It takes cash to make your company run and grow, and to safeguard against surprises or setbacks. So how do you keep your cash flow strong? In theory, the idea is simple: keep more money coming in than you have going out. But in real life, many business owners struggle to keep the optimal amount of cash available on an ongoing basis.

Jody Grunden, CEO and Co-founder of Summit CPA Group, sees five common mistakes digital shops and agencies make when it comes to cash flow. Whether you’re a one-person shop or have dozens or even hundreds of employees, the same rules apply. Let’s take a look at each mistake, with Jody as our guide, and walk through some tools and strategies to help you overcome them. The goal is to stretch every dollar, so you have access to your money when you need it.

Let’s dive in, shall we?

Mistake #1: Not Having a Cash Cushion

Solution: Keep a minimum of 10 percent to 30 percent of your annualized revenue on hand at all times.

When it comes to cash in the bank, the general rule of thumb is to keep a minimum of 10 percent and up to 30 percent of your annualized revenue on hand at all times. Ten percent covers about two months of expenses. Thirty percent equates to approximately six months.

As an example, a company that made $3,497,232 last year will want to stuff away $349,723 (10 percent) at minimum, and up to $1,049,169 (30 percent). To calculate how much cash you should be putting away, take your daily revenue (annual revenue / 365 days) and multiply it by your usage (accounts receivable days – accounts payable days).

Going back to our sample company:
Annual revenue = $3,497,232
Daily revenue ($3,497,232 / 365) = $9,581
Usage (45 – 5) = 40
Cash needed ($9,581 x 40) = $383,240

In this case, for this company, we’ll need a little bit more than 10 percent to last through the cash cycle. So why would anyone want to have closer to 30 percent than 10 percent? Let’s take a look at the working capital requirements.

Working Capital Requirements


  • High recurring revenue

  • Zero accounts receivable days

  • Strong pipeline

  • Younger partners

  • Low growth

  • No big purchases in the near-term

  • One owner

  • Owners have high personal liquidity

  • No clients greater than 10% of revenue

  • High amount of accounts receivable


  • No recurring revenue

  • High accounts receivable days

  • Weak pipeline

  • Retiring partners

  • High growth

  • Big purchases in near-term

  • Multiple owners

  • Owners have low personal liquidity

  • High concentration in one client

  • Low amount of accounts receivable

How Many Bank Accounts Should You Have?

Cash reserve: You’ll want to set up two accounts for your cash reserve: an operating account and a reserve account. The operating account should cover two payrolls. The reserve account should house your remaining monies (hopefully earning some interest along the way).

Line of credit: It sounds counterintuitive to get into your line of credit before you need it. But that’s the best time to get it. If things go south, you won’t have the same opportunity.

Tax account: You’ll want extra money set aside for taxes. Jody recommends approximately 40 percent of your net income.

Mistake #2: Taxes? What Taxes?

Solution: Set aside 40 percent of your forecasted net income, and make estimated quarterly payments.

There’s no reason there should be any big surprises come tax time. To prepare for the year ahead, you’ll want to save 40 percent of your forecasted net income in a separate tax account, in addition to the 10 percent to 30 percent in your cash reserves. If our sample company’s net income is $655,952, they’ll be putting $262,380 aside for taxes. In terms of timeline, you’ll want to make your payments quarterly on June 15, September 15, December 15 and April 15.

The easiest way to keep ahead of taxes is to pull small increments out of your operating account on a weekly or monthly basis. If weekly, divide your estimated annual tax payment by 52. If monthly, divide it by 12. As Jody says, don’t wait for the quarter, half year and definitely not the whole year to make payments, or you’ll find you’ll put the money elsewhere and come up short. Waiting until the last second creates huge troubles, and you don’t want to use the IRS as a bank.

Mistake #3: Not Having a Solid Forecast

Solution: Create a dynamic forecast to guide important decisions throughout the year.

A lot of owners don’t have a clear understanding of the capacity their team can produce, so developing a forecast can be difficult to create. But a forecast is a critical tool to use throughout the year to make important decisions. Let’s talk about the metrics involved with forecasting cash.

To create a forecast, Jody recommends breaking the numbers out on a monthly basis, and calculating the following metrics:

  1. Total available hours: Count the working days for each month, and multiply the number by eight hours per day. Subtract “Culture hours,” hours spent for vacation time, holidays, R&D, internal projects, training or what have you. Total available hours = total working hours – total culture hours

  2. Total billable hours: Next, set the weekly billable expectation. Will each producer bill 30 hours, 38 hours? It’s up to you as a company to decide. Total billable hours = total hours available x weekly expectation %

  3. Average billable rate: Take your standard rate (what you charge in estimates), then subtract your write-down (the amount you typically lose off your standard rate). Any write-down greater than 10 percent should be looked at to determine what the issue is. Average billable rate = standard rate – write-down rate

  4. Individual revenue per producer: This is the billable hours for one producer x average billable rate. Going back to our sample company, if they have 1,254 billable hours and their average billable rate is $165.05, then the individual revenue per producer is $205,720, with the revenue varying month to month. Individual revenue per producer equals billable hours x average billable rate

  5. Forecasted revenue: Multiply the number of full-time producers by the individual revenue per producer, and you have your forecasted revenue. Forecasted revenue = Individual revenue x # of full-time producers

Mistake #4: Not Reviewing & Updating a Budget

Solution: Manage your budget regularly and pay yourself what you are worth.

A fourth mistake many business owners make is not reviewing and updating a budget. Looking at your profit and loss statement, you’ll want to focus on five main categories: revenue, production (typically about 50 percent of revenue), administrative, marketing and facility. From there, you break everything out: employees, tools, etc. Wherever the owner role fits, i.e., production, marketing, slide owner comp into that category.

In terms of gross profit, you want to see between 40 percent, at the lowest, and 60 percent. You want your net income to be between 15 and 20 percent. That varies dramatically as your company grows in size. For example,


$500K – $1M
$1M – $5M
$5M – $10M



Owner Comp


Profit Margin


Mistake #5: Not Staying On Top of Invoicing

Solution: Reduce accounts receivable days.

While 15 days may not seem like a lot, it can make a dramatic difference in your cash flow, and potentially save you from having to dip into your line of credit. If you need cash, reduce your accounts receivable turn. The average is 45 days, but 15 to 30 days is even better, if you can swing it.

And the opposite is also true for accounts payable. Decelerating your AP turn can help you to shore up more cash to better manage your cash flow.

Keeping Your Cash Flow Strong

To recap, cash is king when it comes to business. While these strategies seem simple, they can save you enormous headaches throughout the year. Want to learn more about optimizing your finances? Save your seat and join Jody for a two-day Financial Metrics, Forecasting & Operations Workshop in San Francisco, Nov. 4–5.

This article is for informational purposes only, and doesn't constitute accounting or finance advice.