Tag: small business finance

  • How Do I Pay Myself From My Business: A Founder’s Practical Guide

    How Do I Pay Myself From My Business: A Founder’s Practical Guide

    You've done it. Your business is making money, and it's time you got paid. But you can't just pull cash out of the business account.

    The right way you pay yourself is tied directly to your company's legal structure—whether you're a sole proprietorship, an LLC, or an S-Corp. If you get this wrong, you create a massive tax headache for yourself down the road. Let's make sure you get it right from the start.

    Your First Paycheck The Smart Way

    Figuring out how to pay yourself feels way more complicated than it should. Think of it like this: your business has its own bucket of money, and you have your personal bucket. Your job is to move money from the business bucket to yours using the correct "pipe."

    The pipe you choose—an owner's draw, a salary, or a distribution—depends entirely on how you legally set up your business.

    Each method has its own rules and, more importantly, tax implications. What works for a freelance designer running a sole proprietorship is totally different from what a growing e-commerce brand set up as an S-Corporation has to do. One gives you flexibility; the other demands formal payroll.

    Choosing Your Payment Path

    Making the right choice early on builds good financial habits and keeps you on the right side of the IRS. This is about more than just getting paid; it's about building a real, sustainable, and compliant business.

    Plus, as you grow, you'll find that clean financial records are a critical step in building business credit, which opens doors for future funding and expansion.

    "The way you pay yourself is a direct reflection of your business's financial maturity. It’s the line that separates a hobby from a real, sustainable enterprise."

    This decision tree gives you a quick visual on how your business structure dictates your payment options.

    Flowchart detailing business owner compensation methods and associated tax types based on entity structure.

    As you can see, pass-through entities like sole proprietorships and most LLCs use draws, while corporations require a formal salary. If you nail this concept, you’ve taken the first real step to mastering your business finances.

    How to Pay Yourself Based on Your Business Structure

    To make it even simpler, here’s a quick-reference table that breaks it all down. This chart matches the most common business types with how you're supposed to pay yourself.

    Business Entity Primary Payment Method How It Works Key Tax Consideration
    Sole Proprietorship Owner's Draw You simply transfer funds from the business account to your personal one. No tax is withheld on the draw itself. You pay self-employment tax on all business profits.
    Partnership Guaranteed Payments & Draws Partners receive guaranteed payments for services, plus draws against their share of profits. Guaranteed payments are subject to self-employment tax. Draws are not, but profits are taxed.
    LLC (Single-Member) Owner's Draw Works just like a sole proprietorship. You take money out as you need it. Treated like a sole proprietorship. All net profit is subject to self-employment tax.
    LLC (Multi-Member) Guaranteed Payments & Draws Functions like a partnership. You get paid for your work and can draw from profits. Taxed like a partnership. Guaranteed payments are a business expense.
    S Corporation Salary & Distributions You must be a W-2 employee and pay yourself a "reasonable salary" via payroll. Your salary is subject to payroll taxes (FICA). Distributions are not, which can lead to big tax savings.
    C Corporation Salary & Dividends You are an employee and must take a reasonable salary. Profits can be issued as dividends. The business is taxed on profits, and you are taxed again on dividends (double taxation).

    This table should be your go-to guide. Pinpoint your entity type, and you’ll know exactly which payment method the IRS expects you to use.

    The Core Payment Methods

    Let's quickly break down the main ways you'll move that money. These are the primary tools in your financial kit.

    • Owner's Draw: This is your most flexible option and the go-to for sole proprietors and single-member LLCs. You just transfer money from your business account to your personal account. No tax is withheld on the transfer, but you're on the hook for paying self-employment and income taxes on those profits when you file.
    • Salary: If your business is an S-Corp or C-Corp, you're legally considered an employee. This means you must pay yourself a "reasonable salary" through a formal payroll system. Income and payroll taxes (like Social Security and Medicare) are withheld from each check, just like a regular job.
    • Distribution: This is a major perk for you as an S-Corp owner. Once you've paid yourself that reasonable salary, you can take any additional profits out of the business as distributions. The magic here is that distributions are often taxed at a lower rate than your salary, which is one of the biggest advantages of the S-Corp structure.

    So, How Do I Actually Pay Myself? Draws and Guaranteed Payments

    A desk with a laptop, three coin-filled jars, a calculator, and a 'First Paycheck' banner.

    If you're running a Sole Proprietorship, Partnership, or a single-member LLC, you're in luck. Getting paid is refreshingly simple. You don't have to jump through the hoops of a formal payroll system just yet. Instead, you'll use what's called an owner's draw.

    Think of your business account as a dedicated piggy bank. Revenue goes in, business bills get paid from it, and when you need cash for your personal life, you take a "draw." It’s literally just a transfer from your business checking account to your personal one.

    But here’s the trap that gets so many new founders into trouble: that simplicity. The money you draw isn't a "paycheck" in the traditional sense. No taxes are withheld automatically, which can lead to a nasty surprise from the IRS down the road.

    The Owner's Draw, Demystified

    For pass-through entities, the owner's draw is your main tool for taking money out of the business. It’s simply you claiming a piece of the company’s profits.

    Imagine you're a founder in Chicago selling custom leather goods. You just crushed it this month, and after paying for leather, shipping, and ads, your business account is looking healthy. You need to pay rent, so you transfer $3,000 from your business account to your personal one. Boom. That $3,000 is your owner's draw.

    You can take a draw whenever you want, for any amount, as long as the business has the cash. This flexibility is a godsend when you're starting out and revenue feels like a rollercoaster. One month you might draw $1,500; the next, maybe $5,000.

    The absolute number one rule with an owner’s draw is discipline. Just because the money is sitting in the business account doesn’t mean it’s all yours. You have to leave enough cash to cover expenses, taxes, and your next big move.

