Money Management

Many small businesses struggle with cash flow management. Read on to learn how to control yours when you’re first starting out. [[{“value”:”

Managing small business expenses while trying to grow revenue is a delicate balance. This is especially true if you own a small business that is still in its early stages and doesn’t yet have a regular cadence of money coming in.

A QuickBooks survey from 2022 found that 68% of small businesses experience cash flow problems at some point. All businesses have to figure out which cash flow management techniques work best for them, but here are a few tips for managing your small businesses’ money.

1. Find the right payroll schedule

If you have even a few employees, you’ll need to figure out when to pay them. For some businesses, that may be weekly, while others may benefit from a bi-weekly or monthly schedule.

For example, small businesses that make sales on a daily basis may be able to pay employees on a weekly basis, while businesses that receive large orders monthly may benefit from a bi-weekly payroll schedule. Some states have payday schedule requirements, so make sure to review your state’s regulations when setting the payroll schedule.

How to do it: In the early stages, you may need to experiment with what schedule works best for your business and your employees. Try a payment schedule for a while and then adjust it later if it doesn’t work well for your employees or the business’s cash flow. Finding the right payroll software can go a long way toward helping you figure this out.

2. Use a business credit card to cover expenses

In the early stages of your small business, you’ll likely have to take on some debt to grow. Setting up a physical shop, creating an e-commerce website, buying inventory, and other expenses add up fast.

A business credit card can be a good way to cover some of these costs as you get the business up and running. These cards have higher credit limits than personal cards do and they report to business-specific credit reporting agencies, which helps you build credit as a business.

How to do it: Find a business credit card that offers cash back and other rewards, like a sign-up bonus. Some business cards also have 0% APR introductory offers for up to 12 months, which can help you buy what you need for your business without immediately accruing interest. Just make sure to look at your statements monthly to evaluate how much you’re spending.

3. Time payments wisely

One of the most critical parts of cash flow management is knowing when to pay a bill. Paying all bills simultaneously could drain your cash, leaving you without funds to cover upcoming expenses.

Instead, prioritize your bills to ensure the most important ones — like payroll — are covered first, then set a schedule for the rest. Just make sure you make your payments on time so your business can build credit and you don’t upset your suppliers.

Most small businesses will likely benefit from having a business checking account. This will help you manage your cash flow by keeping all of your expenses and revenue in the same account.

How to do it: Every small business has to figure out the right cadence for paying bills, but one way to do it is to use good accounting software. By tracking your revenue and expenses with accounting software, you’ll be able to figure out how to time your bill payments efficiently.

Managing your small business’s cash flow is no easy task. Fortunately, there are more tools and resources available than ever to help you. The Ascent has compiled reviews of small business software for everything from expense tracking to taxes, and you can view them all on our small business page.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Chris Neiger has no position in any of the stocks mentioned. The Motley Fool recommends Flow. The Motley Fool has a disclosure policy.

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A near-term recession seems unlikely at this point. But if you’re nervous about one, it’s important to know what to do. Read on to find out. [[{“value”:”

In 2022, economists were sounding warnings about an impending recession. These days, however, experts seem more confident about the country avoiding a recession in the near term. But if you’re still concerned about a potential recession, then there are certain moves you may want to make in your brokerage account. Here are three to prioritize.

1. Make sure you don’t have too much money tied up in investments

It’s a good thing to invest money for far-off goals, like retirement. The stock market’s average annual return over the past 50 years has been 10%, whereas if you were to keep your money in a savings account, you might get 2% or 3% on your money on average — if that.

However, recessions and job loss can go hand in hand. So if you’re worried about a recession, take a look at your savings and see how many months of bills you can pay in the absence of a paycheck. If you can’t cover at least three months, you may want to liquidate some investments now and move that cash into the bank for emergency savings purposes.

You may be thinking, “Couldn’t I just leave my brokerage account alone and liquidate investments on the spot as needed?” But the danger of doing that is that you might need cash at a time when the market is down. You’re better off cashing out investments now, when the market is in better shape.

2. Make sure you’re well-diversified

A diversified portfolio might lose less value during a recession that impacts the broad stock market than a portfolio that’s heavily concentrated in a single market sector, or in a select few companies.

Take a look at your investment mix and make sure it’s diversified enough. If you only own shares of seven stocks, you probably need to make changes. If you own 27 stocks, you’re probably OK as long as those stocks are spread out across a range of industries. If you’ve got 15 tech stocks and 12 energy stocks, you’ll want to branch out into different sectors.

