Tag Archives: Prepay

How Can You Best Use Excess Profits? Five Suggestions

Situation: A company, an S Corporation, produced substantial profits during the first 6 months of their fiscal year. This becomes taxable personal income to the owners if it remains profits. How would you advise the CEO and owners to make best use of these excess profits?

Advice from the CEOs:

  • Use some of the funds to invest in new opportunities for the future growth of the company.
  • Prepay significant costs like software licenses multiple years in advance. Make sure that you attend to your accounting so that you properly reflect the ongoing profitability of the business. Otherwise, what you may believe is profitable in future years will not reflect true profitability because you will not be accounting for all of your true expenses.
  • Is anyone in the company deserving of a one-time special bonus for performance or a salary increase?
  • It may make sense to take dollars out of the company and to diversify owners’ investments by investing in real estate, stocks, etc.
    • Check out the current rules around 401K programs that may allow you to invest increased amounts per year per person. Talk to your financial advisor about the details and regulations surrounding these programs.
  • List your alternatives and compare the anticipated ROI, on an after-tax basis, of the various options. This will help you to evaluation options including:
    • Reinvesting in the business – various options.
    • Investing outside of the business – various options.
    • Talk to your financial planner about the choices.

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How Can You Increase Cash Flow to Fund Growth? Five Options

Situation: A company is bringing in new business, but used up its cash reserves to stay afloat during the downturn. As it increases payroll and orders for components to meet production deadlines, it struggles to meet cash flow needs while waiting for customer payments. How can you increase cash flow to fund growth?

Advice from the CEOs:

  • Your customers need your product to meet their own deadlines. Have you talked to them about your needs and seen what they can offer? Offering modest early pay discounts on amounts due may help to ease your cash flow challenges.
    • Among discounts offered by other businesses is, for example 2% if they pay in 10 days.
    • Another option is to offer 5% off if they pay for new orders in advance.
  • As you bring in new business or projects, negotiate early pay options in your contracts. For example, offer the option to prepay on milestones in exchange for discounts on the final payment.
  • Factoring receivables is an option, but can be expensive. On the other hand with investors looking for good returns, it makes sense to check out options that are available on the web.
  • There are now web services which combine small contributions from a large number of investors into funds which can help you to finance short-term cash needs. There are also options which may provide lines of credit which are easier to secure than bank lines.
  • Look at local redevelopment options or funds which are targeted at local businesses. For example, in the San Francisco Bay area there is a organization called Working Resources which provides low interest loans local businesses to meet cash flow needs.

Key Words: Cash Flow, Payment, Discounts, Early Pay, Milestones, Prepay, Factoring, Funds

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