    A Real-World Draw Scenario

    Let's stick with our Chicago leather goods founder, Sarah. She doesn't just guess what she can take. She uses a simple spreadsheet to get a clear picture of her cash flow and decide how much she can safely pay herself.

    Here’s a peek at her monthly math:

    Financial Item Amount Notes
    Total Monthly Revenue $10,000 Money coming in from all those leather bag sales.
    Cost of Goods Sold -$3,000 Raw materials, direct labor, etc.
    Operating Expenses -$2,500 Software, marketing, studio rent, etc.
    Net Income (Profit) $4,500 What's left before her pay and taxes.
    Tax Savings (30%) -$1,350 She moves this into a separate account for the IRS. Period.
    Reinvestment Fund (10%) -$450 Set aside for that new sewing machine or a big marketing push.
    Available for Owner's Draw $2,700 This is the maximum she can safely take this month.

    By following this framework, Sarah avoids starving her business of the cash it needs to survive and grow. She pays her future self first by carving out money for taxes and reinvestment.

    What if You Have Partners? Enter Guaranteed Payments

    Things get a little more complex if you have a business partner (in a Partnership or multi-member LLC). You can still take draws, but you might also introduce guaranteed payments.

    Think of a guaranteed payment as a fixed salary for the actual work you do in the business, separate from your slice of the profits. It's a fair way to make sure partners who do more of the heavy lifting get compensated for it, even if the business has a slow month.

    For example, you and a partner launch a marketing agency. You’re grinding away on client work and sales, while your partner is more of a silent investor. You could agree that you get a $4,000 guaranteed payment each month for your labor before any remaining profits are split. This payment is a business expense, and just like a draw, you're responsible for your own self-employment taxes on it.

    Understanding the financial reality of your startup is key here. The average business startup needs about $40,000 in its first year, but that number is all over the map. A service business might launch with $12,000, while a restaurant could need $400,000 or more. For me and entrepreneurs in the Chicago Brandstarters community, knowing these numbers helps us set realistic expectations for when and how much you can actually pay yourself. You can dig into these stats further in various industry reports.

    Don't Forget the Tax Man

    This is the part you absolutely cannot ignore: an owner's draw is not tax-free. It's the biggest mistake I see new founders make, time and time again. You don't get taxed on the transfer of money itself, but you owe taxes on your business's entire profit for the year.

    Since no taxes are being withheld, the IRS expects you to pay up throughout the year in four quarterly estimated tax payments.

    • Self-Employment Tax: This covers your Social Security and Medicare. It’s a flat 15.3% on your net business income.
    • Income Tax: This is your standard federal and state income tax, which depends on your tax bracket.

    You have to estimate your total tax bill for the year, divide it by four, and send a payment to the IRS by their quarterly deadlines. If you fall behind, you'll get hit with painful underpayment penalties.

    My best advice? Set aside 25-35% of your net income in a totally separate savings account just for taxes. Do not touch it. That's not your money—it belongs to Uncle Sam.

    S-Corps: Salaries, Distributions, and How You'll Get Paid

    When your business really starts to gain momentum, you might find yourself electing S-Corp status. This is a massive milestone, but it completely rewrites the rules for how you pay yourself. You're no longer just the owner taking a draw whenever you feel like it; you officially become an employee of your own company.

    This shift means you have to start paying yourself a formal, W-2 reasonable salary through a real payroll system. It’s a definite move from the Wild West of flexible draws to a more structured, disciplined approach. The payoff, though? Potentially huge tax savings.

    Think of your S-Corp's profit as a pie. The IRS says before you, the owner, can take any of that pie for yourself, you first have to cut a slice for the actual work you did. That first slice is your salary.

    The "Reasonable Salary" Requirement

    So, what exactly is a "reasonable salary"? The IRS is intentionally a bit fuzzy here, but the core idea is simple: you have to pay yourself a wage that’s comparable to what someone else would earn for doing your job in your industry and your city.

    You can't just pay yourself $10,000 a year to dodge payroll taxes if you’re also acting as the CEO, top salesperson, and marketing director. That's a huge red flag.

    The IRS looks at a few things to figure out if your salary is legit:

    • Your Role and Responsibilities: What do you actually do all day? Are you managing a team, writing all the code, or running the entire show? The more critical your role, the higher your salary needs to be.
    • Industry Averages: What do similar jobs pay in your field? You can dig up this data from places like the Bureau of Labor Statistics or even Glassdoor.
    • Business Performance: Your company's revenue and profitability matter. A business pulling in $1 million in revenue can obviously support a higher owner's salary than one making $100,000.

    Seriously, setting a salary that's way too low is one of the easiest ways to attract an IRS audit. They see it as a blatant attempt to avoid paying your fair share of Social Security and Medicare taxes.

    The Magic of S-Corp Distributions

    Okay, once you’ve paid yourself that required reasonable salary, we get to the good part: distributions.

    After your salary and other business expenses are paid, any leftover profit can be taken out of the company as a distribution.

    And this is where you see the tax savings kick in.

    Your salary gets hit with FICA taxes—that’s the 15.3% combined tax for Social Security and Medicare. But your distributions are not subject to those FICA taxes. You’ll still owe income tax on them, but skipping that 15.3% hit can save you thousands, or even tens of thousands, of dollars every single year.

    Salary Slice vs. Profit Slices
    Let's say your business cleared $150,000 in profit this year. You do your research and figure out a reasonable salary for your role is $60,000. That $60,000 is the first slice of the pie, and it gets dinged with the full payroll tax.

    The remaining $90,000 is pure profit. You can take that $90,000 as a distribution, and you won’t pay the 15.3% FICA tax on it. That’s an instant tax savings of $13,770 compared to if you had taken the entire $150,000 as salary.

