and lines of credit have lengthy application processes.

It’s also why online lending and financial tools been developed to meet these needs. Tools like cash flow forecasting that connects to your online accounting software and financing options like invoice factoring to help you get affordable funds more quickly.

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

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

Image via Shutterstock.

10 Reasons Accountants Should Offer Cash Flow Consulting

ccountant offering cash flow consulting

If you’re an accountant who serves small to medium-sized enterprises (SMEs), why should you consider providing cash flow consulting as part of your value-added services?

If like us, you’re dedicated to giving businesses the tools they need to forecast cash flow and strengthen their long-term financial health, here are 10 reasons why you should offer cash flow consulting:

  1. Most businesses are small businesses

Globally, there are more small businesses than any other kind of business. Consider these numbers: 99.9% of all US businesses, 97.9% of Canadian businesses and 99% of all businesses in the world are small businesses.

Most accounting firms are also small businesses. For example, 90% of all accounting firms in the United States have less than 10 partners or owners.

Case Study: Cash Flow Consulting in the Real World 

  1. Accountants are trusted advisors

Like attracts like. If you’re a small business looking for a professional accountant, are you going to go knocking at the door of a major accounting firm with retainer fees as high as the skyscrapers that house their employees?

Or, are you going to look for a small to medium-sized accounting practice (SMP) that’s more reasonably priced and more likely to understand your needs?

The answer is obvious. It is also why most small businesses consider their accountant their most trusted advisor.

  • A majority (92.2%) of accountants provide basic accounting and bookkeeping services.
  • Only 77.7% offer business consulting services, like cash flow analysis and forecasting.

Offering cash flow consulting will give you an edge on the competition. At the same time, it will also help you forge stronger bonds with your clients.

cash flow consulting opportunity

  1. Cash flow is a small business killer

More than half of small businesses never make it past the first five years. The main culprit is cash flow.

  • Studies of the U.S. market conducted by Wasp Barcode have found that 33% of small businesses said cash flow was a top business challenge and 44% found cash flow a top accounting challenge.
  • A similar SCORE study indicated that 22% of small businesses said that cash flow was their main concern.

It’s not that these businesses don’t understand that they need to have the right amount of money to meet their financial obligations. Instead, they just don’t have the correct tools, technologies and processes in place.

By helping your clients master cash flow management, you’ll be teaching them vital survival skills. You’ll also be building mutually respectful long-term relationships.

Forbes Article: How SMEs Can Win the Battle for Positive Cash Flow 

  1. There are intuitive forecasting tools

You don’t have to go and design proprietary systems to create a powerful and meaningful cash flow analysis. Automated tools, like our free cash flow forecasting, make it simple to create an informative, intuitive report filled with key ratios, charts and graphs.

All you have to do is connect the business’ QuickBooks Online account with their free PayPie account, then run the report. The forecast is built using the near real-time data from the company’s QBO account. (Integrations with other accounting software and platforms are coming soon.)

You may run a free cash flow forecast on a monthly, weekly or even daily basis.

PayPie Cash Flow Forecast Example

  1. Technology is changing everything

“CPAs with technology: You have the power to change your customers’ lives.”

Jody Padar, CPA, MST, Accounting Today

With the rise of cloud-based technology, these three trends are changing how small business accountants are interacting with their clients:

  • Digitalization— As more small business data is available digitally, through the use of accounting software and applications, it’s also easier for accountants and bookkeepers to access this information.
  • Virtualization — Because cloud-based technologies can be accessed from any device with an internet connection, it’s no longer necessary for accountants to physically visit clients. Accountants and businesses can work together from virtually anywhere.
  • Transformation — With the greater availability of near-real-time data, accountants are moving from generalized to specialized services.
  1. Cash flow consulting builds value

“The ability to provide business intelligence from a quick analysis of data is a miracle.”

— Geoffrey Moore, technology author and business consultant

Complying with regulations and paying taxes are services that business owners see as have-to-dos. Accountants who take the creation of financial statements one step further by producing cash flow forecasts are transforming routine tasks into recurring, value-added services.

Rather than merely reporting results, cash flow consulting is a key component in business growth. Some advisors even set up monthly consultation calls or video conferences with their clients to discuss goals and objectives — literally becoming voices in the business decision-making process.

Pro Tips: Cash Flow Forecasting — What You Need to Know 

  1. Business financing goes hand-in-hand with cash flow consulting

As you help businesses better understand when, why and how the cash flows in and out of their companies, your clients may also rely on your advice for short-term and alternative lending solutions.

In addition to standard options, like term loans, lines of credit and credit cards, you can also introduce the businesses you serve to innovative financing solutions, like invoice factoring, powered by blockchain technology.

