Whether you’re a seasoned business owner or getting your first new venture off the ground, effective cash flow management is crucial. Being intentional and implementing a cash bucketing strategy can ensure that your business has the liquidity it needs to cover immediate costs – and put you in a strong position to meet your long-term goals, which includes retirement. From growth to legacy, here are the important components of a well-balanced strategy.

Cash flow forecasting: The lifeblood of your business

Accurate cash flow forecasting can make or break your business, and it begins with understanding financial inflow and outflow. Positive cash flow provides you with capacity for covering day-to-day expenses, investing in growth and accommodating unforeseen challenges. The good news is that forecasting your cash flows to be as prepared as possible doesn’t have to be cumbersome. In fact, it isn’t all that different from managing your personal finances.

“It’s a little bit like going on a road trip,” said Angelena Mascilli, Managing Director and Head of Banking, J.P. Morgan Wealth Management. “In order to get where you want to go, you need to know your point of origin and your destination. What cash flow forecasting really requires you to do is reflect on those two end points as well as the journey in between.”

Below are important things to consider:

• Day-to-day business expenses: This includes recurring costs like rent, utilities, payroll and inventory. These predictable expenses can serve as the baseline of your forecasting.
• Seasonality: Are there any patterns or trends that might impact your business? For example, maybe you typically see a dip in sales during the fourth quarter, or you have a large cash outlay at a specific time of year. If that's the case, you can consider earmarking funds to sustain you during any slower periods and storing excess funds during periods of elevated cash flow.
• Industry trends: The more you understand your industry, the better. That can include regulations that affect your line of work, new competitor developments and changing customer demands. Being an expert in your field can help you plan accordingly. It can also inform how much liquidity you might need.
• Larger known expenses. First, think about big-ticket costs you might see coming. For example, you might have expensive machinery that’s nearing the end of its life cycle, or a large-scale marketing campaign or hiring push on the horizon. You can work these expected costs into your cash flow forecasting.
• Cash reserves: Every business needs to have some cash reserves on hand, which can help you navigate financial emergencies and unplanned expenses. Ballpark how much you might need in terms of liquidity. Your personal risk tolerance will come into play here. (We’ll talk shortly about the best places to keep your business’s emergency fund.)

When it comes to cash flow forecasting, Mascilli said to remember that your business is going to evolve. That means you’ll need to determine a regular frequency where you can check in on your strategy as things grow and change, and ensure that your current forecasting still makes sense. Flexibility and adaptability will likely be the essential to your success.

Using liquidity bucketing to shore up your business finances

“If you’ve been reasonable and diligent in your cash flow forecasting, what you’ll start to see pretty organically is that your cash is going to arrange itself into three general buckets,” said Mascilli.

• Short term: This bucket is for operating cash, or money you’ll need over the next six months. That’s made up of day-to-day expenses, plus a little bit of a cushion. A high-yield savings account can be an appropriate place to keep these funds, especially when interest rates are on the higher side. You can also explore money market funds and short-term certificates of deposit (CDs).
• Medium term. This bucket is for those larger, known expenses we talked about earlier, like an equipment purchase or marketing campaign. A CD with a six- to 12–month term can be useful here. Certain U.S. Treasuries might also be a good fit.
• Long term: This bucket is for strategic cash and has a longer timeline. It may be relevant if you’re thinking about new product development or business expansion. You could get creative here and combine strategies that provide a stable return and some fixed income.

There’s one thing these three buckets all have in common – they allow your cash reserves to work a little harder for you.

The importance of budgeting

Budgeting goes hand in hand with cash flow forecasting. If you don’t already have a robust cash flow budget, it's something you’ll want to consider. The idea is to systematically track your cash inflows and outflows. Accounting software can do the heavy lifting for you – and provide a clear financial picture so that you can understand where your shortfalls and surpluses are. These insights can guide your financial plan in a big way.

If you have a mature business (and a lot on your plate), you might need to have someone come in and spearhead your budgeting efforts for you. Just make sure you stay as close to your budget plan as possible.

Preparing for business succession

You’re going to exit your business at some point – the goal is to make it an organized exit. There are five main “D’s” that typically precede a transition:

• Divorce
• Disability
• Death
• Distress
• Disagreement among business owners

Regardless of the contributing factors, you’ll want to have a plan to ensure a smooth transition. Who’s going to take ownership of the business if you’re not willing or able to stay at the helm? The end game is protecting the business and your own financial situation, which is no small thing.

“For many business owners, 80% of their net worth is tied into their business,” said Sarah Daya, Executive Director and Central Lead, Wealth Planning and Advice, J.P. Morgan Wealth Management.

Legacy planning as a business owner

Succession planning and legacy planning are closely connected. What will happen to your business when you pass away? You might want a portion of your assets to go to your children or grandchildren, or to a philanthropy that means a lot to you. Establishing a will and power of attorney can ensure that your wishes are carried out.

A revocable trust is another valuable tool, especially when you have an asset like a business. This allows you to name a beneficiary who will inherit the business after you’re gone. It also prevents your beneficiary from having to go through the probate process, which can be lengthy and time-intensive. A trust can also prevent many hiccups in the business.

Setting the stage for a successful retirement

Everyone deserves a happy, healthy retirement, including business owners.

“That is such a huge part of the planning equation,” said Daya. “We want to make sure that you're not working until you're 80 years old – and that if you decide you want to retire, you have the ability to do so.”

This is why it’s so important to incorporate retirement into your cash flow plan. How much do you need to save now to eventually bring your dream retirement to life? And what type of tax-advantaged accounts can help you get there? These are big questions that should be a main centerpiece of your financial plan.

It’s a lot to manage, but an experienced financial advisor can help you create a strategic plan that’s built around your unique values and goals – no matter where you are in your business. From cash flow forecasting to business succession, the right advisor can be a valuable resource during every phase of your business’s life cycle. As a reminder, it is advisable to get specific legal counsel to guide you on what course of action makes sense for you and your business.

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