    This two-part payment system—a reasonable salary followed by distributions—is the number one reason founders elect S-Corp status. It’s a powerful strategy for you to keep more of the money you earn.

    Getting the Mechanics Right

    Switching to an S-Corp means you can't just transfer money from business to personal anymore. You absolutely have to run formal payroll, just like you would for any other employee. This is non-negotiable.

    Here’s how you do it right:

    1. Pick a Payroll Service: You'll need a real payroll provider. Think Gusto, Rippling, or QuickBooks Payroll. These services handle everything—calculating withholdings, filing payroll taxes, and making sure the government gets paid on time.
    2. Put Yourself on the Payroll: You are now a W-2 employee. You’ll get a regular paycheck (weekly, bi-weekly, whatever you choose) with all the standard deductions for income tax, Social Security, and Medicare. For many founders, this is the first time they see a "real" paystub from their own company. It's a surreal moment.
    3. Process Distributions Separately: When you take a distribution, it must be a completely separate transaction. This is critical. You'll make a direct transfer from your business bank account to your personal one and record it in your books as an "Owner's Distribution," not "payroll."

    Keeping your salary and distributions firewalled from each other is essential for compliance. If you start mixing them up or paying your salary irregularly, you're signaling to the IRS that you’re not really treating yourself as an employee, which could undo all of your tax benefits.

    And if you're thinking about the next step, like bringing on team members, check out our guide on how to hire your first employee for more practical advice.

    How Much Should You Actually Pay Yourself

    A pie cut into slices, illustrating the concept of salary versus distribution in business finances.

    This is the big one, right? The question every founder I know wrestles with. It feels like walking a tightrope. On one side, you've got your personal bills and the life you're trying to build. On the other, there's the business—this living, breathing thing that needs cash to grow, survive, and not completely fall apart during a slow month.

    The answer isn't "as much as I can grab." I’ve seen that movie before, and it ends in disaster.

    The right number is a strategic balance between what you truly need and what the business can sustainably afford. It’s all about being brutally honest with your numbers and disciplined enough to avoid starving your business of the resources it needs to actually succeed.

    Starting With Profit, Not Revenue

    The single biggest mistake I see new founders make is looking at the gross revenue in their bank account and thinking it's a free-for-all. That top-line number is a vanity metric. Your real starting point for any pay discussion is your net income—your profit.

    Think of your business as a fruit tree. Revenue is all the fruit it produces. But you can't just take all the fruit for yourself. You have to save some seeds for next season (reinvestment), use some to fertilize the soil (operating expenses), and set some aside for a potential drought (taxes and savings). Your pay comes from the fruit that's left over.

    A game-changing framework for this is the Profit First methodology. It completely flips the standard accounting formula. Instead of Revenue - Expenses = Profit, you make it Revenue - Profit = Expenses. You decide on a profit margin first, stash that money away, and then force yourself to run the business on what's left. Your pay is a calculated part of that system, not a hopeful afterthought.

    A Practical Monthly Pay Calculation

    Let's make this real. Imagine you are Maria, a Chicago founder who runs a small branding agency. You had a great month and brought in $15,000. You don't just randomly Venmo yourself some cash. Instead, you follow a strict, non-negotiable allocation process.

    Here’s your breakdown:

    • Profit Allocation (10%): The very first thing you do is move $1,500 (10% of revenue) into a separate "Profit" savings account. This is your reward for being a smart business owner. You don't touch this money until the end of the quarter.
    • Tax Allocation (25%): Next, you transfer $3,750 (25%) into your "Tax" account. This isn't your money; it belongs to the IRS and the State of Illinois. By siloing it, you avoid that horrible end-of-quarter panic when a huge tax bill comes due.
    • Owner's Pay Allocation (40%): This is your paycheck bucket. You allocate $6,000 (40%) to your "Owner's Comp" account. This is the pool from which you'll pay yourself your salary or draw.
    • Operating Expenses (25%): The remaining $3,750 (25%) is all you have to run the business for the next month—software, contractors, marketing, you name it. If it doesn't fit in this bucket, you can't afford it. Period.

    This system forces discipline. You know exactly what you can pay yourself and what the business has left to operate. It transforms a scary, emotional decision into a simple, mathematical one.

    Your business's health depends on you being its steward, not just its beneficiary. Paying yourself a sustainable amount is the ultimate act of leadership—it proves you're building something for the long haul.

    Adjusting Your Pay for the Seasons

    Your business is going to have good months and bad months. That's a guarantee. A rigid, fixed salary can be incredibly dangerous in the early days.

    I once worked with a founder who ran an events business. His income was fantastic in the summer but cratered in the winter. He started by paying himself a high, flat salary every single month.

    The first winter nearly bankrupted him. He was pulling money out of a business that wasn't making any, going into debt just to make his own "payroll."

    He had to learn the hard way to be flexible. Now, he uses a percentage-based system just like Maria's. In a $20,000 summer month, his take-home pay is great. In a $5,000 winter month, it’s lean. It was a tough pill to swallow, but that discipline is why his business is still around today. He protected his cash flow management for small business, which is the absolute lifeblood of any company.

    This is a critical consideration. Recent data shows the average small business owner's salary is $69,647 annually, which is about 6% higher than the national average wage. For members of the Chicago Brandstarters community growing from idea to seven figures, this provides a realistic benchmark for owner compensation during those crucial growth phases. You can find more insights about these small business statistics on Bankrate.com.

    Ultimately, figuring out your pay isn't a one-time decision. It's a constant process of evaluation and adjustment. It demands you take an honest look at your numbers, commit to discipline, and adopt a mindset that prioritizes the long-term health of your business above all else.

    Common Paycheck Mistakes and How to Avoid Them

    One of the greatest business hacks is simply learning from other people's screw-ups. When it comes to paying yourself, a few common mistakes can create massive headaches, from surprise five-figure tax bills to serious legal trouble.