Another good way to branch out in your portfolio is to buy an S&P 500 ETF (an exchange-traded fund). This allows you to invest in a few hundred businesses with a single investment.

3. Consider shifting to investments that are generally regarded as recession-proof

Certain stocks or industries tend to be regarded as recession-proof. This doesn’t mean that they can’t lose value during a recession. Rather, it’s that they’re such essential items or services that consumers tend to prioritize them during a recession. It’s stocks like these that may be less likely to plummet in value if broad economic conditions deteriorate.

Healthcare stocks, for example, have long been considered a good example of a recession-proof investment. That’s because people will always need medical care. Residential REITs, or real estate investment trusts, are another example of a recession-proof investment, because people will always need housing.

Again, you might still see the value of your so-called recession-proof investments drop during an economic downturn. However, they may not drop to the same degree as other stocks in your portfolio, which could limit your overall losses.

Even though a near-term recession isn’t very likely, it’s always a good idea to know how to prepare for one. And frankly, the above moves are good ones to make in general — even if you’re not necessarily convinced that economic conditions are going to sour in the next few months. It’s never a bad idea to make sure you’re all set on emergency savings, diversify your portfolio, and load up on at least a few investments that are naturally suited to withstand a recession.

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It’s possible to overfund your savings account, and it causes more issues than you may realize. Check out the unexpected downsides of doing this. [[{“value”:”

Savings account rates have gone up quite a bit over the last two years. Some of the top high-yield savings accounts are currently offering APYs of over 5%, and there’s no risk involved.

Believe it or not, it’s possible to keep too much money in a savings account. This type of account is great for your emergency fund and any upcoming savings goals you have. But there are a couple of potential drawbacks to overfunding your savings.

You could grow your money more by investing it

It’s generally not recommended to use a savings account for money goals more than five years away. The best example of this type of goal is saving for retirement. Depending on your age, this could be decades down the road. For these long-term goals, investing is a much better way to grow your money.

The U.S. stock market has historically grown by an average of about 10% per year over the long run. That’s not a fixed or guaranteed return — some years are much better than others. But it’s the average going back over the last 50 years.

High-yield savings accounts are offering about 4.3% to 5.3% right now. That won’t last forever, though. This is the highest rates have been in years, and they’ll almost certainly decrease if the Federal Reserve lowers interest rates later this year (which it’s expected to do).

To put this difference in perspective, let’s say you have $100,000 and 30 years to grow it. You can either invest in stocks and get a 10% yearly return or stash it in a savings account with a 5% APY. Here’s how you’d do with each option:

If you invested $100,000 for 30 years, it would be worth $1.74 million.If you put $100,000 in a savings account for 30 years, it would be worth $432,194.

You end up with over $1.3 million more by investing. And this is assuming the savings account APY stays at 5% for all 30 years, which is highly unlikely.

Your savings account will increase your taxable income

Keeping too much in your savings doesn’t just affect your future returns. It can also cost you more money every year at tax time.

Interest from a savings account is taxable income. Your bank will send you a 1099-INT if you earned $10 or more in interest during the year. If not, you won’t receive that form, but you’re still required to report any interest you earned on your tax return.

Imagine you earn $2,000 in interest from your savings account. If that portion of your income is in the 22% tax bracket, it would cost you an additional $440 in taxes. It’s not a bad thing — you’re still making money, after all. But it’s another way saving too much can cost you money compared to investing.

When you invest, you don’t pay taxes on your capital gains (the amount your investment has increased in value) until you sell. Also, profits are considered long-term capital gains if you held the investment for over one year. Long-term capital gains tax rates are lower than income tax rates.

Find the balance between saving and investing

This doesn’t mean that you should invest all your money. That’s not ideal either. You should do both: Save and invest a portion of your income. One simple and effective option is to save 10% of your income and invest another 10%. But you may want to adjust that if you already have plenty of savings and haven’t invested much.

Your savings is where you’ll work toward short-term goals. For example, if you want to go on a big vacation at the end of the year, use a savings account to set aside money for that. If you want to buy a home in three years, a savings account is well-suited for that, too. It’s also where you should have savings you may need to access at any time, such as your emergency fund.

It wouldn’t be a good idea to invest money you’ll need in the next few years or at a moment’s notice. The stock market has its ups and downs. If you need to take out money during a downturn, you might be stuck selling investments at a loss.

The safest option isn’t to have most of your money in a savings account. It’s to have enough to cover your needs and be ready for emergencies, while also investing so you can build long-term wealth.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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