  1. Better cash flow lowers risk

The cash flow forecasts created using PayPie’s insights and analysis also contains a risk score that summarizes and reflects several key variables linked to cash flow. This indicator shows how a business is viewed by lenders, vendors and other third parties wishing to do business with them.

Helping a business improve their cash flow also improves their risk score. With a better risk profile, businesses can access funding more easily and set more favorable terms with vendors.

Cash Flow Basics: How to Read a Cash Flow Statement 

  1. Better cash flow builds confidence

As you work with your clients reviewing cash flow, setting goals, controlling costs and planning for future investments and opportunities —you’re not only improving the business’ financial health, you’re also bolstering the owner’s confidence.

As you go through a cash flow forecast, especially the day-to-day costs involved in operational cash flow, you get a better sense of where the client’s priorities lie, which concepts they understand the most and the areas that need the most improvement.

In a nutshell, you’re able to ask the hard questions and offer informed solutions that truly benefit the bottom line.

  1. Cash flow consulting makes you a better advocate

“Running a small business is about the grind, the day-to-day operations and finding a way to keep your head above water. Like the shock of cold water in the ice-bucket challenge, reality can hit you hard and all of those hours picking paint colors for the office suddenly seem wasted. Small businesses inherently overlook the technology platforms that help them manage their day to day — and that’s exactly how cash flow begins to erode.”

— Stacy Gentile, Forbes Communication Council

Managing finances isn’t always the most alluring part of owning a business, but it’s fundamental for success. Cash flow consulting takes the implementation of best practices and better tools to a new level by delivering tangible results in the form of more cash. And no one can dispute the value of money in the bank.

Be a cash flow advocate — try our free cash flow forecasting for QBO users today.

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

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

Image via Shutterstock

Best Business Credit Cards in the United States

Best Business Credit Cards in the United States

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

Travel miles, reward points and cash back — the reward programs for business credit cards almost as tempting as the sugary breakfast cereal with the leprechaun on the front of the box.

A business credit card can be an incredibly convenient tool to help you build a credit history, separate business and personal expenses and manage cash flow. But what are the best business credit cards in the United States and how can you tell which one will be best for your business?

In order to provide businesses using our financial management tools and reading our blog the tools they need to sustain a healthy cash flow, we decided to do a little research ourselves. Here’s what we found out about the best business credit cards in the United States:

The 15 best business credit cards in the United States

We sourced the comparison sites and the table below shows the cards that appeared time and again on other lists of the best business credit cards in the United States.

American Express®

Business Gold Rewards Card

Card Type: Charge card

Rewards: 3X points per one specified category: airfare, advertising, fuel, shipping or computer hardware and software. | 2X points the remaining categories. (3X and 2X points apply only to the first $100,000 spent.) | 1X for all other purchases.

Employee Cards: Free

Interest: As it’s a charge card, you are expected to pay in full at the end of each month. If you have to carry a balance, the interest rate is 19.99% and the penalty rate is 25.99%.

Annual Fee:  $175 – Free for the first year.

Personal Guarantee: Required

Welcome Offer: 50,000 points after you spend $5,000 in the first 3 months.

Best For: Established businesses who want flexibility in their rewards an lower annual fee.

Business Platinum Card®

Card Type: Charge card

Rewards: 5X points on flights and prepaid hotels on amextravel.com. | 1.5X points on eligible purchases of $5,000 or more. | 1x for all other purchases.

Employee Cards: Free

Interest: As it’s a charge card, you are expected to pay in full at the end of each month. If you have to carry a balance, the interest rate is 19.99% and the penalty rate is 29.99%.

Annual Fee: $450

Personal Guarantee: Required

Welcome Offer: 50,000 points after you spend $10,000 and an extra 50,000 points after you spend an additional $15,000 within the first 3 months.

Best for: Established businesses with large travel budgets. This card also gives you access to American Express Global Lounges at airports around the world.

Blue BusinessSM Plus Card

Card Type: Credit card

Rewards:  Earn 2X points on everyday business purchases up to $50,000 with no category restrictions.

Employee Cards: Free

Credit Limit: Adjusts with usage.

Interest: 0% introductory APR for the 15 months. | After that your APR will be a variable rate, 12.99%, 16.99% or 20.99%, based on your business’ creditworthiness.

Annual Fee: None

Personal Guarantee: Required

Welcome Offer: Earn 10,000 extra points after $3,000 in eligible purchases within the first 3 months.

Best For: Businesses looking for one of the longest introductory APR offers on the market.

SimplyCash® Plus

Card Type: Credit card

Rewards: 5% cash back on office supplies and mobile phone services. |  3% back on an expense category of your choosing. (5% and 3% up to the first $50,000 in purchases.)| 1% on all other purchases.