    I’ve seen these exact landmines take down promising founders. The good news is, with a little foresight, you can sidestep them completely.

    The Commingling Catastrophe

    The number one mistake, hands down, is mixing your business and personal finances. It’s a cardinal sin for a reason.

    Think of your LLC or corporation as a suit of armor protecting your personal stuff—your home, your car, your savings. Using your business account like a personal ATM punches holes directly through that armor. This is called commingling funds, and it's how you lose your legal protection.

    If your business gets sued, a lawyer can argue that you and your business are the same entity because you treat its money as your own. If a judge agrees, they can "pierce the corporate veil," and suddenly, your personal assets are on the table.

    The Fix: From day one, you must open a separate business checking account. All business income goes in, and all business expenses go out. You pay yourself with a clean, documented transfer (like a draw) or a formal payroll check. No exceptions. This isn't optional.

    Forgetting About Uncle Sam

    The second blunder I see all the time is founders forgetting that an owner’s draw isn't tax-free cash.

    When you take a draw from your sole proprietorship or LLC, no taxes are withheld automatically. I’ve seen founders take draws all year, feeling flush, only to get slammed with a tax bill they can't possibly pay come April. It’s a nightmare.

    You have to remember, the IRS expects you to pay taxes on your profits throughout the year with quarterly estimated payments. This covers your income tax and the hefty 15.3% self-employment tax.

    The money in your business account isn't all yours. A huge chunk of it belongs to the government. If you act like it's all yours, you're setting yourself up for disaster.

    The Fix: This is simple but non-negotiable. Open a separate savings account and label it "Taxes." Every time you get paid, immediately transfer 25-35% of that revenue into the tax account. This isn't your money. Do not touch it for anything other than paying your quarterly taxes. This single habit will save you from so many sleepless nights.

    Setting an Unreasonable S-Corp Salary

    If you run an S-Corp, the temptation to game the system is strong. Distributions are free from payroll taxes, so some founders try to pay themselves a ridiculously low salary—like $12,000 a year—and take the rest in distributions to dodge taxes.

    Bad idea.

    The IRS has been dealing with this trick for decades. They see an unreasonably low salary as a massive red flag. An audit will almost certainly lead them to reclassify your distributions as salary, hitting you with a bill for all the back taxes, plus penalties and interest.

    The Fix: You need to do your homework. Research what a person with your experience, in your industry, and in your geographic area would earn for the job you're doing. Document this research, and then pay yourself that "reasonable salary" through a proper payroll service. It keeps you compliant and safely off the IRS's radar.

    Answering Your Top Questions About Founder Pay

    Desk with a 'Business/Personal' binder, an orange book, and a sign: 'Avoid Paycheck Mistakes'.

    When you're trying to figure out how to pay yourself, it can feel like you're lost in a maze. I get it. I’ve been there.

    So, I’ve put together some of the most common questions I hear from founders. No fluff, just straight answers to give you some clarity.

    Think of this as your quick-reference guide. Come back to it anytime a new question pops up.

    When Is The Right Time To Start Paying Myself

    The short answer? When your business is consistently profitable and your cash flow is stable. Before you hit that milestone, every single dollar needs to go back into the business to fuel your growth.

    A good rule of thumb is to have at least three to six months of operating expenses tucked away in a business savings account. This buffer is crucial—it ensures you're not putting the company's survival on the line just to get a paycheck.

    When you do start paying yourself, start small. Even a minor, consistent payment builds good financial discipline and proves your business model can actually support you. Never, ever pay yourself if it means going into debt or pushing back payments to your suppliers.

    Do I Really Need A Separate Business Bank Account

    Yes. One hundred percent. This is non-negotiable. It's the very first piece of advice I give every new founder I meet.

    Mixing your personal and business money is a classic rookie mistake called "commingling funds." Trust me, it makes your bookkeeping an absolute nightmare.

    But more importantly, it can "pierce the corporate veil." That’s a scary legal term which means if your LLC or corporation gets sued, your personal assets—your house, your car, your savings—could be fair game. A separate account is your financial suit of armor.

    You have to open a dedicated business checking account from day one. No excuses.

    What Tools Can Help Me Manage Payroll And Payments

    The tools you’ll need really depend on how you're set up.

    • For Draws (Sole Proprietors/LLCs): Simple bookkeeping software is your best friend here. A tool like QuickBooks or Xero is perfect for tracking those money transfers from your business account to your personal one. It keeps everything clean and organized.
    • For Salaries (S-Corps/C-Corps): The moment you need to run formal payroll, you absolutely need a dedicated service. Don’t even think about doing it manually. It's a recipe for costly mistakes and IRS headaches.

    Gusto is incredibly popular with startups because it’s so easy to use. Another fantastic option is Rippling, which can handle a ton of other HR stuff as you start to build a team. These tools are lifesavers that automatically handle tax withholdings and filings, keeping you compliant.

    How Does My Pay Structure Change As My Business Grows

    Your pay structure isn't set in stone. It will, and should, evolve as your business hits new milestones.

    In the very beginning, as a Sole Proprietor or LLC, you’ll probably be using flexible owner's draws. This makes sense when your revenue is all over the place. It gives you the adaptability you need.

    As you scale up and your income becomes more stable and predictable, you might transition to an S-Corp. This forces the discipline of a regular, "reasonable" salary.

    Then, as you start pushing past the seven-figure mark, your salary might plateau, but your distributions (your share of the profits) will likely grow quite a bit. The key is to sit down with your accountant every single year to review your compensation. This makes sure it's optimized for your personal goals, the company's health, and your overall tax strategy.

