11 Apr 2013

Do You Change Your Draw or Salary?

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An article in the NY Times business section today poses an interesting cash flow question for small business.

Even if you are not having a collection problem there are times, especially in these times, that your cash flow will ebb and flow without reason. That can have a substantial impact on your sales targets and working capital.

At the same time, as the owner, you have probably set a salary or draw level based upon your revenue projections. If your sales are cyclical, this is also an issue about balancing what you are taking out of the business at any time as well.

The challenge is how to determine whether to continue to take that salary or draw when your business is experiencing the collection downward trends? This of course that you are monitoring your cash flows on a regular basis. Keeping an eye on accounts receivable and accounts payable is clearly something every business should be doing no matter how small.

The answer is probably different for everyone and there may not be a good answer at any particular time. Much of the answer may depend on whether you have confidence in your sales pipeline and can comfortably predict that cash flow will resume. This should require an analysis or projection by you of whether your orders are still coming in, whether you are still being asked for quotes or other indicia that your business is on track.

On the negative side, you may be experiencing issues that might reflect a different future for your business. You will have to address those issues right away.

Part of owning a small business is taking steps to navigate your financial ups and downs. Often, a variable that you can control is how much money you are taking out of the business at any given time. It would be an interesting discussion or thought process that many have probably already gone through

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