What You’ll Learn:
- How tax season creates unique cash flow challenges for small businesses
- What strategies can help you manage your cash flow this tax season
- Long-term planning techniques to reduce your tax-related financial strain
Tax season can be a financially stressful time for small businesses. However, implementing seasonal strategies can help minimize the impact of tax obligations and ensure you have enough cash flow to cover day-to-day operations.
Check out these practical tips for handling this year’s taxes and learn how to plan even better for next year.
The strain of tax season on cash flow
Many small, service-based businesses can experience gaps in cash flow despite careful financial planning and management. The lag time between invoicing your clients and getting paid can feel even more precarious during tax season, when unexpected tax costs can stretch your cash flow too thin.
Even if you have pending income, funds might not be available in time to meet your tax deadline. Here’s how to make sure long payment cycles don’t cause problems for your business during tax season:
Tips for managing cash flow during tax season
If you’re feeling the tax-time pressure, there are a few things you can do:
- Leverage your accounts receivable: When you need to free up funds quickly, factoring your accounts receivable makes it possible to convert unpaid invoices to instant capital. AR factoring can cover shortfalls, and since the money is a cash advance against your future receivables, you may even be able to deduct the fees for the factoring service as a business expense.
- Speed up your invoice processing: Get paid quicker by ensuring your invoices go out promptly after delivering products or services. You can use software to automate the invoicing process to ensure you stay on top of payment cycles and follow-ups.
- Review and optimize your expenses: Take a look at your expenses and eliminate items from your budget that aren’t 100% necessary—at least in the short term. Cut out subscriptions and any extra services you don’t absolutely need, and see if any of your typical purchases can wait until tax season is over.
- Get your spending down to the essentials: Take care of the essentials first. Think payroll, rent, and critical operational expenses. Then, postpone discretionary spending until after you’ve got your taxes covered. If you have to, talk to your vendors about extending payment terms.
- Offer early payment discounts to clients: Clients who can pay early are more likely to do so when you add a little incentive. Be clear you’re making a limited-time offer to create a sense of urgency. This can help you generate more cash and reduce stress.
- Create a cash flow forecast template: A cash flow forecasting template is a record of your available cash, inflow, outflow, and other details to help you know just how liquid your business is at a given time. Having this information on hand helps you identify and avoid potential cash flow issues.
Is it better to file taxes early to improve cash flow?
If you hate getting stuck in rush hour traffic, you can leave early to avoid the jam. The same strategy works when it comes to paying taxes.
On the plus side, you’ll know exactly what you owe early in the game, so you can better plan your budget for the months ahead. There’s also a chance you’ll receive a tax refund earlier, which can help with cash flow.
But, there’s also a chance that rushing your taxes will make you overlook last-minute deductions or credits. To strike the right balance, you should file as soon as you’re confident you have complete and accurate information. It’s always best to ask your accountant to weigh in on your factoring receivables tax treatment to be certain.
How to minimize the impact of tax season on cash flow
Say no to last-minute scrambling: A little planning ahead can help you minimize disruption to your cash flow for the next tax year and beyond.
Be proactive with the following plan of action:
- Set up a tax savings account (and actually use it): It’s like saving for a rainy day, but you know precisely when that day is coming. Make consistent contributions toward your future peace of mind.
- Automate transfers: It’s easier to be diligent with a set-it-and-forget-it strategy. Set up a recurring monthly transfer so you know you’re always preparing for tax time.
- Use financial tools to your advantage: Improve cash flow predictability with tools like Hopscotch to send invoices, get paid on time, and unlock your working capital on-demand as needed.
- Improve your revenue forecasting: Analyze your client payment cycles closely. This helps you predict variable and seasonal client payments, prepare for likely dips in revenue, and leverage liquidity at the right times.
Reduce tax-related stress with Hopscotch Flow
Small businesses will always experience some stress around tax time, but a little proactive planning while using the right tools can make a profound difference. Implementing the strategies we’ve shared here can reduce the financial strain on your cash flow and help you better manage expenses all year.
If you’re ready to take control of your cash flow and lower your tax-time stress, get started with Hopscotch Flow!
Bret Lawrence
Writer
Bret Lawrence writes about invoicing and cash flow management at Hopscotch. Her previous roles include senior financial writer at Better Mortgage, where she covered lending and the home buying process. Her writing is not financial advice.