    Building a business can be a lonely journey, but it doesn’t have to be. If you're a kind, hard-working founder in the Midwest, Chicago Brandstarters is your community. We skip the awkward networking and connect you with a small, private group of peers who share real stories and support each other. Learn more and apply to join at https://www.chicagobrandstarters.com.

  • Cash Flow Management for Small Business: A Founder’s Guide

    Cash Flow Management for Small Business: A Founder’s Guide

    Here's a hard truth I learned early on: profit on paper means nothing if you can't pay your bills. That's the core of cash flow management. It isn’t some accounting puzzle; it’s about making sure you always have enough actual cash on hand to cover payroll, rent, inventory, and all those other costs that pop up.

    For you, the small business owner, cash flow is oxygen. Without it, your business suffocates.

    Why Cash Flow Feels Like Oxygen

    When I built my first app, I was obsessed with my profit and loss statement. The numbers looked great! But my bank account told a completely different, and much scarier, story. I was making "profit" but had no money to pay my developers.

    That’s when it clicked. Profit is like owning a beautiful, high-performance race car. Cash flow is the fuel. Without gas in the tank, that shiny car is just a very expensive lawn ornament. It’s not going anywhere.

    It’s a shockingly common mistake. You get so focused on revenue and profit margins that you forget about liquidity—the cash available right now. A recent study from OnDeck found that a staggering 82% of small business failures trace back to poor cash flow management. It’s the silent killer.

    And things are only getting tougher. With inflation squeezing margins, 30% of owners now say it’s their top challenge. In the US, 51% of companies are battling uneven cash flow, making it their third-biggest operational headache.

    Profit vs Cash Flow: The Core Differences

    It’s easy to confuse these two, but they tell very different stories about your business's health. Think of this table as your cheat sheet for understanding the distinction.

    Concept Profit Cash Flow
    Measurement Earnings minus expenses (on paper) Actual cash moving in and out of your bank accounts
    Timing A snapshot, usually quarterly or annually A real-time pulse of your business, tracked daily or weekly
    Impact Shows your business's potential long-term value Determines your immediate survival and operational breathing room

    Getting this right helps you spot the blind spots in your financial story before they become full-blown crises. Profitability is the goal, but positive cash flow is what gets you there.

    Why You Need to Monitor Your Cash Flow Religiously

    Constantly keeping an eye on your cash isn’t about being a pessimist; it’s about being a realist.

    Here’s what it does for you:

    • Eliminates nasty surprises. You’ll know exactly when you can afford that new hire or that big marketing push.
    • Informs your strategy. It tells you when to invest aggressively in growth and, just as importantly, when to pull back and conserve cash.
    • Plugs leaks before you sink. You can spot where money is quietly draining out of your business before it becomes a major problem.

    You don't need complicated software to get started. A simple log of what's coming in and what's going out is enough. I want you to start checking your cash balance daily, or at least a few times a week. This simple habit alone can be a game-changer. If you’re just starting out, my guide on starting a business with no capital shows how this kind of basic tracking builds incredible momentum from day one.

    Cash flow isn’t some optional metric for your accountant to worry about. It’s the absolute life support system for your business.

    I’m not here to bore you with theory. My goal is to give you a practical, no-fluff playbook for keeping the lights on, meeting payroll, and sleeping soundly at night. In the next sections, I'll walk you through exactly how to diagnose your cash situation, build a simple forecast, and pull the right levers to keep your business healthy and growing.

    How to Build Your First Cash Flow Forecast

    Forecasting your cash flow isn't some dark art only for CFOs. Honestly, it's more like a weather report for your money. It tells you when to expect sunshine and when you might need to grab an umbrella, giving you precious time to prepare. You don't need fancy software—a simple spreadsheet is your best friend here.

    I’m going to walk you through building a 13-week cash flow forecast. Why 13 weeks? Because it gives you a full quarter’s view, which I've found is the perfect sweet spot between long-term vision and short-term, actionable steps. This is the exact tool I use with founders to get them out of their gut and into making decisions with real confidence.

    Mapping Your Cash Inflows

    First up, let's get a handle on all the cash you actually expect to come into the business. This is way more than just looking at your total sales numbers. You have to get granular about when that money will physically hit your bank account.

    Your cash inflows will probably include a few things:

    • Sales Revenue: Project your sales on a weekly basis. And be real about it. Dig into your past data, consider seasonal trends, and factor in any promos you're running. If you're an e-commerce brand, what are your average weekly sales, really?
    • Invoice Payments: When are clients actually paying you? If your terms are Net 30, don't fool yourself into forecasting that cash for the day you send the invoice. I always tell founders to add a week or two to the official due date to account for the inevitable late payers. It’s just reality.
    • Other Income: Got a loan coming through? Expecting a tax refund or an investor check? Slot that into the specific week you know it's landing.

    This exercise is what turns an abstract idea like "profit" into tangible, spendable cash.

    A forecast is just your best-educated guess. It will never be perfect, but an imperfect plan is infinitely better than flying blind. It gives you a baseline to measure against reality.

    The whole point is to map the journey from a sale (which is profit on paper) to actual funds in your bank (which is cash flow). That's what really determines if your business is healthy enough to survive and grow.

    Diagram illustrating the cash flow process for business vitality, from profit to health and growth.

    This diagram nails it: profit is just the starting line. It's the cash flow that actually fuels the health and vitality of your business.

    Projecting Your Cash Outflows

    Now for the other side of the coin—the money going out the door. This part is usually a bit easier to pin down since so many of your costs are fixed or recurring. But you have to be brutally honest with yourself here. Underestimating your expenses is a fast track to serious trouble.

    List out every single thing you have to pay for, week by week:

    • Fixed Costs: These are your regulars, the predictable bills like rent, payroll, software subscriptions, and any loan payments.
    • Variable Costs: These move up and down with your sales. For an e-commerce brand, think cost of goods sold (COGS), shipping fees, and what you're spending on ads.
    • One-Time Expenses: Are you buying a new laptop, placing a huge inventory order, or paying that big annual insurance premium? Pinpoint the exact week that cash is scheduled to leave your account.