Employee Cards: Free

Buy Above Your Credit Limit: Make larger purchases and earn cash back on those purchases — even when the purchases exceed your credit limit.

Interest: 0% introductory APR for the 9 months. | After that your APR will be a variable rate, 13.99%, 18.99% or 20.99%, based on your business’ creditworthiness.

Annual Fee: None

Personal Guarantee: Required

Welcome Offer: None

Best For: Businesses who want a cash back card with high rewards and no annual fee.

Mastercard®

Bank of America® Business Advantage Cash Rewards

Card Type: Credit card

Rewards: 3% on purchases at gas stations and office supply stores. (Maximum $250,000 annually.) | 2% on purchases at restaurants. | 1% on all other purchases.

Employee Cards: Free

Interest: 0% intro APR for 9 months. | 12.99% to 22.99% variable APR thereafter.

Annual Fee: None

Personal Guarantee: Required

Welcome Offer: An additional 25% – 75% bonus on every purchase made when you join the proprietary rewards program. | $200 statement credit bonus after $500 in net purchases in the first 60 days when you apply online.

Bank of America® Business Advantage Travel Rewards

Card Type: Credit card

Rewards: 3 points per every travel dollar spent when you book through the Bank of America Travel Center. | 1.5 points for all other purchases.

Employee Cards: Free

Interest: 0% intro APR for 9 months. | 12.99% to 22.99% variable APR thereafter.

Annual Fee: None

Personal Guarantee: Not required

Welcome Offer: 25,000 bonus points after $1,000 in purchases in the first 60 days.

Best for: Businesses who want rewards points without an annual fee or personal guarantee requirement.

CitiBusiness® AAdvantage® Platinum Select®

Card Type: Credit card

Rewards:  Earn 2 miles for every $1 spent on American Airlines and for telecom, car rental and fuel purchases. Earn 1 mile for other purchases.

Employee Cards: Free

Interest: 17.49% – 25.49% APR based on your business’ financial history.

Annual Fee: $99 – Free for the first year.

Personal Guarantee: Sometimes

Welcome Offer:  Earn 70,000 miles with $4,000 in purchase in the first 4 months.

Best For: Businesses who regularly travel on American Airlines.

Bento for Business

Card Type: A pre-loaded credit card and expense management system hybrid.

Rewards: None

Employee Cards: Free

Credit Limit:  The primary account holder sets individual limits for each cardholder. They can also limit where each card is used.

Interest: None

Annual Fee: 60-day free trial. | Monthly fees ranging from free up to $149 depending on the number of cardholders.

Welcome Offer: None

Best for: Businesses that need to manage employee purchases.

Capital One® Secured

Card Type: Secured credit card

Rewards: None

Employee Cards: Free

Credit Limit: $200 initial credit line that you can increase after making your first 5 payments on time. | Requires a refundable deposit of $49, $99 or $200.

Interest: 24.99% variable APR.

Annual Fee: None

Personal Guarantee: Required

Welcome Offer: None

Best For: Building or rebuilding credit.

Wells Fargo Business Secured Credit Card

Card Type: Secured credit card

Rewards:  Your choice of cash back or reward point program. | Enrollment in either rewards programs is optional.

Employee Cards: $25

Credit Limit: $500 to $25,000 credit line based on the amount you deposit in your business banking account.

Interest: Prime + 11.90% on purchases. | Prime + 20.74% on cash advances. | Up to 21-day grace period.

Annual Fee: $25

Personal Guarantee: Required

Welcome Offer: Join the rewards program when you get your card and earn 1.5% cash back on qualified purchases for the life of the account.

Best For: Building or rebuilding credit.

Visa®

Capital One Spark Cash for Business

Card Type: Credit card

Rewards: Unlimited 2% cash back with no minimum to redeem.

Employee Cards: Free

Interest 18.74% variable APR

Annual Fee: $95 — Free for the first year.

Personal Guarantee: Required

Welcome Offer: $500 cash bonus with $4,500 on purchases in the first 3 months.

Best For: Businesses who simply want one flat rewards rate.

Capital One Spark Classic for Business

Card Type: Credit card

Rewards: Unlimited 1% cash back with no minimum to redeem.

Employee Cards: Free

Interest: 24.74% variable APR

Annual Fee: None  

Personal Guarantee: Required

Welcome Offer: None

Best For: Businesses that can’t qualify for the Spark One Cash card.

Chase Ink Business CashSM

Card Type: Credit card

Rewards: Earn 5% cash back at office supply stores and on internet, cable and phone services. | 2% cash back on spent at gas stations and restaurants. (5% and 2% up to the first $25,000 in purchases.) | 1% on all other purchases.

Employee Cards: Free

Interest:  0% intro APR for 12 months. | 14.99%–20.99% variable APR thereafter.

