Author Topic: Small business cash flow buffer: invest it or keep in checking?  (Read 2557 times)

protostache

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I've been running a small software consulting business for a little over a year, initially on the side but as of last September it's been my sole revenue source. Currently I have one large retainer client that pays all of the business expenses and my salary, plus a few here-and-there clients that I work into my schedule as needed. I also have small somewhat-unpredictable additional revenues from a book that I sell. I plan on expanding my product line over the next year to the point where it can contribute equally to the retainer client.

I tend to keep about eight weeks of cash flow in the business at any given time (I pay myself weekly). Every quarter I take any cash above eight weeks, set aside 30% for taxes, and pay myself a distribution. I have no employees.

Eight weeks of cash is a substantial amount of money to be floating in a checking account. I opened a money market account next to the checking which pays a paltry amount of interest (something like 0.5%) for the quarterly tax savings to live but I would like the cash flow buffer to work a little harder, if possible.

On the personal side, my wife and I have about 4 months of current-budget savings. If we just have to compensate for the big client dropping off but she keeps her job we can stretch it to about 10 months, and we'd be able to stretch further by dropping non-essential luxury expenses.

Questions:

1) Is eight weeks enough? Too much? It's basically insurance against the possibility that my big retainer client cancels my contract (I would put this at about a 5% probability within the next 12 months).

2a) Should I be thinking about throwing a portion of the cash flow buffer into an investment account of some sort?

2b) If so, are there any banks that make more sense than others? As far as I can tell I can't open a taxable Vanguard account with the business EIN.

Thanks!

Bob W

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Re: Small business cash flow buffer: invest it or keep in checking?
« Reply #1 on: April 13, 2015, 04:23:21 PM »
Don't know where you would put it EIN wise but I would suggest it be fully invested and also your 4 month home reserve and here is why  -

1.  You have a low risk of business going south.  (lower than the average private sector employee has of losing their job.
2.  Markets go up above 2/3 of the time and probably closer to 7/8th in bull markets
3.  Even if the market takes a hit just at the time you end up needing the cash your loss will be probably less than 20%
4.  Obtain a HELOC and a business line of credit prior to needing them
5.  Have adequate low interest (12% or less) credit cards to carry you at least 18 months (you'll never need it)
6.  Pay all the bills you can with credit cards to give you 20 days of float.  (of course pay the ones with interest off before interest accrues)
7.  Use airline rewards cards (Richmondsavers.com) and you can earn 10K + in free and tax free travel per year. 

More importantly you should consider a business model in which your wife is the owner and you are a mere employee.   That way you can pay your unemployment insurance.   If your contract goes away you may then be eligible for unemployment benefits.

Your biggest unpredictable risk is temporary or long term disability.   You will lose you income immediately and probably lose your contracts eventually.   (what happens to your biz if you're in a car wreck and out for 4 months?)   It is very hard to insure against this so it may be best to be sure you have lots of lines of credit ready to go. 

For a bit of context imagine you have 1 dollar earning zero dollars.    In 60 years you will have 10 cents inflation adjusted.   Now imagine that 1 dollar earns a tax deferred 10% --- in 60 years you will have 20 dollars inflation adjusted.   So the ultimate question will be would you rather have your children or grandchildren have 10 cents or 20 dollars?     If you take that 1 dollar and multiply it by the amount you have in reserve you will probably come out with a very large number. 

James!

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Re: Small business cash flow buffer: invest it or keep in checking?
« Reply #2 on: April 13, 2015, 04:52:02 PM »
I have been wondering about these questions as well. I'm starting a business later this year.

What are the options for investing cash that belongs to a business, as opposed to the employee(s) ? This is a hard thing to google, you get a lot of articles about how to invest in small businesses. Not how to invest as a small business.

-J

protostache

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Re: Small business cash flow buffer: invest it or keep in checking?
« Reply #3 on: April 13, 2015, 05:12:08 PM »
Thanks Bob!

Quote
4.  Obtain a HELOC and a business line of credit prior to needing them
5.  Have adequate low interest (12% or less) credit cards to carry you at least 18 months (you'll never need it)
6.  Pay all the bills you can with credit cards to give you 20 days of float.  (of course pay the ones with interest off before interest accrues)

I currently have $36k in credit card headroom for the business and my wife and I have quite a bit more on top of that. They're not low interest but they'll do in a pinch. I've been looking into HELOCs to see what our options are, but as far as I can tell they need two years of documented self-employment income. Probably have to go talk to the bank about it.

