Business cash flow is often very tricky for lot of owners. And what this can do is leave an absorbent amount of cash in the business, create a lot of confusion on what can actually be taken out of the business or put back into it for growth, and at the same time, well, how do I use my business to build my personal wealth versus letting it be my wealth over the course of time?
Because of this question, well, most of the time people will either leave a lot of money in their business, or at the same time, they run their business very lean, not knowing, well, how do I handle these situations as they present themselves?
When you’re a pass-through entity, such as a sole proprietor, a partnership, an S corporation, all of the profits that that business makes gets pushed over to your personal tax return so they can figure out how much you’re gonna pay in tax.
So why aren’t you actually benefiting from it yourself? A good rule of thumb to be able to follow when you’re looking at your business, if your business is very cyclical—meaning that it fluctuates a lot, so the revenue is up one month, down another month, or you go through seasons—we might want to consider having maybe one to one and a half times expenses in cash inside the business. If you want to push for two months, that’s perfectly fine. And a good rule of gauge that you can focus on here is salaries, because well, you have to pay your team. There’s very, very limited times where you’re going to have to dig into that much cash.
But as a good buffer, a good rule of thumb, hey, probably between one to maybe two times you’d want to keep in there. And if you are a business that is pretty consistent, steady, and you’re seeing even more growth over time, you could probably get away with maybe three quarters of the expenses or at least one times whatever your employee salaries are in a given month. So as a good gauge, well, anything that’s in excess of that should be either used to help enhance the profitability of the business or should be transferred over to your personal balance sheet to build personal wealth.
The last thing you wanna do is get later on in your career, you’re ready to sell your business, and your entire plan has become dependent on that sale. And most times, people are unsure what they can actually get for the sale of their business.
And there’s this big question mark of, what’s gonna happen next? So if you can get into a strategy or a plan, to where you’re actively creating what we call a dead cash number. So anything beyond that operational fund that you keep in your business would be useful to start sweeping and putting it onto your personal balance sheet. So you can start building up other assets that have different tax characteristics to them. They have different risk factors and maybe different accessibility so you can get to them for certain circumstances.
And a good gauge is to take a look at what you’re taking as a W-2, which you’re actually making in profits and multiplying that by 20%. So for instance, a number, if it’s 200,000, the goal would be at least $40,000 a year. And if part of it’s salary and then part of it’s business, there’s a structure that we show people how to set up to really be able to capture these opportunities. And along the way, well, the goal here is to get on a continual flow of, I’m taking money and putting it in my personal plan, and then I’m also keeping money inside the business.
If you’re running your business like this where you don’t have a structure, there’s a good chance you’re gonna get to the end of all of this and not have additional assets to supplement the sale of your business. Or at the same time, you could be a person that starts putting, keeping a lot of money in your business and then using it for things that are not very useful for you from a planning perspective. And a good rule of thumb to follow here is that how are those assets that you’re accumulating, what are they going to do for retirement income purposes for you?
So if you were to take it and use it towards debt repayments or put it back into the business and not sure on the profits, how does it really help you? If you wanna take a look at what you’re currently doing, reach out to us, fill out our contact form, we’re always happy to chat.
Video Summary:
Many business owners unintentionally stunt their personal financial growth by mismanaging cash flow inside their companies. This is especially common among owners of pass-through entities like S-corporations and sole proprietorships. Some hold on to too much cash “just in case,” while others run lean to avoid taxes—both approaches can backfire.
A smarter strategy is to keep an intentional amount of reserves in your business and regularly transfer profits to your personal accounts to build diversified wealth. For businesses with seasonal fluctuations, aim to keep 1 to 1.5 times monthly expenses in cash; for more stable operations, about 75% of monthly expenses is typically enough. Anything above that becomes “dead cash”—idle money that could be working harder for you. A good rule of thumb is to move at least 20% of annual profits to personal assets each year. This habit reduces dependency on a future business sale and strengthens long-term financial security.
This material is intended for general public use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Tom is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Florida Veterinary Advisors and The Next Step Planning Group are not an affiliate or subsidiary of PAS or Guardian. California Insurance License #0K80141. AR Insurance License #15823672. Florida Veterinary Advisors is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. The individuals associated with Florida Veterinary Advisors do not maintain specialized licenses or qualifications for the financial services provided to veterinary professionals. 7989827.1 Exp 5/27