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.

Accounts Receivable Turnover: Why It Matters

Accounts Receivable Turnover Paid Invoices

As a business owner, you probably have numbers running through your head all the time as it is. But, it’s important to add another calculation to your list — accounts receivable turnover — to help complete your cash flow picture.

At PayPie, we know how difficult it can be to stay on top of every sum, ratio and forecast of your accounts, no matter how diligent of a business owner you are. That’s why we try and make it simpler with insightful tools that delve deeper into your finances, rather than showing you your account balance and nothing else.

Together, we can add this calculation to the list.

What’s accounts receivable turnover?

When you invoice a customer and set the terms of payment, you’re essentially creating a form of credit.

Customer credit is a vital payment method for any business — it lets your customers buy goods or services from you now and fully pay for them later. Therefore, it can drive sales, but it can also be a detriment to your cash flow if some of your customers fail to pay in full, even with time to do so.

Accounts receivable turnover analyzes just how well you’re dealing with outstanding customer credit. The simple ratio, also known as the accounts receivable turnover ratio or debtor’s turnover ratio, gives you an insight into how customer credit affects your business.

Mainly, it points out how well you’re managing your customer credit relationships and collecting the proper payments on any outstanding debts your customers are carrying.

Read More: 7 Ways to Boost Cash Flow

How accounts receivable turnover is calculated

Jot down this ratio — or bookmark this page — so you remember it from now on:

Accounts receivable turnover = net credit sales ÷ average accounts receivable during the tracking period

Be sure you’re only incorporating your credit sales since cash payments have nothing to do with the effectiveness of your crediting scheme.

This ratio is often calculated on an annual basis. However, it can also be measured on a quarterly or monthly basis.

accounts receivable turnover ratio calculation

An example of how to calculate accounts receivable turnover

The following is an example of how to calculate accounts receivable turnover on an annual basis.

Let’s say Widgets Incorporated had $1,000,000 in accounts receivables as of January 1, the start of their fiscal year. On December 31, at the end of the year, they had $2,000,000 in accounts receivables.

Throughout the year, they had a total of $5,000,000 in net credit sales.

Step 1: To get the average accounts receivable, you follow the same formula that you would for any average. You add both numbers together and divide by two.

Average accounts receivable = ($1,000,000 + $2,000,000) ÷ 2 = $1,500,000

Step 2: Take the net credit sales and divide it by the average accounts receivable.

$5,000,000 ÷ $1,500,000 = 3.33

Step 3: Divide 365 (number of days in a year) by the accounts receivable turnover to see how long it takes an average customer to pay their bill.

365 ÷ 3.33 = 109.6

This means that the average Widgets Incorporated customer takes nearly 110 days to pay their bill. Clearly, this needs to be fixed. The company makes great widgets, but they’re a bit too generous with their payment periods and need to ramp up on collections.

Accounts Receivable Turnover Ratio

How accounts receivable turnover is used

You can’t predict future sales or cash flow with 100% accuracy, but the accounts receivable turnover ratio gives you deeper insight into your business prospects. The ratio shows you how long it takes customers to pay their debts, which can help you plan your future expenses.

By pinpointing any collections problems your company faces, you can boost cash flow back into the business. This will help you foster future growth for your company and focus your efforts to cultivate a client base that’s financially robust and responsible.

Read More: Cash Flow Basics — Key Concepts and Terms 

Why accounts receivable turnover matters

Your ratio can reveal whether or not your company has a good credit policy. It also shows how well you’re managing any outstanding debts. A low accounts receivable turnover ratio might deter lenders from working with you. Without available cash flow at the right points in time, how will you repay your debts?

If you’re unhappy with the ratio you find, you can implement new policies to boost your figures. For example, a low ratio might require you to impart more stringent penalties on late payments. Or, you could come up with a rewards program for those clients who always — or begin to — pay on time.