Annual Fee: None

Personal Guarantee: Required

Welcome Offer: $500 bonus cash back after you spend $3,000 in the first 3 months.

Best For: Flexible cash back rewards with no annual fee.

Chase Ink BusinessSM Preferred

Card Type: Credit card

Rewards: Earn 3 points per $1 on the first $150,000 spent on travel, shipping, internet, cable and phone services and advertising purchases made with social media sites and search engines.

Employee Cards: Free

Interest: 17.74% – 22.74% variable APR

Annual Fee: $95

Personal Guarantee: Required

Welcome Offer: Earn 80,000 bonus points after you spend $5,000 in the first 3 months. | Earn 20,000 bonus points when you refer another business owner who signs up for the same card.

Best for: Businesses that regularly travel to trade shows or advertise regularly.

Read More: 10 Best Businesses for Cash Flow

Checklist: Choosing the best business credit card for your business

You’ve just read our list of the best business credit cards in the United States, now comes the challenging part — picking the best one for your business. Use this checklist of things to consider and questions to ask to help narrow down the best options for your business.

The following sections after this checklist will also help you prepare for the application process and do the math as your final point of comparison. Then we wrap up by revealing our top picks.

Figure out if your business needs a charge card, credit card or secured credit card

While you know there are several main credit card brands, you probably didn’t know that there are three types of cards.

1. Charge cards: These cards have no pre-set limits, which can be helpful whenever you need to make large purchases. However, you must pay the balance each month in full. If there are times when you have to carry a balance, the interest and penalty rates are substantially higher than those for similar credit cards.

In our list of the best credit cards in the United States, two charge cards from American Express made the list — the Business Gold Rewards  Card and Business Platinum Card. For these cards, users can earn rewards points or travel miles at a higher rate than with other comparable credit cards. You also have to have a pretty solid credit history in order to qualify for these cards.

2. Credit cards: These are the traditional credit cards (revolving business credit cards) that you’re most familiar with. There’s a set limit you can spend each month and they’re more flexible in terms of carrying a balance. Because businesses are more likely to carry a balance with a credit card, the interest and penalty rates are lower than with charge cards.

If you like to earn rewards, you can choose from reward points, travel miles or cash back. Many of the best business credit cards in the United States also offer a 0% introductory APR. If you’re considering a business credit card, making a large purchase or changing cards, the 0% offers are pretty enticing. Just make sure you know what the interest and annual fees will be when these offers expire.

3. Secured business credit cards: Designed for newer business or business with lower credit ratings, secured cards offer a way to build or repair credit. If you can’t qualify for a traditional business credit card, a secured card can also be a first step to getting a standard business credit card.

With a secured card, you have a pre-set limit. In certain cases, you have to have the exact amount as the limit in your business checking or savings account. The issuing company will explain the requirements. Once you’ve established a record of on-time payments, you can increase your monthly limits and/or switch to a regular (unsecured) business credit card.

The interest rates depend on how the card is structured as well as your business’ credit history. In general, the rates are competitive with traditional business credit cards.

Know how your business credit card affects your credit history

Before you apply for a business credit card, even if it’s one of the best business credit cards in the United States, find out if your application will be reported on your business credit history. Some applications may also trigger a record on the owner’s personal credit history, so make sure you know ahead of time.

Certain credit card companies also report to the major business credit bureaus. Again, find out if they report both good and bad financial transactions – or only delinquent or late payments. This kind of information is invaluable for building and maintaining your business and personal credit histories.

This table from NerdWallet summarizes which banks report business credit card activity to the credit bureaus.

US credit cards that report to credit bureaus

Learn More: What’s a Business Credit Report?

Know what the interest rate for your business credit card will be

The interest rates for the best business credit cards in the United States definitely vary. It’s also important to note that unlike consumer credit cards, business credit card companies don’t have to notify customers about interest rate changes.

While a credit card company can’t raise the interest rate on a past-due amount until a period of 60 days has passed, business credit card companies aren’t held to this standard.

As you investigate business credit cards for your business, find out:

  • How long the introductory rates are valid.
  • Exactly which rate you qualify for and the reasons why.
  • The rates for late payments, cash advances and balance transfers.
  • If you’ll be notified in advance of upcoming increases.
  • If your payments will be applied to the balance with the highest interest first.

Understand how the annual fee works

With any of the top business credit cards in the United States, you’ll want to know how much the annual fee will be and if you’ll be notified of any increases. You should also ask if the annual fee is applied to employee cards too.

According to creditcards.com, the higher the fee, the greater the rewards. But, you also have to factor in the value of the rewards and if they matter to your business. Later in this article, we’ll be doing the math on business credit cards. This will show you how to compare rewards cards to cards with lower or no annual fees.

