The 13-Week Cash Flow Forecast

One of the best tools to forecast cash requirements is the 13-week cash flow forecast. It can help a business owner predict what their cash balance will be 13 weeks in the future. It helps to answer whether there will be enough cash to cover payroll and bills for a particular week. If you’re having significant ups and downs in your cash balance, it’s the perfect tool to help gain clarity around your cash needs. 

Thirteen weeks may sound like an odd length to select, but it’s the length of a calendar quarter. This is the length of a financial projection that is typically used when a business is in financial distress; however, it’s also useful when a company is going through some ups and downs or simply wants to get a better handle on its cash requirements.    

The forecast computations start with entering cash receipts and cash disbursements into a spreadsheet. Start with actual spending and receipts for the first week, then use estimates for the remaining weeks. Include planned expenditures such as overhead, payroll, and loan payments. Add in inventory purchases. Project your receipts based on history or recent changes in your business.

Once you’ve completed your forecast, you can make changes and do what-if scenario planning.  For example, if the forecast shows that you will run out of cash in week seven, you have some time to decide what you need to do to remedy the shortfall. Options might be:

  • Accelerate the collection of 30% of your receivables.
  • Dip into your line of credit to cover a portion the shortfall.
  • Furlough 10% of your workers.

Plug your selected scenario into the forecast to see how much that relieves your shortfall. 

The benefits of creating a 13-week cash flow forecast are many. You can see what actions need to be taken and when to take them well ahead of time. You can also see how much of an action you need to take. For example, instead of furloughing 50 percent of your staff, you may only need to furlough 25 percent.  Or instead of borrowing $50,000, you might only need $20,000.

The cash flow forecast can also save time when developing your annual budget. Budgets are especially useful when business conditions are volatile or when business owners need all the clarity they can get. 

Try your hand creating a 13-week cash flow forecast for your business, or reach out to us for help any time. 

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Are You Withholding Taxes on Your State Unemployment Compensation?

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Many people erroneously believe that state unemployment compensation is not considered taxable income, resulting in quite an unpleasant surprise at tax time when they realize their mistake.  With a record number of Americans filing for unemployment benefits due to the Covid-19 pandemic and struggling to make ends meet, it’s important to plan ahead in order to not have a shortfall.

Unemployment Compensation is Taxable Income

While taxpayers don’t pay Medicare or Social Security taxes on unemployment compensation, they are still required to pay federal taxes on the income.  Additionally, most states count unemployment compensation as taxable income, too.  Currently, only California, Montana, New Jersey, Oregon, Pennsylvania, and Virginia do not require income tax to be paid on unemployment compensation.  This also applies to states that don’t have state income taxes, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Establishing Withholding

If your state allows you to specify withholding, take advantage of it!  However, it doesn’t necessarily mean that the amount withheld will satisfy your tax burden.  Some states only calculate withholding on the state unemployment portion of the income, not on the additional $600/week federal pandemic unemployment compensation component. 

To illustrate, say your weekly state unemployment compensation benefit is $300 and you qualify for the additional $600 federal pandemic unemployment assistance, giving you a combined weekly benefit of $900.   You select 10% withholding, thinking that you will have $90 withheld, but notice that the actual withholding is only $30.  Consequently, this lack of withholding could result in a balance owed at tax time. 

How to Fix Under-Withholding of Taxes

If you are having little or no income taxes withheld from your unemployment compensation, the first step in making a course correction is to determine what your effective tax rate (not tax bracket—effective rate is the actual percentage of taxes you pay to the IRS) was for the prior year.  While current year income may have trended up or down this year, knowing your prior year effective tax rate provides a good starting point.  Compare that number to the percentage of tax that is being withheld from your unemployment compensation—if it is less, there’s a good chance you’re not having enough tax withheld and will owe when you file your tax return.  Consider taking one or more of the following steps:

  1.  If your state allows it, increase your withholding percentage on your unemployment compensation.  If you are at the maximum amount of withholding and don’t believe that it will be sufficient, look to step 2 below.
  2. Make quarterly estimated tax payments.  In order to avoid both a large balance owed at tax time and possibly neutralize an underpayment penalty, initiate quarterly estimated tax payments for the amount you believe you may be under-withholding.  Using the example in the paragraph above where there is a difference of $60 not being withheld each week, a taxpayer could earmark those funds for taxes and remit an estimated tax payment to the IRS on a quarterly basis.
  3. Adjust withholdings on a secondary W-2.  In a situation where you have a spouse who continues to receive W-2 income, consider increasing the amount of tax withholding on that activity in order to offset the lack of withholding on the unemployment compensation.

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