Quote
Your biggest unpredictable risk is temporary or long term disability.   You will lose you income immediately and probably lose your contracts eventually.   (what happens to your biz if you're in a car wreck and out for 4 months?)   It is very hard to insure against this so it may be best to be sure you have lots of lines of credit ready to go. 

Yep, this is exactly why I'm going to be focusing on transitioning to products. Specifically, more info products like my book, or maybe a small piece of software that doesn't take much work to keep up and running.

Quote
More importantly you should consider a business model in which your wife is the owner and you are a mere employee.   That way you can pay your unemployment insurance.   If your contract goes away you may then be eligible for unemployment benefits.

According to the State of Michigan that's not allowed. Good idea, though.

James:

Quote
What are the options for investing cash that belongs to a business, as opposed to the employee(s) ?

So far all I've found is this Schwab Organization Account and Merrill's small business account (owned by Bank of America). I'm sure there are more, but I don't know if "organization account" is the term to be searching for.

edit

Looks like you can set up a Vanguard account as an organization! It's a mail-in form instead of an online form.
« Last Edit: April 13, 2015, 05:26:55 PM by zrail »

Prepube

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Re: Small business cash flow buffer: invest it or keep in checking?
« Reply #4 on: April 13, 2015, 09:32:11 PM »
Not sure why you think you can't open a corporate Vanguard account...  For my business I maintain accounts at Vanguard, one money market, a total bond market account on which I can write checks, and a brokerage account (all under my ein).  I keep three months of payroll (I have 12 employees) just in case one of our bigger contracts fails to pay on time, which often happens with government agencies.  Automatic deposits are made from my local checking account into the bond/mm accounts at Vanguard.  I like to keep the local banker in case I need a fast a/r loan to make payroll in an emergency. 

Call vanguard and talk to them about the account options you have, and keep as much invested as possible, as bob said.

Bob W

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Re: Small business cash flow buffer: invest it or keep in checking?
« Reply #5 on: April 15, 2015, 09:20:20 AM »
Thanks Bob!

Quote
4.  Obtain a HELOC and a business line of credit prior to needing them
5.  Have adequate low interest (12% or less) credit cards to carry you at least 18 months (you'll never need it)
6.  Pay all the bills you can with credit cards to give you 20 days of float.  (of course pay the ones with interest off before interest accrues)

I currently have $36k in credit card headroom for the business and my wife and I have quite a bit more on top of that. They're not low interest but they'll do in a pinch. I've been looking into HELOCs to see what our options are, but as far as I can tell they need two years of documented self-employment income. Probably have to go talk to the bank about it.

Quote
Your biggest unpredictable risk is temporary or long term disability.   You will lose you income immediately and probably lose your contracts eventually.   (what happens to your biz if you're in a car wreck and out for 4 months?)   It is very hard to insure against this so it may be best to be sure you have lots of lines of credit ready to go. 

Yep, this is exactly why I'm going to be focusing on transitioning to products. Specifically, more info products like my book, or maybe a small piece of software that doesn't take much work to keep up and running.

Quote
More importantly you should consider a business model in which your wife is the owner and you are a mere employee.   That way you can pay your unemployment insurance.   If your contract goes away you may then be eligible for unemployment benefits.

According to the State of Michigan that's not allowed. Good idea, though.

James:

Quote
What are the options for investing cash that belongs to a business, as opposed to the employee(s) ?

So far all I've found is this Schwab Organization Account and Merrill's small business account (owned by Bank of America). I'm sure there are more, but I don't know if "organization account" is the term to be searching for.

edit

Looks like you can set up a Vanguard account as an organization! It's a mail-in form instead of an online form.

So yeah,  you are thinking a very good long-midterm game! 

 You can spend some time looking for a bank that will HELOC or wait out the 12 months.    You may want to talk with a very good Michigan CPA regarding business structures.   If it is set up right you may be able to purchase LTDI.    You also may want a structure that allows you to draw minimum Soc Sec income (18K?) and that allows you to max out tax deferred accounts such as simple IRAs.  Would also build it to allow for HSAs.  (see rootofgood.com for how he earned 150K per year with no income tax)

In the short term, since you are not adverse to credit cards,  you should really check out the rewards miles game.  Besides Richmond check out milesedividendmd.com for advice on earning over 20K in free travel per year.     

It all pans out as you hope and your simple software and book sales create a passive revenue stream you may have lots of time for travel in the not too distant future.   It is really cheap to live in some very nice countries and do the geographic arbitrage deal.  (Earn in US value, spend in Thailand value?)  You can check out boldanddetermined.com to see how he sells books on his website to earn 6 figures. 



*disclaimer - I am not associated with any links provided.  Just think they have some very good MMM type ideas.