Note: Another consideration is that business credit card annual fees are also valid business tax deductions. When you’re making your decision, factor in the fact that you can deduct your annual fee at tax time.   

Determine if you’ll need employee cards

Need to offer a way for employees to manage expenses or purchase items as a routine part of doing business? Most business credit cards let business add employees to the main credit card amount. While many on our list of the best business credit cards in the United States, there’s at least one that charges an annual fee for each employee card.

Some business credit card companies also place a limit on the number of free employee cards they’ll issue. One more thing: Be sure to verify if the employee cards also include any fraud or purchase protection plans.

Establish if your business will benefit from a rewards program

Within our list of the best business credit cards in the United States, there are three main types of reward programs: points, air miles and cash back. Beyond this, the differences are in how the programs are applied.

Some have varying rates of returns based on specific spending categories. Other credit card companies give you more air miles when you use their travel services. (Meaning you should research their online travel services to see if they match your company needs before signing up for rewards.)

Again, it all comes back to doing the math and asking the right questions. How much do you have to spend to earn your rewards and what’s the value of the rewards over time? Plus, some rewards have limits and expiration dates too.

Tools, like ValuePengin’s rewards calculator, can also help you determine the long-term value of the rewards. According to their formula, using an average monthly spend of $1,430, the Chase Ink Business CashSM card had the highest two-year rewards value.

Know if there are places where your business credit card is accepted or not accepted

While American Express, Mastercard and Visa are widely accepted, there are instances where they aren’t. If your business makes regular purchases at certain retailers or wholesalers, make sure you know which types of credit cards these merchants accept. It’s one of those “know before you go” type things.

Ask if there’s a foreign transaction fee

If you travel or operate internationally, foreign transaction fees can add up. Read the fine print or as a service representative to verify if there’s a foreign transaction fee before you sign on the dotted line.

More Tips: 7 Ways to Boost Cash Flow

Understand if you’ll be dealing with the credit card company itself or the issuing bank

In the United States, Mastercard and Visa are only issued through banks. This means you’ll be establishing a relationship with the issuing bank, which may also have a service agreement with Visa or Mastercard to manage cardholder needs. With American Express, you work with American Express. It’s mostly just how they’ve set up their business models. As long as you feel that you’ll get the service and support you need, that’s all you need to know.

Applying for a business credit card

Applying for a credit card is a business transaction and you’ll want to have all the required information, whether you apply online, over the phone or in person at the bank. Here’s what you’ll need to apply for any of the best business credit cards in the United States:

  • Employer Identification Number (EIN) — If your business is incorporated, then you would have received this number when you registered your business with the Internal Revenue Service (IRS). If you’re a sole proprietor, your Social Security Number is also your EIN.
  • Business name and address — When you provide these items, make sure they match the information on your tax records. Otherwise, the issuing company may have a harder time verifying your business details.
  • Business financial information — This includes your business banking accounts and may include your previous tax filings to help substantiate your income and overall financial health.
  • Personal financial information — If you own more than 25% of the business, you will need to provide your legal name, date of birth, SSN, home address and percentage of ownership.
  • Your business plans, books and budget — While each of these items informs each other, they also help creditors evaluate the overall strength of your business. Having your books in order and providing copies of your recent financial statements can go a long way in showing that your business is creditworthy.

Before you apply: Verify if you’ll have to provide a personal guarantee

A personal guarantee is pretty much what it sounds like. It’s a promise that the business owner or applicant will be personally responsible if the business fails to pay its debts. It doesn’t matter if you’re incorporated or not. The laws are on the side of the card issuers on this one. This is why you need to find out if you have to provide a personal guarantee as part of the application process.

If you already have a business relationship with the issuing bank along, along with a record of on-time payments and low debt-to-equity ratio, you might be able to negotiate the waiving of the personal guarantee. If not right from the start, you can also try again after a few months of paying your credit card on time.

In general, find out if a guarantee is required and if there are any criteria for exclusion that your business can meet. Also know that there are cards on our list of the best business credit cards in the United States, like the Bank of America® Business Advantage Travel Rewards card that don’t require a personal guarantee.

Best Practices: Separating Business and Personal Finances 

Calculating the costs and rewards of business credit cards 

Brace yourself, this is the math part. If you’re not a math person, you will be when you see how important determining costs and comparing rewards is in choosing the best business credit cards in the United States.

Start by estimating your average owing balance each month. For these examples, we’ll use $4,000. Keep in mind that these examples assume you’re not using your business credit card again until the owing balance is paid.

Example # 1 — Comparing annual fees and interest rates (excluding rewards and intro offers)

In this example, we’re looking at interest rates and annual fees only. We’re leaving out any introductory 0% APR and waiving of the annual fee offers.

