Examples of typical overhead expenses are rent, office supplies, insurance, and administrative staff payroll.

Overhead comes in two types, fixed overhead and variable overhead.  Fixed overhead are expenses which stay consistent regardless of how much business you do, rent is a good example of a fixed overhead cost.  Variable overhead are expenses which vary, or change as sales change.

Good Deal alert 

If you, and your future college student are both Maryland Residents, if you don’t already have a Maryland College Investment Plan account open, and if you otherwise qualify for the program, then the Save4College State Contribution Program may be worth considering.

What’s the catch?

Yes, there is one.  You do have to forgo the Maryland deduction of up to $2,500 per beneficiary in any tax year that you receive a $250 state contribution.

So is the trade off, giving up the deduction to get the $250 state contribution, worth it?

If you can qualify it seems that it is.  For example, If you put in the maximum deductible amount each year, $2,500, a Maryland resident can take an income subtraction of $2,500 on their state return.  At Maryland’s top tax rate of about 8% the subtraction is worth about $200 per year in tax savings, versus a $250 state contribution.

How Does It Work?

According to Maryland 529, To be eligible, an applicant must meet the following requirements:

• The beneficiary must be a Maryland resident
• Your Maryland Taxable income cannot exceed $112,500 as an individual or $175,000 as a couple.
• You must open a Maryland College Investment Plan and submit your application for the Save4College State Contribution Program and file and application before June 1, 2017.

Once approved, you must make a minimum contribution to the plan in an amount based on your taxable income.  The minimum contribution is due between July 1 – Nov 1, 2017, the $250 State Contribution will be made by December 31, 2017.

If you only expect to contribute a modest amount into the plan, then the $250 state contribution will likely hold considerably more value than the subtraction deduction will for you anyway.

The deadline to apply for the Maryland State Contribution is June 1, 2017.  Contributions are not guaranteed to all who apply.  They will be awarded on a first come first serve basis to approved applicants until the allocated funds are used up.

For more information about the plan and to apply visit the Maryland529 website https://maryland529.com/MDMatch250

Capital Asset – a physical item not a product for sale, instead used in the operations of the business.  A capital asset has a market value and a useful life of typically more than one year.  Also called a fixed asset, or property, plant and Equipment (PP&E)

A few examples of capital assets:

• vehicles
• heavy equipment
• computers
• furnishings
• buildings

Capital assets are usually not written off the books as a single expense all in one year.  Instead the expense related to a capital asset is recorded over time.  This drawn out method of writing off capital assets is called depreciation.

This post includes Amazon affiliate links, which means Amazon may pay me a small commission when someone makes a purchase via one of these links.  This does not influence my recommendations.  I only recommend books and products that I believe are worthwhile and are likely to be interesting to my readers.

In Time Management Magic: How To Get More Done Every Day And Move From Surviving To Thriving, author Lee Cockerell shares the steps of his own planning system that helps him make the best use of his time every day.  He credits his time/life management skills for much of his personal and executive success.

“Everyone knows what he or she should and should not be doing, but for some reason many of us don’t act on that knowledge.  ‘Someday’ is not a day of the week.” – Lee Cockerell

I am a busy business owner, a mom of three, a wife, a daughter, a community member, and on, and on… I am always on the lookout for better ways to keep track of my schedule and those ever growing to-do lists.

In the book, Lee explains with story why time management is so important and then he shows you step by step how to do it for yourself.  He provides a list of supplies and illustrated examples where he shows you how to use the planner.

For his system he recommends using a paper based planner versus exclusively relying on mobile apps.  He specifically recommends the Day-Timer Daily Planner Refill January 2017 – December 2017, Two Page Per Day, 5-1/2 x 8-1/2″, Desk Size, Traditional (928001701).

He suggests using it along with a tri-tip pen, which is a pen with a black ink pen, red ink pen and mechanical pencil lead along with a built in eraser. The author calls his pen a time management magic wand.  The Cross Tech3+ Multifunction Pen with Stylus, Satin Black with Chrome Plated Appointments (AT0090-3) is an example of this type of pen.  After giving the planner a go with regular pens I decided to take the plunge and bought a shiny blue one of these for myself.  It has a nice heavy feel to it and I use it exclusively with the planner.

I have tried Lee’s system and I like it.  I haven’t mastered it yet.  But I am getting there and I do feel more in control of my life when I discipline myself to use my planner and special “magic wand” planner pen.

If you are swimming in to-do lists like I was, and that darned “Someday” never seems to show up on your calendar either, then I recommend you take this book and the author’s time/life management system out for a spin.

So what do you need to know about cash flow?

• How much cash does my business need?
• How do you measure your business cash flow?
• How do you build a cash reserve?

How much of a cash reserve do I need?

A good rule of thumb when you are starting out is to build and save cash reserves of 3 to 6 months of your monthly cash flow needs.  Once you have your business humming along in a predictable fashion you may choose instead to figure your reserve as a percentage of annual sales.  10% of average annual sales is a common reserve amount. However, every business is unique.  If you belong to an association specific to your industry, you may find that they provide cash reserve recommendations more specific to your business type.

I find the industry recommendations are often expressed as a percentage of sales, such as 10% of annual gross sales, instead of being based on expected monthly expenses.  If you are just starting the business, you are better off taking the 3 – 6 months of expenses route to get going on building your reserve.

