Cash flow tips: Allocating income for dividends, debts, and business expenses

Your business has had a good year so far. When you look at your books, you see strong cash flow and added income. You can rightly expect an increase in profit.

It’s a welcome feeling for a small business owner. But where will this money go?

One immediate (if not final) answer to this question is dividends. The goal of business success is to provide an increased return for shareholders. So passing on additional income to the owners and shareholders of your business seems more than reasonable.

Smart cash flow planning makes passing on financial reward as a personal payout not just reasonable, but an actionable reality. It does this because it first takes into account the expenses, necessary and beneficial, that your business must balance against any current increase in income.

Consider your debts. They may be long-standing or short-term. They may be urgent or largely taken for granted. But a windfall in increased income gives you a good opportunity to reduce the money owing in your business. Proper cash flow planning can see a precise proportion of your new income go into paying loans, credit cards, and other lines of debt.

Think about your regular business expenses. Surely you can look at your increase in income as a financial bonus, and presume that if you paid your regular business expenses in the past, you can do so in the future without needing to spend this additional income? Not necessarily; timing is key here. Your employee, tax, and other regular business payments may well rise at times over the course of the year. Your client billing may not synchronise with your employee payments. There may be a need to invest in new assets and resources just around the corner. Can spending the windfall income on your business set you up with a stronger position even though the shareholders miss out on an additional return in the short-term?

Understanding whether or not you should put new income into debts, your business expenses, or dividends is not a one-off decision. Nor is it one that can be made without forethought and analysis. Just as you plan for business growth, small business owners should have a plan for cash flow management that tracks income and expenses in real-time. This will allow you to have the best plan when it comes to deciding how to spend an increase in income or profit, especially in light of potentially unforeseen business or tax payments.

It’s good to have funds in hand; it’s even better to have advance understanding of how to spend them. In fact, this can raise the question of whether your increase in income is actually sufficient for your business to develop over the long-term. Perhaps additional funding – through investors, or a loan, or a bank overdraft – can come into play alongside your increase in income to truly boost your operations.

Calibre Business Advisory helps numerous businesses of a variety of sizes to attain accurate cash flow data and analysis. Using accessible accounting technology and dedicated virtual CFOs, we can help you get on top of your cash flow, develop real-time tracking of your income streams and expenses, and so guide you to be more secure about your business’ returns.

Calibre Business Advisory invests more time than most firms into finding solutions for our clients. Contact our business advisors and tax accountants to discover new options for your business in Australia and beyond.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.