Card # 1 — CitiBusiness® AAdvantage® Platinum Select®
$4,000 x 17.49% (the lowest variable rate) = $699.60 in interest charges.
$699.60 + $99 annual fee = $798.60 total cost to carry a balance

Card # 2 — Capital One Spark Cash for Business
$4,000 x 18.74% (the lowest variable rate) = $749.60
$749.60 + $95 annual fee = $848.60 total cost to carry a balance

The 1.25% difference in interest had a lot more impact than the $5 separating the annual fees. With close to half of the cards on our list setting interest rates based on financial health, you can clearly see how solid financial health helps out.

Example # 2 — Comparing the value of rewards and intro offers

In order to compare “apples” to “apples” — we’re going to compare two cash back cards. We also factor in the intro offers to show the costs the once the offers expire.

Card # 1 — Capital One Spark Cash for Business

In the first year, with the intro offers:
$4,000 X 18.74% = $749.60
$749.60 + $0 annual fee = $749.00
$4,000 X 2% cash back = $80 + $500 cash bonus = $580
$740.00 – $580 = $169 total cost when you carry a balance in the first year.

Following years:
$4,000 X 18.74% = $749.60
$749.60 + $95 annual fee = $848.60
$4,000 X 2% cash back = $80
$846.60 – $80 = $766 total cost when you carry a balance thereafter.

Card # 2 — Capital One Spark Classic for Business

Every year (This card has no annual fee or intro offers):
$4,000 X 24.74% = $989.60
$989.60 + $0 annual fee = $989.6
$4,000 X 1% cash back = $40
$986.60 – $40 = $949.60 total cost when you carry a balance.

The lower interest rate and higher cash back percentage of the Spark Cash for Business card offset the costs of the annual fee. When you compare the difference in cost between the first year and the following year without the offers, brace yourself for a little sticker shock.

Our choice for the best business credit card in the United States

Our top choice is the American Express SimplyCash® Plus card. Now that the suspense is over, we’ll explain our criteria. First, in terms of rewards, cash is the most tangible. You don’t have to convert it to anything, you just use it. This is why compared all the cash back cards on our list of the best business credit cards in the United States to determine the best value.

  • Cash back: We overlooked any first-year offers, like 0% APR for 9 to 12 months or no annual fee. Then we just ran the numbers. As the cash back rewards for the SimplyCash® Plus card were tiered, we broke the reward amounts on our $4,000 monthly spend number down this way: $2,000 x 5% + 2,000 x 3% + $1,000 x 1% = $100 + $60 + $10 = $170 cash back per month. (Assuming that you’re going to spend more on the categories where you earn the most.)
  • Cost of carrying a balance: We then calculated, that if you carried this $4,000 balance over for one billing cycle at 20.99% (the highest APR), you’d pay $839.60 in interest. Subtracting the cash rewards of $170, you end up with a cost of $669.60 to carry a balance. This was the lowest cost of all the cash back cards. Plus, there’s no annual fee for the lifetime of the card.
  • Introductory offers: If you take advantage of the introductory offers, you really do well with no interest for the first nine months. Meaning for nine months, all you do is accrue cash rewards. This card also has the highest maximum, $50,000 each year for the 5% and 3% categories.
  • Flexible spending: With this card, you can “buy above your limit” when making large purchases. There are no overlimit fees and you simply need to pay the overage amount in full when payment is due.
  • Flies in the ointment: The main drawback is that the categories are set to narrow parameters that suit a white-collar professional business more so than a manufacturer, contractor or retailer. The highest level of cash back is at office supply stores and US-based mobile phone providers. The second highest level also favors travel and tech over raw materials. If you travel or do business internationally, this card also has a foreign transaction fee.

Our second and third runners-up for the best business credit cards in the United States

At $689 to carry a balance, the Chase Ink Business CashSM card comes a close second to the American Express SimplyCash® Plus card. Its cash back rewards are structured similarly to the top card, but its second tier of rewards is only 2% cash back at gas stations and restaurants and both tiers have a $25,000 annual limit.

With its flat 2% cash back on all qualified purchases, the Capital One Spark Cash for Business card the top contender for businesses who don’t want to fuss with categories. Granted the cash back when you spend $4,000 is a mere $80. When you add interest and the annual fee, the total cost to carry a balance is $766. In the first year, waiving of the annual fee and the $500 cash bonus when you spend $4,500 in the first three months brings the cost to carry a balance down to $169.

Closing thoughts: Know all the tools available for accessing funds and managing cash flow

A business credit card, even if it’s one of the best business credit cards in the United States, is a financial tool. But, it’s not the only tool at your disposal to help you manage your cash flow.

Start by analyzing and forecasting your cash flow to get a clearer picture of how money moves through your business on a regular basis. The more you track and monitor your financials, the more aware you’ll be of the patterns and which variables have the greatest impact.