I am a big proponent of having a target amount of cash in reserve.  BUT, Keep in mind that holding on to too much cash can also cause problems.  Many of you are probably thinking, “Hey, I’ll take those problems any day”. But seriously, truly excess cash, over your target reserve number, left in the business starts to behave like cash shoved under a mattress, or money buried in the backyard.  Consider if the excess could be growing more effectively invested in business growth.  Or diversify by distributing it to the owners who can save it elsewhere.

That said, for a lot of you, 3 months of expenditures alone is a pretty big number.  It may even feel like a “yikes!” number.  You may also be thinking your business can get by on less.  Yes, you probably can, for a while. And many businesses do just that. But trust me, after a short while not having a cash reserve will wear on you.

If you find a way to get the right amount of reserve in the bank your business will be in a stronger position to grow, to borrow, to respond to market pressures and so on…  Not to mention, you, the owner, will very likely sleep better, be more comfortable going away on vacation, and be comfortable saying no to jobs that you just know are going to cause you heartburn and headaches.

How to measure your business cash flow?

If you are in business and are not reconciling (or having your bookkeeper or accountant reconcile) your bank statement every month you must make it top priority to start doing so right away.  If you are not reviewing your bank statement routinely I think it is unlikely that you truly understand your current cash position and cash flow needs. Start there first.

If you use a computer accounting software, such as QuickBooks, you can run a cash flow report.  This is assuming your QuickBooks inputs are up to date (…hmmm hmmm).  You can generate a monthly cash flow report that will show you how much cash came in to the business, cash inflows, and how much flowed out, cash outflows. You can use 6 to 12 months worth of this results to figure out your business’ cash position and your routine cash flow needs.

If you are not using accounting software, you will use your bank statements or cash receipts and cash disbursement records to create a sample summary of at least 6 months of monthly cash inflows and outflows.

In either case see the sample cash flow worksheet set up below for the fictional Buster Q Smith’s Plumbing and Heating Co.

You should make it a priority to know your average monthly cash outflow need.  This figure is sometimes casually referred to as the monthly burn, or monthly nut.  Simply put, It is the amount of cash you need to pay all of your obligations, on time in an average month.

Buster’s average monthly cash outflow, monthly burn, is $19,404.

Using the 3 – 6 month rule of thumb the cash reserve target would be between $58,212 (3 mos) and $116,424 (6 mos).

Now, Buster has been in business for a while and has a fairly predictable cash flow.  He may choose to use 10% of average annual sales to figure his reserve.  Based on his six month summary he has determined that his gross sales are usually about $265,000 per year.  10% of $265,000 = $26,500 to hold in operating cash reserve.  That’s only about 1 ½ months of expenses.

The right number for Buster may actually be somewhere between the two approaches.  And that is often the case for services and small business trades. Buster still does a lot of the work for his company.  Even though his income and expenses are predictable he still needs to consider how the business would get through a couple of months of illness or injury, if he could not work.

Note, in this example we used 6 months of data.  If your business has a peak season you may need to expand your sample out to 12 – 15 months to get a clearer picture.

If you are more like Joann, another business owner, who operates a swimming pool maintenance and supply company, you will want to use a longer time span in your sample.  Joann keeps her shop open all year, however, sales are not steady.  They peak twice a year when area residents open and close their pools.  Sales tank during the winter months even though some expenses stay constant.  To figure her cash flow needs Joann cannot just look at the summer months in her sample.  Instead she conservatively projects her business cash flow over a 15 month period so she can plan for the leaner winter months and the months that lead up to her busy period.

How do you build a cash reserve?

In a nutshell, there are four main sources of cash reserves:

• Old fashioned savings – Systematically saving part of the business profits until you reach your goal. Squirrel it away.
• Financing – borrowing cash in exchange for increasing the business’ liabilities via a loan or line of credit, which will cost you in fees and interest expense. I talk about preparing for business borrowing in a future post, check back.
• Outside investor capital – giving ownership/profit shares of the business to outsiders in exchange for cash investment. (equity)
• Owner capital – injecting your own personal cash into the business (equity)

To save your reserve I suggest you go to your business banker and look into opening a business savings account in addition to your operating account.

Find out what the minimum balance is to avoid fees before you get started with the savings account.

Each week transfer a certain percentage of profits into the savings account.  This will take discipline.  But having that specific goal will help. Once you have your reserve decide what you will do with the excess cash.

When you have to dip into the reserve, replenish it as soon as possible employing the same method.  As your business grows check your target reserve amount annually to make sure it is still right for you.

Okay I know what some of you are saying – “Yeah right.  Transfer a percentage of profits, what profits?  I can’t afford to save money, I am barely making it as it is.”

If you are in the start-up stage, I hear you.  In your case, owner capital or outside investors are probably where you need to look to start to build your reserve.

For established business owners though, here is the hard truth.  You are in business to make a profit.  If you are past the ramp up stage, you are staying busy, and you are not making a profit, then either your pricing strategy isn’t working for you, your costs are out of control, or your pipeline of business is not strong enough.  You need to take a hard look to see what the core issue is and take steps to fix it.  I will cover those topics in future posts. Stay tuned.