For any small business owner, tracking financial metrics is a daily reality. You monitor gross sales, profit margins, and marketing return on investment (ROI). But among all the financial data you track, one metric stands above the rest in its impact on your company’s ability to survive as well as thrive: cash flow.

Your business may turn a profit on paper, with plenty of sales and strong profit margins. But if you don’t have enough cash on hand to pay bills, you’re facing serious cash flow issues. For growing companies, where reinvestment in inventory is constant, having a healthy business cash flow isn’t just a goal—it’s the lifeblood of the operation. Read more about common cash flow problems facing small businesses and strategies to solve them.

Table of contents

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What is cash flow?

In simple terms, cash flow is the movement of money going into and out of your business during a specific period of time. Cash inflows are the money coming into your business from sales, financing, or investments. Cash outflows are the money paid to cover operating expenses, inventory, salaries, and other financial obligations.

When inflows exceed outflows, you have positive cash flow, giving you money to cover your costs and reward owners or investors. Conversely, when outflows are greater than inflows, you have negative cash flow. This can cause financial pressures and potentially put your business in danger.

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Common cash flow problems

Cash flow problems occur for a variety of reasons. Recognizing these challenges in the early stages is an important step toward creating a resilient business. Here are a few of the most common cash flow issues that can impair a business’s financial operations.

High overhead costs

Overhead costs are fixed expenses your business incurs regardless of sales volume, including insurance, rent, utilities, and salaries for non-production staff. When these costs are too high relative to revenue, they can drain your cash reserves. This leaves little room to pay for unexpected expenses or to invest in growth opportunities.

Late payments

If you sell on credit, timely customer payments are your company’s lifeline. However, late payments are a frequent source of cash flow shortages. A high volume of outstanding invoices means that although you’ve made sales, the cash isn’t in your business bank account yet. This gap between billing and receiving payment can strain your ability to cover expenses needing immediate payment.

Inventory management issues

For ecommerce businesses, inventory is a major cash expenditure. Buying too much inventory can tie up cash in unsold goods that sit in storage. Buying too little inventory often leads to stockouts or lost sales. Without effective inventory forecasting and control, you could make spending miscalculations that harm your net cash flow.

Low profit margins

Your profit margins can be squeezed if you underpriced your products or services, or your cost of goods sold (COGS) is too high. Even with strong sales, you will generate little cash from each transaction. This also could make it difficult to build a cash cushion and leave your business vulnerable to any increase in operational costs or a dip in sales.

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Aggressive growth

Rapid expansion can result in large cash outflows for additional staff, bigger facilities, and increased marketing spend. If this growth siphons off regular cash flow rather than drawing on well-planned financing, it can quickly lead to a cash flow shortfall. Your revenue might increase rapidly, but if you’re spending cash faster than you’re bringing it in, you’re heading for trouble.

Seasonal fluctuations

Many businesses experience peaks and valleys in demand during different seasons. For instance, a clothing retailer might see a huge surge of sales during the holidays but experience a lull in the first quarter. This could make it a challenge to manage cash flow, because you have to cover fixed expenses even during slower times.

How to address cash flow problems

Fixing cash flow problems requires a proactive approach to financial management. Here are six best practices for effective cash flow management, incorporating advice from Armine Alajian, CPA and founder of Alajian Group, an accounting firm that focuses on startups and business management.

1. Reconcile diligently and track your cash

The single biggest mistake business owners make is failing to reconcile their financial accounts, such as your business bank account and company records. You can’t manage what you don’t measure, and if you aren’t reconciling, you don’t have an accurate picture of your cash position.

Not reconciling your cash is the most common error Armine says she sees.

“You have this data coming in from different sources,” says Armine. “And if you don’t reconcile, you don’t know if something is missing, something is overstated, or something has been duplicated.”

Armine suggests making reconciliation a monthly—or even weekly—routine. Beyond your accounting software, she recommends a simple but powerful tool.

“Everybody should also have a cash tracker, just some sort of a tracker to see what’s happening with your cash,” she says.

This can be a simple Excel spreadsheet tracking daily or weekly cash inflows and outflows. It can give you a clear, up-to-the-minute view of where you stand financially.

2. Manage receivables and payables

To solve the issue of late payments, you need to streamline your collections process. The longer an invoice goes unpaid, the harder it is to collect. Automating your invoicing and payment reminders is an important step. However, Armine cautions against a set-it-and-forget-it mentality.

“You’ve got to monitor it,” she says. “You can’t just let it do its own thing.”

Armine suggests utilizing accounting software to set up automatic invoicing and follow-up reminders for outstanding receivables. To further encourage prompt payment, consider offering early payment discounts (e.g., a 2% break for invoices paid within 10 days).

For clients with extended payment terms, keep communication channels open and establish a clear process for escalating overdue invoices. The goal is to reduce the time it takes to convert a sale into cash in the bank.

Extending your accounts payable can often improve cash flow. For instance, if payment to a vendor is due in 30 days, rather than pay it on day one you could schedule the payment closer to the due date. This helps to keep cash in your business longer. You could also try negotiating with your vendors for longer payment terms (e.g., from net 30 days to net 60), which can provide more breathing room for your cash flow.