You should also be aware of the range of traditional and non-traditional short-term financing options available to businesses. Know all the tools in your toolbox from term loans and lines of credit to invoice factoring and financing. There’s always a cost for borrowing money, the key is knowing which costs make the most sense for your business and the specific instance in which you need funding.

Finally, pay attention to how other businesses and financial service providers view your business in terms of risk. Monitor your credit scores and use our proprietary risk score to assess your standing.

QuickBooks online users can get started right now.
(Other integrations are coming soon.)

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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Short-Term vs Long-Term Business Financing

short-term vs long-term financing hero image

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

invoice factoring vs invoice financing application image

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.

 

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.  

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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.

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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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Cash Flow Basics: Key Concepts and Terms

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A majority of the businesses around the world are small businesses. According to OECD data, the figure is 99%. Another thing they have in common is cash flow problems. Regardless of whether a business is in an advanced economy, emerging area or somewhere in between, cash flow and cash flow basics are a universal lifeblood and stumbling block.

In the United States alone, most small to medium-sized businesses (SMEs) only have enough cash on hand to cover 27 days of normal costs of doing business. Even the superstars, the top 25% of SMEs only have two months of cash reserves to fund their businesses.

At PayPie, we don’t believe that any SME ever intentionally overlooks its cash flow basics. It’s just matter of finding the right resources to explain the concepts and the best tools to manage financial health.

That’s why we’re providing an overview of some of the basic cash flow concepts and terms. It’s not a glossary so the words won’t be in alphabetical order. Instead, they’ll be grouped by concept in order to add context to each explanation.

Cash flow is the amount of money that moves in or out of a company.

Cash flow basics 101 — A definition of cash flow 

In its simplest form, cash flow is the amount of money the comes in or out of a company. A primary indicator of financial health, cash flow shows how efficiently a business is running and if that business is able to pay its bills and keep the lights on.

A business that’s cash flow positive has enough money available to meet its current and most-pressing financial obligations. A business that’s cash flow negative has more debt than income and might struggle to meet its financial responsibilities.

There are instances where a company is cash flow negative and is doing so intentionally, such as going through a launch or investment phase. However, in most cases, unless it’s planned or managed, most businesses would prefer to be cash flow positive.

Inflows, outflows and everywhere your cash goes

Income earned through sales, assets that can easily be converted into cash and funding, are called inflows. Cash used to pay for expenses and investments are referred to as outflows.

Some more cash flow basics every business should know are the difference between recurring cash flows and one-time cash flows.

A recurring positive cash flow is a predictable, reliable income source, like retainer or subscription fees billed to customers, while recurring negative cash flow is a consistent expense, like payroll.

A one-time positive cash flow (sit down for this) is a singular influx of cash. One example would be cash from the sale of equipment, land or facilities. A one-time negative cash flow would be a large purchase or expense, such as an insurance deductible for flood damage.

In the same vein, a fixed cost is something like leasing costs for office or retail space. No matter how many widgets you sell, you’re still paying a set rate for your kiosk. This is another shocker: A variable cost changes. These are things like fuel, utilities and raw materials.

Long story short, in most cases, you want your recurring positive cash flows to be greater than you recurring negative cash flows. You also want to be aware of your fixed costs and do as much as you can to control or plan for changes in variable costs.

Get more tips: How to read a cash flow statement.

A cash flow statement explained

There are three fundamental financial statements for tracking and measuring a business’ financial health:

  • Cash flow statement (statement of cash flows)
  • Profit and loss statement (P&L or income statement)
  • Balance sheet (statement of financial worth or net worth)

As per its name, a profit and loss statement compares revenues against costs and expenses to determine if a company is profitable. A balance sheet compares what a business owns to what it owes in order to indicate the amount of working capital, cash reserves available to cover near-term commitments and recurring expenses.

A cash flow statement brings information from the profit and loss statement and balance sheet together by analyzing the flow of cash through the company in terms of day-to-day operations, capital investments and financing activities. (This is one of those cash flow basics to remember.)

  • Operational cash flow literally includes all the nitty gritty expenses (labor, inventory, etc.) that go into making and offering the goods and services a business provides.
    • It also includes accounts receivable and payable (ingoing and outgoing invoices).
    • Current assets and liabilities are two key terms related to this concept.
      • Current assets (counted as part of your inflows) include your cash on hand and any assets that can be quickly sold to generate cash within 12 months.
      • On the flip side, current liabilities (tracked as outflows) are your expenses that must be paid within 12 months.
    • Investment cash flow represents the purchase of long-term assets, like buildings and equipment.
    • Cash flow from financing activities is the money that comes from loans or lines of credit. Depending on your business model, this can also include investors.

