Cash Management Strategies
Jun 10, 2024In our latest episode, Shannon tackled various cash management strategies that entrepreneurs can use to maximize their financial growth and stability.
Shannon began by discussing fundamental types of bank accounts every business owner should be aware of: checking and savings accounts. A checking account is essential for all businesses. If your business doesn’t have one, it’s time to prioritize this. Checking accounts are used for operating expenses such as payroll and income deposits. Shannon emphasized that having multiple checking accounts can help manage finances better by dedicating each one to a specific purpose. For example, separate accounts for payroll and operating expenses can streamline budgeting and financial tracking.
Savings accounts come with higher interest rates compared to checking accounts, especially if you opt for high-yield savings accounts. As of May 2024, interest rates in high-yield savings accounts hover around 4.65% to 4.8%. These accounts are ideal for setting aside money for tax payments or large upcoming expenses due to their higher interest but limited withdrawal capacity.
Shannon introduced an important financial concept: liquidity, referring to how quickly an asset can be converted into cash. She provided a handy metaphor—think of liquidity like snow in your hand that melts into water. Savings accounts offer liquid cash, useful for managing immediate financial needs without compromising on earning interest. In contrast, stocks, bonds, or other investments are not considered liquid because converting them to cash can take a few days.
For business owners who have their checking and savings accounts well-managed and are looking to make their cash work harder, Shannon outlined advanced strategies. One option is opening a corporate brokerage account, allowing businesses to invest in the stock market under the corporation’s name. However, Shannon cautioned that this approach carries risks and involves understanding capital gains and losses, impacting investment income and expenses. Alternatively, investing personally by taking distributions from your business can be more tax-efficient through vehicles like IRAs or 401(k)s, offering potential tax benefits.
While investing excess cash can be tempting, Shannon advised caution, particularly for businesses generating less than a million dollars in annual revenue. For these businesses, sticking to high-yield savings accounts and minimal brokerage investments designed for specific long-term purposes is usually prudent. Only consider more aggressive investments if your business has stable cash flow and a clear understanding of the potential risks and rewards.
Here are practical takeaways from Shannon’s insights: use multiple checking accounts to simplify budgeting and financial management, opt for high-yield savings accounts to store liquid cash saved for taxes or large purchases, understand liquidity to ensure you know how quickly you can access your funds when needed, and consider corporate brokerage accounts for long-term investments if you are knowledgeable about the associated risks.
Effective cash management is a cornerstone of a successful business. By understanding different types of bank accounts, the concept of liquidity, and various investment options, you can make informed decisions that optimize your cash flow and enhance your business’s financial health. If you want to explore these strategies in-depth, Shannon offers power sessions designed to help business owners navigate their financial landscapes with clarity and confidence. The goal is to keep what you earn and make your money work harder for you. For more helpful financial insights, tune into Keep What You Earn or book a session with Shannon to tailor these strategies to your business. Here’s to a prosperous financial future!
What you'll hear in this episode:
04:22 Understanding liquidity: how fast assets can convert.
08:10 Business owners can choose where to invest.
If you like this episode, check out:
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CFO Q&A: Should You Pay Off Loans with Extra Cash?
Best Practices to Collect Cash from Customers Faster
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