Read More: Cash Flow Problems: 6 Top Causes

Evaluating your accounts receivable turnover

What’s a good turnover ratio and what represents opportunities for improvement? When it comes to the account receivable turnover ratio, the higher the number, the better. A sizeable figure can highlight plenty of good qualities about your business, including:

  • You’re regularly receiving debt payments, thus boosting cash flow.
  • Customers pay you back fast, which means they don’t have an outstanding line of credit and can buy more from you.
  • You have a good customer base that adheres to invoice due dates rather than taking on debts
  • Your collection system works well.

On the other hand, you might calculate your account receivable turnover to find a very small number after the equal sign. If so, your low ratio could indicate that:

  • Your cash flow is low since your customers have lingering debts.
  • Customers can’t make payments, which means they likely won’t buy again in the future.
  • You have an overly lenient credit scheme.
  • Your collection system is ineffective.

Fortunately, once you see where you fall on this spectrum, you can start making some of the improvements mentioned above to your crediting scheme. Or, you can keep moving forward if you’ve already got a system that’s proven to work.

If you experience a cash flow shortage while you’re working on improving your accounts receivables processes, invoice factoring is one way to turn an unpaid invoice into cash. Basically, it lets you sell the invoice to a buyer/lender so that you can get a set percentage cash out of the invoice as quickly as possible. (Learn more about invoice factoring here.) 

How accounts receivable turnover affects cash flow

It’s clear how a positive accounts receivable turnover would boost cash flow. If customers are diligent about repaying their debts — and if you incentivize their behavior or penalize lateness — you’ll have more cash pumping into your company.

On top of that, your regular customers will keep coming back, since they’re regularly repaying and re-opening their lines of credit. The more good payments you’re receiving, the better your cash flow will be.

Cash flow is vital to your business— when money comes in on a reliable and regular basis, you can expand your reach and seize opportunities in countless ways. And, while the accounts receivable turnover ratio is one way to figure out how you can boost the amount of cash on hand, you will also benefit from a cash flow forecast from PayPie.

This report takes a deep dive into your accounts receivables to show you just how healthy your business is right now and how much it’s set to grow in the future. It helps you visualize your strongest suits, as well as the areas in which you can improve.

If you’re a business owner, then there’s no better time than now to start forecasting and planning for the future.

Log in — and crunch some numbers of your own — to get on the right track.

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

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

Images via Shutterstock and Pexels.

Choosing a Business Banking Account

Choosing a business banking account

It’s already hard enough to open your bank account, scroll through your expenditures and remember exactly when and where you made each purchase. That task would become exponentially more difficult if you added your business expenses into the mix — you’d have to mark each payment as professional or personal, then figure out the rest.

That’s why it’s so important to open separate bank accounts for both areas of your life. Some business owners go so far as to choose two different banks — one for their professional dealings, and one for their personal expenses. The clear separation makes it simpler to stay on top of all your financial standings. Separate accounts also lead to more straightforward tax filings and improve your company’s transparency.

Of course, you can’t do it without choosing a business banking account to start. At PayPie, we know how difficult this task can be without a little guidance. As we’re also all about guiding small and medium-sized businesses, like yours, on how to improve cash flow, here are our best tips for selecting the right place to keep your money:

1. Consider the services you’ll need

It’s simple to shop for a bank that meets your personal financial needs. You know how much money you have, the type of interest rate you want and the ease with which you can find ATMs around town. But choosing a business banking account means having to tick more boxes. It’s up to you to discern which services are vital to you and your company before choosing a bank.

Every business owner’s banking needs will be different, of course, but required features tend to include:

  • Checking and business savings accounts
  • Online banking access
  • Credit cards and deposit-only cards
  • Access to discounted accounts for employees
  • Wire transfers
  • Payroll features
  • Retirement accounts and insurance
  • Discounts on other services, such as shipping and office supplies

You might want a bank that offers lending or other financial services. Some banks will provide further benefits, too, such as checking incentives, overdraft protection and discounted fees for inter-bank transfers. Depending on the ways you’ll use your bank, you can compare each company’s features before settling on the right bank for you.

Learn more about separating business and personal finances. 

2. Compare large and small banks

Well-known names in banking have reached their height for good reason. They’re convenient — if you travel from city to city, you can probably find a branch of a national bank wherever you go. They may also have better interest rates and might be able to provide a longer list of services.