    Putting It All Together

    Okay, once you have your inflows and outflows listed out, this is where the magic happens. For each of the next 13 weeks, you’ll calculate your net cash flow (Total Inflows – Total Outflows) and, most importantly, your ending cash balance.

    The math is simple:

    Ending Cash = Starting Cash + Net Cash Flow for the Week

    Your ending cash for Week 1 becomes the starting cash for Week 2, and so on. This rolling calculation creates a powerful snapshot of your financial future. You'll immediately spot the weeks where your bank balance might dip dangerously low, giving you a chance to do something about it before it's a five-alarm fire.

    Think about it. Imagine you’re planning a big product launch. You can use this forecast to see if you can actually afford a $50,000 inventory purchase in Week 4 and still make payroll in Week 6, all based on your sales projections. That's the kind of clarity that turns chaos into control.

    Shorten Your Cash Conversion Cycle

    A cafe employee works at a POS system while various baked goods are displayed on the counter, with a sign reading 'shorten cash cycle'.

    Alright, let's get tactical. Once you've built your forecast, the real work begins. Your next move is to actively shrink the time it takes to turn your investments back into real, spendable cash.

    This is your Cash Conversion Cycle (CCC), and it’s one of the most powerful levers you can pull in your entire business.

    Think of it this way: if you're a baker, your CCC is the time between paying for flour and a customer's payment for a cupcake actually hitting your bank account. A long cycle means your cash is trapped—in ingredients, in finished goods, or in unpaid invoices. A short cycle means you get paid faster, freeing up your capital to reinvest and grow.

    The formula might look a little intimidating, but the idea is simple. You just have to manage three core parts:

    • Days Inventory Outstanding (DIO): How long your products sit on the shelf before you sell them.
    • Days Sales Outstanding (DSO): How long it takes your customers to pay you after a sale.
    • Days Payable Outstanding (DPO): How long you take to pay your own suppliers.

    Your goal is to crush your DIO and DSO, making them as short as possible, while stretching out your DPO as long as you can (without, you know, ruining your supplier relationships). Let me break down how to attack each one.

    Reduce Your Days Sales Outstanding (DSO)

    This is all about getting paid faster. Every day an invoice sits unpaid is another day someone else is using your money to run their business. A high DSO is an absolute cash flow killer.

    I once worked with a branding agency whose DSO was a terrifying 90 days. They were profitable on paper but constantly on the brink of collapse. I helped them cut that number in half in just a few months with some simple, non-confrontational tactics.

    Here’s what you can do right now:

    • Invoice immediately and clearly. Don't wait until the end of the month. Send the invoice the moment the work is done with crystal-clear payment instructions and due dates.
    • Offer more ways to pay. Make it ridiculously easy for people to give you money. For Chicago's bold yet kind builders, practical wins include offering payment variety to speed up inflows. Data shows 70% of businesses accept credit cards, and 62% use PayPal. You build a resilient business by making these small operational tweaks. You can find more small business cash flow insights in a report from Xero.
    • Automate your follow-ups. Set up friendly, automated email reminders for invoices that are approaching their due date or are just past due. This removes the emotion and awkwardness from collections.
    • Consider early payment discounts. Offering a small carrot, like 2% off if paid in 10 days instead of 30, can be a powerful nudge.

    Optimize Your Days Inventory Outstanding (DIO)

    If you sell a physical product, this is huge. Inventory is just cash sitting on a shelf, not working for you. Your mission is to move it as efficiently as possible.

    I know a local t-shirt brand that struggled because they ordered massive batches of every design to get a lower per-unit cost. The problem? Some designs flopped, and that cash was trapped in boxes of unsold shirts for over a year.

    Your inventory isn’t an asset until it sells. Before that, it’s a liability that’s actively draining your cash resources.

    To shrink your DIO, you need smarter inventory management.

    • Get better at forecasting. Use your past sales data to make better predictions about what will sell and when. Don't just guess.
    • Try a Just-In-Time (JIT) approach. Where it makes sense, order inventory closer to when you actually need it. This reduces the time it sits in your warehouse burning a hole in your pocket.
    • Liquidate slow-moving stock. Run a sale or a promotion on items that have been gathering dust. It's better to get some cash back now than no cash back ever.

    Improving how you manage products on the shelf is a core part of effective cash flow management. If you want to dive deeper, my guide on the inventory turnover formula is a great place to start.

    Extend Your Days Payable Outstanding (DPO)

    Finally, let's talk about the money you owe. This is the one part of the cycle you actually want to make longer. By strategically timing your payments to suppliers, you keep cash in your own bank account for a longer period.

    This isn't about being a deadbeat or hurting your relationships. It's about using the payment terms you've already negotiated to your advantage. If a supplier gives you Net 30 terms, don't pay the bill on day one. Pay it on day 28 or 29. That extra month of holding onto your cash can make a huge difference.

    • Negotiate better terms. Once you've proven you're a reliable customer, don't be afraid to ask your key suppliers for longer payment windows, like Net 45 or even Net 60. The worst they can say is no.
    • Schedule your payments. Use your accounting software or even just a calendar to schedule payments to go out right before they are due, not weeks ahead.
    • Use credit cards strategically. Paying a supplier with a credit card can instantly give you an extra 30 days before the cash actually leaves your bank account. Just be sure you pay the balance in full to avoid nasty interest charges.

    Proven Tactics to Get Cash in the Door Faster

    Getting paid is always priority number one. But just sending an invoice and hoping for the best isn't a strategy—it's a recipe for sleepless nights. The real goal is for you to pull specific, actionable levers that get money into your bank account faster.

