Improve Your Cash Flow By Doing These 3 Things

When meeting with business owners one of the topics that always comes up is cash vs cash flow.  Most people think that having cash is the most important thing when it comes to safety and security.  I’m sure you’ve heard the adage “Cash is King”.  Although having some cash on hand is good, it isn’t King because a pile of cash can run out if you’re not restocking it.

To have a wealthy financial life that creates freedom, you need more than cash, you need a continuous stream of cash flow.  Money is similar to many things in life, in order for it to stay healthy, it has to keep moving. Your money has to be productive and it has to grow. Wealthy people recognize this and are constantly seeking opportunities to put their money to work.

Like banks and financial institutions, they want to keep their money moving like a stream.  They understand the velocity of money and the power behind it. If your money isn’t moving it becomes stale and stagnant like water sitting in a pond.

So how do you make the shift and focus on creating cash flow rather than stockpiling cash?  In this article, I share with you some ways to create more cash flow in your life and in your business.

#1 – Give It Direction

Create boundaries around your cash flow so that it continues to move in the direction you want it to go.  If you’ve ever been around cattle you know you can move them along a fence line pretty easy. If there is a hole in the fence you can bet the farm they find it and at least one will take off causing havoc with the rest of the herd.

Cash flow will do the same thing.  Unless you create boundaries and plug the holes it is going to find ways to escape. Whether it’s a trickle or a large hemorrhage, you may not realize it but it’s causing havoc in other areas of your life.  So one of the first things you have to do is pay attention, be intentional and plug the holes.

The holes where cash flow can leak are many and some are more common than others.  Here are a few common places to look at immediately.

Take a look at your current loans and determine if they need to restructuring or paid off. Restructuring a loan with a lower payment or better terms gives you the ability to free up hundreds or thousands of dollars a year.  Don’t fall into the trap of just plugging away at a loan. Make sure the loan is efficient and working for you rather than against you.

Once you have restructured your loans or exhausted the options to do so.  Then roll all your loans into an efficient loan elimination strategy. There are several ways to do this.  Snowballing payments from the lowest balance to the highest. Paying off the highest interest rate loan first.  Or freeing up revolving loans before structured loans. All those options will get the job done but the most efficient way to eliminate your loans is to use the cash flow index strategy.

The second hole to plug is taxes.  This can be a complex topic but it doesn’t have to be.  Building wealth is a process with strategy. There are things you can do every day to help lower your taxes and there are decisions to make that will lower your taxes in the long term.

One of the most basic and short term tax strategies is looking at how you’re taking your compensation.  If you’re taking all your compensation in salary, then stop it now. The IRS looks at working in your business differently than working on your business.  Working in your business according to the IRS should be paid as a regular salary which has a tax bracket from 24% to 37%. Whereas working on your business can be paid in the form of dividends.  Dividends are taxed at 15% and capped at 20% for those in higher tax brackets. Restructuring your compensation will increase your cash flow by 17%-20% right off the top.

Increasing your long-term cash flow through taxes can happen through investments. Businesses, real estate, oil & gas, conservation easements, and captive insurance are a few that help.  Don’t get bamboozled. Government-sponsored tax-deferred vehicles are not a good tax reduction strategy. Not paying taxes now to likely pay more taxes in the future isn’t a good idea.

The third hole is often times the easiest.  Look at what you’re paying for that you shouldn’t be paying for (anymore). Many business owners have subscriptions or services they’ve signed up for with automatic payments.  Dive into your statements, if you’re being charged for a product or service you’re no longer using, cancel it. Dive into your systems and processes. If there is a piece of technology that isn’t serving you, sunset it and quit paying for it.  It’s that simple.

#2 – Create systems

I’ve worked with many successful entrepreneurs. The one thing that stands out contributing the largest impact to their success is the systems they’ve created around their life. It has a greater effect than their personality, their education, their resources, and even their network.  This is because systems create consistency and consistency will outperform talent every time. In the words of Bruce Lee, “long term consistency beats short term intensity”. Building real sustainable wealth is a long term play.

The first system you want to improve cash flow is a revenue allocation system.  I learned this the hard way when my partner and I started a bail bonds company. Our accounting system has you depositing all your revenue into a business checking account.  Then you pay your expenses, set money aside and take profits all from that same account. Although you’re managing this through accounting statements. It works better in theory than practice.  Especially during the day to day hustle and bustle of running a business. The best thing to do is to create a cash flow management system. Create rules allocating all your business’s revenue in separate accounts.

When you have revenue come into your business deposit that into a checking account.  Hold the money there until you distribute it to other areas of your business. Then pick a day of the week or month (needs to be the same day for consistency) for bookkeeping.  Your bookkeeper or CPA will divide a percentage of that revenue to other accounts. You should have no less than 3 other accounts. One for profit, one for taxes and another for operating expenses.  Take your profit first, then set money aside for taxes and what is left over, use to run your business. This ensures your company is always profitable. Uncle Sam will never pay an unwelcomed visit. And you’ll quickly know if your expenses are too high.

The next system you need is a system for saving money.  When you make your savings an automatic process it becomes much easier to build up your war chest.  With technology today this is an easy process. Have it automatically moved. Remember this is automatic savings, not automatic investing!  Make sure you are saving money in a safe, liquid account you can access without penalties. I prefer using an overfunded high cash value life insurance.  A policy to store cash is foundational in creating a privatized banking system. This system helps to build wealth.

Another monitoring system you need in place is a scorecard.  I keep a scorecard in most areas of my life. It helps with consistency.  Identify 8-12 KPI’s across the main pillars of your business. Sales/marketing, operations, and finance are the heartbeat of your business. If there are more, make sure to identify them. They should be the things that if you consistently do and keep track of every week, your business will grow and be more efficient.  Doing this helps you see trends and quickly identify where something is off that may be burning cash.

#3 Invest for Cash Flow

Investing is different than saving.  You need to be intentional about where you invest your money.  When looking at investments, look for investments that will kick off cash flow on a regular basis.  One of the keys to building wealth is to not only get your money working but also to get it back as fast as you can.  This creates an additional stream of income you can then use to reinvest for more cash flow.

Rinsing and repeating this process gives you flexibility.  You can now diversify your portfolio and acquire more assets.  Over your investing lifespan, this exponentially builds up. It gives you the ability to take advantage of opportunities others can’t.  Their assets are tied up in investments that are appreciation focused. When you invest for cash flow, appreciation of the asset becomes the icing on the cake.

Interested in getting a cash flow strategy to Build Wealth outside of your business?  Watch our Free Training.