But a smaller bank has a hand in the local market, which means they’ll be more interested in the success of your business. They might be more inclined to give you a loan because they know it will help the economy to bring another company into the mix. They can offer tiered interest rates to compete with bigger banks, along with other incentives. The personal touch will sometimes extend to tougher times, too. If you’re late on repayment or if you overdraft your account, for example, a local bank might not hit you with as many fees as a bigger branch would.

Contrast the merits of local banks with better-known brands when choosing a business banking account. Again, it’ll be important to know what you need before embarking on your search, so you can choose the bank that’s best for you.

3. Ask other business owners

As a small business owner, you already know the importance of networking with other business owners. You can connect in person, online or even at networking events. Regardless of how you do it, though, you’ll find fellow entrepreneurs vital in your search for the perfect business banking account.

That’s because established business owners have already charted the course you’re on right now. They’ve been through the process of choosing a business banking account based on the criteria you have in mind. They also have experience with the places you’re considering. So, reach out to your contacts and ask whom they use. They might have incentives to help you — some banks give clients referral bonuses so the conversation will be mutually beneficial.

Of course, you might find the results of these conversations inconclusive, or you might not know any business owners whose banking needs compare to your own. In that case, you have the internet at your fingertips. Do some online searches to find customer reviews of the brands you’re considering. You should always take extremely positive or negative reviews with a grain of salt. More moderate accounts of what’s good and what’s bad will be more helpful to you in your search.

4. Bond with your banker

Once you’ve landed on the right bank for you, don’t stop there. Instead, try your best to work with the same banker every time you reach out to your branch for help.

For one thing, you’ll be happy to have a familiar, trusted face guide you through something as stressful as your financial dealings. But a trusted banker will also know what types of services might suit your needs, even if you didn’t initially ask for them. They’ll find discounts or improved rates, all of which will enhance your company’s standing without much effort on your part.

Discover 7 ways to boost cash flow. 

5. Bank with confidence

Perhaps the most important tip of all when choosing a business banking account is to go with your gut. Which financial institution makes you feel the most secure? You’ll have an easier time deciding if you’ve done the research to point out the type of services you need, uncovering the banking options you have and asking for others’ opinions.

At PayPie, we’re all about making your financial needs simpler to fulfill — and banking is just one of our areas of expertise. Explore our website and see all the ways we can make your business’ finances stress-free with the click of a button.

Having a business bank account that meets your needs is just one component of managing your cash flow. At PayPie, we’re all about giving you the tools you need to manage your cash flow — starting with cash flow forecasting and risk scoring based on the business data in your accounting software.

QuickBooks Online users can get started today. (Other platforms are coming soon.)

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

Image via Pexels.

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.

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.

Image via Pexels

The Golden Rule: Separating Business and Personal Finances

separating business and personal finances lifestyle image

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

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

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

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

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

Is separating business and personal finances really a big deal?

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

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

Read more: Cash flow 101 — the basics. 

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

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

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

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

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

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

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

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

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

Sole proprietorships — separating business and personal finances and cash flow

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Separating business and personal finances improves...

Incorporated businesses — business versus personal finances and cash flow

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

Corporations are taxed as separate entities.

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

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

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

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

Mixing business and personal finance increases

Five ways to keep your business and personal finances separate

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

1. Open business banking accounts.

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

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

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

3. Pay yourself a salary.

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

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

4. Know the difference between business and personal expenses.

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

A business expense relates to the running of a business.

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

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

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

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

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

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

5. Develop systems for tracking business and personal expenses.

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

Businesses can track expenses in their accounting software.

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

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

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

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

Read more: The 10 Best Businesses for Cash Flow. 

The moral of this post…

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

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

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

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

More money rules to follow

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

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

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

Image via Pexels

 

What’s a Business Credit Report and Why You Should Care

business credit report lifestyle desktop

Depending on your own personal experience, this business credit report story might sound all too familiar. A business owner goes to a bank to request a business loan, which is rejected quicker than the ink dries on the application.