    Think of your accounts receivable like a garden hose with a bunch of kinks in it. The water (your cash) is trying to get through, but it’s stuck. Your job is to find those kinks and straighten them out so the cash can flow freely.

    Reimagine Your Invoicing and Collections

    The single biggest kink for most businesses is a passive collections process. You do amazing work, send an invoice, and then… you wait. This is a massive mistake. You need to actively guide your cash home.

    I worked with a founder who was constantly stressed, waiting on payments that were 60 or even 90 days past due. I helped him implement a few tiny changes that cut his average collection time by 40%. The secret? We made his invoices friendlier and his follow-up system consistent.

    Here’s what you can steal from that playbook:

    • Offer a Carrot: Incentivize early payments. A simple phrase like, "Pay within 10 days for a 2% discount" can work wonders. It reframes paying you early as a smart financial move for your client, not just a favor to you.
    • Automate Friendly Nudges: Set up simple, automated emails. One that goes out a week before the due date as a gentle reminder, and another the day it's due. This takes the personal awkwardness out of it and ensures no invoice falls through the cracks.
    • Change Your Language: I had my client ditch the sterile "Payment Due" subject line and try "Ready for Your Thoughts & Payment." It felt more collaborative and less like a demand, which, believe it or not, got a much faster response.

    Don't think of collections as nagging. Think of it as excellent customer service. You're making it easy for them to do business with you and keeping their account in good standing.

    Build Predictable Revenue Streams

    Another powerful way to fix your cash flow is to stop living project-to-project. You have to build systems that generate predictable, recurring revenue. This is all about smoothing out those terrifying peaks and valleys.

    For service businesses like mine, this means getting clients on retainers. Instead of a one-off project, you agree to a set scope of work for a fixed monthly fee. Suddenly, you have a reliable income baseline you can actually count on.

    For you ecommerce founders, the principle is the same, even if the execution is a little different. The question is: how do you turn one-time buyers into repeat customers?

    • Subscription Models: Can you offer your product as a monthly subscription? Think coffee, skincare, or even curated snack boxes.
    • Fix Your Checkout Flow: A shocking number of sales are abandoned right at the finish line. You need to simplify your checkout, offer multiple payment options (like PayPal or Apple Pay), and be totally transparent about shipping costs upfront. Every bit of friction you remove makes it easier for cash to find its way to you.

    Get Paid Before You Start the Work

    This might sound like a no-brainer, but I see so many founders skip this step. For any significant project, you absolutely must require a deposit before you lift a finger. This is non-negotiable.

    Requiring 30-50% upfront does two critical things. First, it immediately injects cash into your business, giving you capital to cover initial costs without draining your reserves. Second, it secures commitment. A client who has paid you a deposit is far more invested in seeing the project succeed.

    Finally, I want you to take a hard look at your pricing. Sometimes the fastest path to better cash flow isn't just collecting faster—it's collecting more. Are you charging what you're truly worth? Bumping your prices by just 10% can have a massive impact on your cash reserves, often with little to no pushback from clients who already see your value.

    Smart Strategies to Control Cash Outflow

    Hands writing in a financial planner with a calculator on an orange background, symbolizing control spending.

    Dialing in your spending is just as important as cranking up your sales. Every single dollar you don't spend is another dollar you can plow back into growth, marketing, or even your own pocket.

    Being disciplined with your cash doesn't mean you have to starve your business. It just means you need to be intentional about where every dollar goes.

    Think of it like packing for a long hike. You can't bring everything. You have to be ruthless about what's essential versus what's just dead weight. Let’s sort through your business’s backpack and make sure you’re only carrying what you need to get to the top.

    Conduct a Ruthless Expense Review

    First, you have to get an honest look at where your money is really going. Most founders I know have a decent grip on big-ticket items like rent and payroll. But it’s the small, recurring charges—the "death by a thousand cuts"—that quietly drain your bank account.

    I recommend you try a simple monthly ritual. Print out your bank and credit card statements and grab three different colored highlighters.

    • Green: Highlight everything that is absolutely essential to keep the lights on. This is your rent, core software, and payroll. No debates here.
    • Yellow: Highlight the "nice-to-haves." These are things that are helpful but not strictly necessary for survival. Think of that extra analytics tool or the premium coffee subscription for the office.
    • Red: Highlight anything that makes you ask, "What is this even for?" or "Are we still using this?" You’ll be shocked at what you find. I guarantee it.

    This simple, hands-on exercise forces you to confront every single outflow. It turns your expenses from an abstract number in QuickBooks into a concrete list of decisions you’ve made. That’s powerful.

    Adopt a Lean Operating Model

    Especially in the early days, your default answer to any new expense should be "no." A lean mindset is your best defense against burning cash on things you don't need yet. You can always add costs later when your revenue actually justifies it.

    Here are a few practical ways I’ve seen founders stay lean without slowing down:

    • Freelancers Over Full-Timers: Need a great designer, writer, or bookkeeper? A skilled freelancer can deliver amazing results without the crushing overhead of a full-time salary, benefits, and payroll taxes. It’s no surprise that 38% of small businesses fail because they run out of cash; high fixed payroll costs are often the killer.
    • Negotiate Everything: Never, ever accept the sticker price, especially from vendors. Whether it's your software provider or your packaging supplier, you should always ask, "Is there any flexibility on that price?" or "What do your payment terms look like?" The worst they can say is no.
    • Leverage Technology Wisely: Automation is your best friend. Use tools to handle social media posting, email marketing, and even basic customer service chats. Every hour you save is an hour you can spend on things that actually bring in cash.

    Your job as a founder isn't to eliminate all costs—it's to get the absolute maximum return on every single dollar you spend. Be a disciplined investor, not just a spender.