Every business financial statement has a specific function. What a cash flow statement does differently is that it helps identify patterns in terms of how and when money is coming into or leaving a business.

Publicly traded corporations have to share their cash flow statements. The average small business doesn’t. Instead, for SMEs, its cash flow basics and measurements are vital financial management tools.

While business models and structures vary, most SMEs will pay the most attention to operational cash flow as part of their cash flow analysis and forecasting.

A cash flow statement combines info from the P&L statement and balance sheet

The direct versus the indirect method of reporting cash flow 

The difference between cash and accrual accounting and how each one calculates net income lies at the heart of the direct and indirect methods for reporting operational cash flow.

Operational cash flow is singled out because it’s the main areas affected by differences in how inflows and outflows are tracked. Warning: It’s a little dry for the next few paragraphs, get ready to skim…

  • Net income is the total amount of money a company has left once all other expenses are taken out.
  • The cash method of accounting tracks income and expenses as they take place.
  • The accrual method includes future income and expenses before they’ve actually hit the company’s books.

Businesses that use cash-based accounting are able to easily use the direct method. This is because they’ve already tracked the actual cash movements in and out of the business as part of the net income.

As most small businesses use the accrual system, the indirect method requires that flow of cash be added back in when net income is entered into the cash flow statement.

When you use the indirect method, you have to account for the actual amounts that come in and out, like accounts receivable (money coming in from customers) and accounts payable (the money you owe to others).

And that’s more detail than you probably ever wanted to know about the direct and indirect method. (So much for just cash flow basics.) Big picture: Whether you scramble or poach your eggs, in the end, you’re still eating eggs.

If you’re curious, when you request a free cash flow forecast from PayPie, we use the indirect method in our calculations.

cash flow basics cash flow management

Cash flow management and monitoring — the basics

One of the cash flow basics that every overview should cover is all the terms that relate to management and monitoring. Cash flow management refers to the entire process of monitoring your cash flow from the creation of cash flow statement to analyzing the results.

The process starts by creating a weekly or monthly cash flow statement. Once the statement is complete, you can perform a cash flow analysis or deep dive on the numbers.

Cash flow forecasting (cash flow projections) are the inferences and predictions drawn from the regular creation and analysis of cash flow statements. A cash flow forecast is a report that contains these interpretations.

Then there’s a cash flow budget that compares the projections in a cash flow forecast with the actual numbers reported in your cash flow statements.

When you bring all these details together to determine how much cash moves in and out of your business and when it happens, you have a cash flow cycle (cash conversion cycle).

It’s sort of like a Russian nesting doll with the cash flow statement as the smallest doll and forecasting and budging being the next sizes up. Each level of detail and analysis builds up to create a larger whole.

Learn more about cash flow and financial health. 

Cash flow versus profitability — what you really need to know

The more you read about cash flow and cash flow basics, the more you’ll see discussions on the difference between cash flow and profitability.

What you need to know is that profitability just means that there’s money coming in. On the other hand, cash flow shows the money coming in and going out. Cash flow helps you determine your break-even point when the amounts coming in equal the amounts going out.

Profitability is only one side of the coin. A business can be making money, but money can also be leaving a company at a rapid or unexpected rate. It happens — more often than anyone would like.

Here’s an example: Jane’s bakery, Cake-and-Bake, is extremely popular. She’s got so many orders, she can barely keep up. Since business is booming, she bought a few more industrial mixers and hired more staff.

What she didn’t do was project was how much cash was coming in from the current and future orders — before buying new equipment and hiring more people. The result: She went too far beyond her break-even point. She found herself low on dough (pun alert) because the cost of the mixers and the new staff members was more than amounts coming in from existing orders.

Short-term liquidity versus long-term solvency  

Liquidity and solvency are often mentioned together, especially in discussions on business financial health. The key takeaway is that liquidity is a short-term measure of your ability to pay your bills.

Solvency is the long-term measure of your ability to keep your company running over time. It’s often used as an indicator of the overall viability of your business model.

Most areas within a cash flow statement and forecast focus on liquidity. This is especially true for operational cash flow, where most of the current assets and liabilities are tracked.

Solvency is often evaluated in terms of debt levels and equity (primarily recorded in cash flow from financing activities). It measures how much ownership the company and its founders have retained in comparison to outstanding loans and/or investor and shareholder agreements.

Take a bow… you’ve just covered some of the basics of cash flow.

It wasn’t that bad, was it? One more concept that’ll change how you see your cash flow basics is automation. You don’t have to build spreadsheets or toil away endlessly to create cash flow forecasts. With PayPie, you can use the information you already have in your accounting software to create easy-to-read cash flow forecasts.*  Learn more and get started today.

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

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

 

Image via Pexels.