Why? Because the bank checked the company’s credit by going to at least one of the major credit bureaus and researching the business’ credit score. But, wait, the business hadn’t requested a credit report for itself. That’s right. But, these guys don’t just serve the business owners, they also provide credit ratings to third parties. In order to grow their businesses, the credit bureaus are always growing their databases.

Business credit report. Hmm… it sounds serious, doesn’t it? It almost brings you back to the days of getting a report card. (For any junior entrepreneurs or entrepreneurs in training, please adjust this phrase accordingly.)

In all reality, your credit report is a tool that you can use to measure the health of your business, most specifically, in terms of how creditworthy you are in the eyes of third parties, like banks and vendors.

The minute you start talking about business credit reports, the conversation will quickly swing to the topic of credit scores. Here’s how they’re related: A credit report is a document that contains the credit score.

Going back to comparing a business credit report to a report card, your credit score is like your total grade point average, it’s the measure that sums up all the different things (key performance indicators or KPIs in business-speak) that are taken into account in to how well you’ve managed your company’s performance in terms of securing funding and paying debts.

Just like test scores, business credit scores usually are recorded on a numerical or grade scale. The lower your score or letter grade, the riskier you appear. The higher your score or letter grade, the more universities want to recruit you and possibly give you a scholarship.

But, you know what? Those honor students only tell part of the story. There’s a range of learning styles and a range of business experiences and a low credit score doesn’t have to be the end of the world or your business. It simply gives you a perspective on where you’re staring and the specific obstacles you have to face in order to promote your strengths and your creditworthiness.

Remember, Bill Gates and Steve Jobs both dropped out of college.

The factors that affect a business credit score

One of the current challenges with business credit reports is that there isn’t a single, uniform standard or algorithm for determining the actual credit score. It’s true —  it’s 2018 and there’s no prevailing benchmark.

Current methods for building business credit reports focus predominantly on liabilities, like business loans, credit cards and collections. What’s missing is a comprehensive view of both assets and liabilities.

As a result, there’s a chance that a company can be unfairly cast in a negative light — depending on the KPIs used in calculating the credit score.

Consider a business that has several outstanding invoices from some of its most dependable customers. While this business will most likely have these funds in the near future, in the meantime it might be seen as a credit risk based on these liabilities. Despite the likelihood that these invoices will be paid.

If their credit score took their proven track record with a reliable vendor into account, this company would be less likely to be seen as a risk. But, right now, this aspect of accounts receivable isn’t taken into account by traditional business credit report calculations.

In another instance, a company has an outdated collections notice referenced in their credit file. Even though the company has resolved the outstanding debt, the negative information is there until a successful appeal process leads to the removal of this data.

Each of these business owners has worked incredibly hard to build their business — only to hit a crossroads created by inadequate or inaccurate information in their business credit reports.

What PayPie is doing differently

Through our free analytics and insights, you will receive a risk score that gives you an indicator of your overall financial health. Your risk score also gives you a better idea of how other businesses and third parties and might view you.

By including variables that many other rating services leave out, like how many customers you added in the last 30 to 60 days, how many repeat customers you have and the average lifespan of your customers, we’re able to give you a more complete view of how others might evaluate you in terms of risk.

Your assessment will also help you better understand your cash flow and provides insights on how to build on your strengths and conquer your weaknesses.

Getting started is as easy as connecting your QuickBooks Online account to PayPie.* Then all you have to do is run an assessment, using the current data you’ve worked so hard to build and maintain in your accounting system.

The current business credit score landscape 

The scores and reports that old-fashioned legacy players offer are parts of much larger enterprise-level solutions. Each of these players also sells these indicators to third parties, so that these third parties can determine which businesses represent the highest and lowest levels of risk.

Earlier in this article, we mentioned that there’s no standardized method for creating a business credit report and calculating the resulting credit score. Each of the top three credit bureaus gathers data from banks, vendors, trade associations and credit card companies — information that is also verified by third parties.

Because these details are sourced and validated through third parties, there’s a greater likelihood that these reports can contain inaccuracies or mistakes. (Another reason why companies should routinely check and monitor their credit ratings.)

In fact, a Wall Street Journal survey found that nearly 25% of businesses who check their credit reports find errors or missing data that lowered their scores.

