Episode 218: Business Cash Flow: How to Pay Yourself (and the IRS) Consistently with Erica Goode
Cash flow planning helps us look forward and know what you can plan out in your business to make those good investment decisions, hiring decisions, pay yourself more, or plan for taxes.
Erica Goode, CPA and host of the Coaches, Consultants, and Money podcast, helps business owners manage their money. She also runs a virtual accounting firm that supports coaches and consultants with bookkeeping, tax planning, and CFO services. Goode, a former director of finance at Walgreens, started her career as an editor at KPMG.
Let’s talk about money
Looking back, Erica realized her passion for budgeting and forecasting goes back to when she was eight. She had her eye on an American Girl doll named Molly, which cost $90. Erica had a cash flow projection of saving $10 every two weeks from her allowance. She had the date she could buy Molly, and it all made sense to her brain.
“I love talking money, getting hold of money in a mental kind of way,” says Erica. “Getting our mindset wrapped around money so that we can feel empowered and confident in our decisions as opposed to uneasy and confused about what we should do next.”
She says she often encounters a mindset with women where they were brought up thinking that they can't handle money alone. That their tax person wouldn't talk to them unless their husband was there – that kind of thing.
Myth of paying no taxes
As a business owner, Erica says there is so much noise about paying zero taxes. There are legitimate ways for companies to pay no taxes, but they are really specific tax credits for really specific industries.
If you want to build massive housing, solar farms, or microchips – you'll have better luck with not paying taxes.
“I think there's this concept because we hear about these really unique situations, we assume they apply to everybody and they apply to us,” says Erica. “And I'm doing something wrong if I'm paying tax, when in reality, in a service-based business … the goal is to pay tax because tax means you made a profit.”
Erica says the biggest mindset shift people have to work through is not the idea of paying taxes but needing to prepare for a $30,000 tax bill you didn't see coming. It might be because you start a business that sees incredible growth from Year 1 to Year 2, which could then be layered on top of a spouse's salary or something similar.
Erica wants to plan with her clients so there are no surprises come tax time. She looks at real-time quarterly profit and ensures they pay the correct withholding and estimated taxes. So even if you have to pay $30,000, you break it into four chunks, and you're not writing that full check with penalties at the end of the year.
Comfort in financial consistency
At the end of the day, Erica works to block out cash flow planning for each moving part rather than focus on the balance in your bank account. While everyone might know the amount they want to see in their bank, Erica works to talk through the cash flow of a client's tax contribution, 401K, etc., so those pieces aren't a surprise later.
For those who've left corporate jobs, financial comfort was knowing what would hit their bank account at the end of the month. They knew when they were going to get a bonus. It was consistent. They didn't have to worry about making the mortgage payment.
When you strike out on your own, that's one of the biggest mindset shifts you have to work on. How scary and uncomfortable that can be as you acclimate to the idea that running a business doesn't mean a consistent income.
What to know about cash flow
There has always been a focus on looking backward with our money. You submit your tax return, and it’s about the past, including the compliance pieces and bookkeeping. Cashflow planning helps turn that focus to look forward and how to allocate the money you are bringing in.
Erica likes to hold a monthly sit-down with clients to see what is coming up in the next six months. Month to month, you know how much your expenses cost, so what you can and can't afford becomes very clear.
“Sometimes we don't feel like we can pay ourselves because we don't have a clear view,” says Erica. “I love to look forward because I think when we can build out the confidence of the future, we make better decisions today.”
Free gift for listeners
Check out Erica's guide to 6 Don't Miss Tax Deductions for Coaches and Consultants
Follow Erica here:
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