    Use Your Payables Strategically

    One of the most overlooked tools in your cash flow management toolbox is your accounts payable. This isn't about stiffing your vendors; it's about using the payment terms they give you to your advantage.

    If a supplier gives you Net 30 terms, don't pay the invoice on day one. Pay it on day 29. That extra 28 days of holding onto your cash can be the difference between making payroll and having a full-blown panic attack. Think of it as a free, short-term loan from your supplier.

    Business credit cards can also be a powerful tool, but you have to use them with extreme discipline. A card can extend your payment cycle by another 30 days, potentially giving you a 60-day buffer before cash actually leaves your account. But this is a tool for managing timing, not a lifeline to fund a failing business. You must pay that balance in full every single month, without exception.

    This approach keeps your cash working for you longer. As your cash flow improves, you can start to think more about how to pay yourself from your business more consistently.

    Alright, let's get down to business. All the theory in the world is useless if you don't actually do something with it. This is where you stop talking and start building. I’m giving you a straightforward 30-60-90 day plan to get a handle on your cash flow once and for all.

    Think of this as your personal playbook. It's designed to take you from chaos to control, step by step.

    The First 30 Days: Diagnosis Mode

    Your first month is all about getting brutally honest with yourself and gaining clarity. You can't fix what you can't see, so your only goal here is to understand your financial pulse. No judgment.

    • Pick your weapon. Before you do anything else, commit to a tracking system. Seriously, a simple spreadsheet is more than enough to get you started. Just list every dollar that comes in and every dollar that goes out.
    • Calculate your runway. Look at your current bank balance and your average monthly burn. If your revenue dropped to zero tomorrow, how long could you keep the lights on? This number might be scary, but you need to know it.
    • Track your CCC. Go ahead and calculate your Cash Conversion Cycle for the first time. The number might be ugly. That’s okay. You now have a baseline—a starting line for the race ahead.

    Days 31-60: Time to Optimize

    Now that you have your baseline, it's time to make a few smart moves. You’re not trying to boil the ocean here. Your goal is to find a couple of small, high-impact wins to build some momentum.

    Don't overcomplicate it. Just choose one tactic to improve your cash inflows and one to tighten up your cash outflows.

    • Build your forecast. This is the moment to create that 13-week cash flow forecast we talked about. Think of it as your financial weather report for the next quarter.
    • Pull one "inflow" lever. As an example, start offering a 2% discount for customers who pay their invoices within 10 days. It's a simple, classic move for a reason.
    • Pull one "outflow" lever. Pick one of your suppliers and just ask to extend your payment terms from Net 30 to Net 45. The worst they can say is no.

    The goal here isn't perfection; it's progress. Small, consistent actions create massive change over time. Just focus on making one smart decision for your inflows and one for your outflows. That's it.

    Days 61-90: Make It a System

    By now, you should have much better visibility into your cash and a couple of small wins under your belt. This final month is all about turning these new actions into habits that stick. This is how you build a resilient business that can actually weather a storm.

    • Schedule your weekly cash check-in. Block out 30 minutes on your calendar every single Friday. Use this time to update your forecast and review your cash position. You must treat this meeting with yourself as non-negotiable.
    • Set real financial goals. Based on what your forecast is telling you, set a clear, tangible goal. Maybe it's increasing your cash runway from two months to three. Or maybe it's slashing your DSO by 15 days.
    • Define your red flags. Decide now what a "cash emergency" looks like for your business. A common one is having less than 30 days of operating expenses in the bank. Figure out ahead of time what you'll do if you hit that number—will you draw on your line of credit? Cut specific costs immediately? You need to make the decision before the pressure is on.

    Founder FAQs on Cash Flow Management

    I get a ton of questions from founders trying to finally get a handle on their finances. It’s a common pain point, and it usually boils down to a few key worries. Here are the most common ones I hear, along with my straight-up, no-fluff answers.

    What Is the Best Software When I’m Just Starting?

    Honestly, don't overcomplicate this. A well-organized Google Sheet or a simple Excel spreadsheet is all you need at first.

    I've seen founders waste weeks and thousands of dollars on complex software they didn't need yet. Your real goal in the beginning is to build the habit of tracking, not to become an expert in a new tool.

    Once your revenue gets more consistent and you have more moving parts, then you can graduate to something like QuickBooks or Xero. For an early-stage founder like you, simple is powerful.

    How Much Cash Should My Business Keep on Hand?

    A solid rule of thumb is for you to have enough cash in the bank to cover at least three to six months of your essential operating expenses. Think of this as your business's emergency fund.

    This is the cash you’d need for rent, payroll, and critical software subscriptions if your sales suddenly dropped to zero. This buffer gives you the breathing room to handle a slow month or an unexpected cost without panicking. If your revenue is still unpredictable, as it is for most startups, aiming for that six-month cushion is always the safer, smarter bet.

    Your cash reserve isn't idle money; it's a strategic asset. It buys you time to make smart decisions instead of desperate ones.

    My Cash Flow Is Always Negative. What’s the First Thing to Fix?

    If you're constantly in the red, it points to a fundamental problem with your business model. The very first place you need to look is your gross margin. That's just your revenue minus the direct costs of what you sold. Are you charging enough to actually make money on each sale?

    If your margins aren't healthy, you really only have two choices: raise your prices or find a way to lower your costs, period.

    But what if your margins look good on paper and your bank account is still empty? Then your issue is likely your payment cycles. Are clients taking way too long to pay you? Fixing your collections process is often the quickest win for your cash flow.

    At Chicago Brandstarters, I believe that kind, hardworking founders deserve to win. If you're building a brand in Chicago and want to surround yourself with a vetted community of peers who share honest war stories and real tactics, I’m here for you. Learn more and apply to join our free community at https://www.chicagobrandstarters.com.