On top of this, a National Small Business Association (NSBA) survey found that 23% of businesses had a hard time trying to fix mistakes on their credit reports — meaning that efficient reporting tools are more than necessary ever before for businesses to thrive.

Which information is used most often to calculate a business credit score?

As there’s no “gold standard” — here are some of the factors that are often taken into consideration when generating a business credit score:

  • The company’s size — Newer, smaller businesses will have fewer cash reserves and a shorter track record.
  • The industry in which the business operates and the associated risks with this industry — some industries with higher risk are actually blacklisted by conventional sources.
  • Borrowing history — how often the business has used financing before, including how much was borrowed and how quickly it was paid.
    • Current levels of outstanding debt are also examined — including credit card usage.
  • Public and court records — business credit bureaus will look to see if there are records of bankruptcies, lawsuits and other liabilities.

Again, this is only a short list of variables. Did you know that there can be as many as 800 different pieces of information that go into the calculation of a standard business credit score?

How is a business credit score used?

While it may seem obvious that a business credit report and its corresponding credit score is used to help a company access financing, there are also lesser-known uses. For instance, a solid business credit rating can help a company secure better insurance rates and negotiate more favorable payment terms with vendors, suppliers and other third parties.

Additionally, having a credit score for your business is another way to show that a company’s finances are separate from the owner’s personal finances. This adds further credibility in terms of best practices and makes tax time a lot easier.

What’s the difference between a business credit report and a credit score?

We’ve alluded to this throughout the article, but now we’ll take a moment to spell it out. A business credit report (business credit file) is an assessment, based on several KPIs. A business credit score is a KPI included in the report. It’s the hero or the cool kid of the entire analysis.

In general, the established providers will let you search or even request your business credit score for free. But, they almost always charge for a full report. Sometimes you can take advantage of a promotional offer, but in most cases, you can expect to pay.

While a credit score is a helpful business metric, it’s not the only KPI you need to know. A free business assessment from PayPie lets you build a visual, easy-to-follow report created from the data you already have in your current accounting software.*

*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.

 

Stock photo by rawpixel.com from Pexels.

Reporting, Cash Flow and Your Business’ Financial Health

business owner reviewing financial statements on a computer

While you know that financial health of your business is important, it’s actually a pretty difficult topic to discuss. Business financial health involves all sorts of accounting and financial terms, which don’t always roll off the tips of everyone’s tongues. But, more than that, most business simply have no idea where to start.

Rather than waiting until you have a cash flow crisis, using insights and analysis can help you better understand the financial health of your business.

What is business financial health and how do you measure it? 

Like 64.4% of businesses, you use accounting software to help track financial health by systematically recording your income and expenses and other crucial data. In turn, this information becomes the foundation for key financial statements, like your balance sheet, profit and loss statement and cash flow statement.

Learn how to read a cash flow statement and what cash flow forecasting can tell you about your business’ financial health. 

Why should you routinely review your business’ financial statements?

According to Mike Kappel, CEO of Patriot Software, the best way to measure success and overall financial health is to look at your financial statements.

“Measuring business performance means checking out the money flow (cash flow) of your business. If you want to see how profitable your business is, check out the financial statements.”

The challenge with financial statements and financial health

While most business owners recognize the significance of reviewing their financials, business coach Adam Sonnhalter notes that he and his business partner have seen:

“Grown, husky men cry when we ask them to tell us what they see on their financial statements and tell us what the numbers mean.”

The difference between financial statements and financial reports

In truth, the terms are often used interchangeably. However, in the world of business accounting and determining financial health, there are inferred differences.

  • Financial statements are often considered internal documents intended for stakeholders within the business itself.
  • Building upon, summarizing and visualizing the data from within the business statements, a financial report (business assessment) is most often used to quantify or substantiate the business’ performers to external stakeholders, like lenders.

Financial assessments and analysis, like cash flow forecasting, bridge the gap between having the numbers in hand and actually having a handle on what they really mean. When financial insights are presented in a clear, concise report, it’s easier for business owners to see what these numbers are telling them about the financial health of their company.

Although in a textbook sense, reports have traditionally been used to provide information to third-parties, the financial analysis and insights within the reports are also highly valuable to the businesses themselves. After all, you can’t make informed decisions if you don’t have the right information in the first place.

PayPie Cash Flow Forecast Example

Putting all the pieces together for better financial health 

In order to get the information you need to measure your company’s financial health, you need to know what you’re looking for, where to find it and what it all means.

The four main indicators of a business’ financial health

In an article written for Investopedia, contributor J.B. Maverick writes that liquidity, solvency, profitability and operating efficiencies are the four main areas that should be examined to determine a business’ overall and long-term financial health.

  • Liquidity — The amount of cash or assets easily convertible into cash that a company has available in order to meet short-term obligations.
  • Solvency — A company’s ability to meet long-term payment responsibilities.
  • Operating efficiency — A measure of how much profit the company makes with each transaction, once the cost of production or providing the services is accounted for.
  • Profitability — Put simply, this is whether or not the company is making money.
Discover which businesses have the best cash flow and why.

Your financial statements — what they are and what they tell you

There are three financial statements that a business should produce and review on a regular basis for the data needed to measure financial health and inform better decision making in relation to your financial health.

A balance sheet (statement of financial worth or statement of net worth) compares a company’s assets to its debts detailing what it owns versus what it owes. Assets are listed in order of liquidity (how quickly they can be converted to cash) while liabilities are listed in the order in which they’ll be paid.

A balance sheet is often described as a “snapshot” of one particular point in time in company’s financial health. The date at the top of the balance sheet tells you the period of time (year, quarter or month) for which the information applies.

A business’ working capital ratio (assets divided by liabilities) is derived from the information provided in the balance sheet.

balance sheet

While a balance sheet shows how well a business is managing its liabilities, a profit and loss statement (P&L statement, income statement or statement of operations) tracks revenues, costs and expenses over a quarter or fiscal year, providing measures of profitability.

Answering the question, “Is this business profitable?” — a P&L statement starts with top-line revenue items from which the costs of doing business, such as costs of goods and services (COGS), taxes and other operating expenses are deducted. The resulting amount is the famous “bottom line.”

Gross profit margin (gross profit divided by revenues), operating profit margin (operating earnings divided by revenue), net profit margin (net profit divided by revenue) and operating ratio (operating expenses divided by net sales) are generated from a business’ P&L statement.

Learn why you should always keep your business and personal finances separate. 

profit and loss statement

A cash flow statement (statement of cash flow) is the third document in this trifecta. By comparing metrics from a business’ operations, purchasing and borrowing activities (merging the balance sheet and P&L statement) it shows where a company’s money comes from and where it’s going (or has gone).

A company’s cash flow ratio (operational cash flow or free cash flow) represented as the operating cash flow divided by current liabilities is considered a measure of operational efficiency and solvency.

The difference between cash flow and profitability

Cash flow and profit are not the same things, especially in relation to financial health. Unlike a balance sheet or P&L statement which are static — a cash flow statement shows movement by accounting for funds coming in or out of the business as credit, such as paid or unpaid invoices.

It’s entirely possible for a profitable business to have limited cash flow, especially if a business’ inventory, accounts receivable or fixed assets are growing rapidly. Unlike Fortune 500 companies with large cash reserves, independently owned businesses are more likely to reinvest their funds into their business — as a result, they are also more likely to be cash poor.

What financial reporting can tell you about your business’s financial health

A financial report takes the information in a business’ financial statements and translates them into analysis and insights. A cash flow forecast, like the one generated by PayPie, puts your cash flow, debts, assets and other factors related to financial health front and center.

The assessments we generate are a visual way to help you understand the metrics that matter most to your business’ financial health. In your report (pictured earlier in this post), you’ll find charts, graphs and other breakdowns that help give you the big picture of what you need to know in order to make the right decisions for your business.

How does it work? Simply sign up for PayPie, connect your accounting software to use your current financial information and you’re ready to go.* You may also run cash flow forecast as often as you like — free of charge — to help you start building a history of your progress.

Ready to improve your business’ financial health? Then click here and get started now!

*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.

 

Stock photo from Pexels.