3. Optimize inventory to free up cash

For businesses selling products, inventory is one of the biggest factors in business cash flow. Diligent inventory management ensures your cash is working for you, not tied up in goods sitting idle on warehouse shelves.

Inventory management often is a complex activity, and Armine recommends seeking specialized solutions.

“Inventory is a little bit more challenging,” she says. “Just like payroll, find a company that does that specifically and then connect it to QuickBooks and have a system to reconcile.”

You can use inventory management software for tracking stock levels, sales velocity, and lead times for suppliers, among other things. This data will let you make better purchasing decisions so that you don’t tie up cash in slow-moving products. Implementing systems such as just-in-time (JIT) inventory can minimize the amount of stock you hold, or use ABC analysis to prioritize high-value items.

4. Build a cash reserve

An emergency fund is not a luxury; it’s a necessity. It’s a safety net to help your business withstand unexpected expenses or a sudden drop in revenue without going into debt.

How much should you save?

“I think six months,” Armine says. “But cash is so tight for everyone, especially for entrepreneurs, because they’re risk takers. So if you know how much cash is coming in, how much cash is going out, then you’ll know what you need, cash wise, monthly.”

You can start by setting up an automatic transfer to a high-yield business savings account every week or month. Even a small percentage of your revenue can add up over time. This reserve can cover operating expenses like rent and paying employees during a downturn.

5. Seek expert guidance and leverage financial tools

As a business owner, your time is best spent on activities generating revenue. Becoming overwhelmed by complex bookkeeping can lead to unnecessary stress and costly mistakes.

“Have a system, have a budget, have a projection, and track it,” Armine advises.

And you don’t have to do it alone.

“Accountants are your friends,” she says. “Hire someone who knows what they’re doing.”

Consider investing in accounting software like QuickBooks or Xero to serve as the central hub for your financial statements. And, as Armine suggests, consider hiring a qualified bookkeeper or accountant. They can help you set up your systems, create an accurate cash flow forecast, manage taxes, and provide the objective insights you need to maintain your company’s financial health.

When using a general ledger system that brings in data from other sources (such as Gusto for payroll and Shopify for ecommerce sales), Armine emphasizes the importance of ensuring that it’s integrated with your other systems.

6. Explore financing options if needed

Sometimes, despite the best strategic planning, you may face a cash flow crunch. In these situations, a short-term loan can provide the liquid cash needed to fund new marketing strategies, seize a growth opportunity, or bridge a seasonal lull.

For businesses using the Shopify platform, Shopify Capital is an integrated option that takes a percentage of daily sales to repay the cash advance and cover fixed fees.

“When you have sales, they offer you capital,” she says. “It makes it easy for the owner.”

Although it’s convenient, she encourages business owners to understand the additional costs of financing options before using them.

Before taking on any debt, create a detailed plan for how you will use the funds and how the investment will generate more money to cover the loan and its interest payments. Evaluate all options, from traditional bank business lines of credit versus loans to alternative lending options. Choose the one aligned with your business goals and repayment capacity.

Cash flow problems FAQ

What are examples of cash flow problems?

Examples of common cash flow problems include regularly struggling to meet payroll or pay suppliers on time, even when sales are strong. An excessive amount of money tied up in unpaid customer invoices or taking on high-interest debt to cover day-to-day operational costs are other examples. Having too much cash invested in slow-moving inventory can also create problems.

What does it mean to have a cash flow problem?

Having a cash flow problem typically means your business does not have sufficient liquid cash to meet its short-term financial obligations. Your financial statements might show you’re profitable. But if your cash is locked up in inventory or outstanding invoices, you can’t use it to pay your rent, employees, or suppliers. This is why it’s often said that “cash is king,” because profitability alone doesn’t guarantee a business’s survival.

How do I fix my cash flow?

To fix your cash flow, you need to focus on improving your cash flow management. This involves accelerating cash inflows by collecting payments promptly, controlling cash outflows by negotiating better payment terms with suppliers, planning ahead by creating regular cash flow projections, and getting help from a financial professional.

","excerpt","Cash flow problems can stem from high overhead costs, late payments from clients, aggressive spending on growth or excess stock, and low profit margins.","excerptHtml","

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Cash flow problems can stem from high overhead costs, late payments from clients, aggressive spending on growth or excess stock, and low profit margins.

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The difference between a company that barely survives and one that dominates its market is often traced to one critical metric: revenue growth. It’s central to a great corporate report card, reflecting a company’s ability to keep bringing in more money from sales year after year.

Healthy revenue growth is a driver of long-term value and success. For example, a growing revenue stream provides the capital a company needs to reinvest in itself, whether that’s by hiring top talent, launching new products, or expanding into new markets. It’s a key indicator of a business’s financial health and helps provide the stability needed to weather economic shifts and outperform competitors.

This guide explains what revenue growth is, how to calculate it, and how to evaluate the drivers behind it so you can make better decisions.

Table of contents

What is revenue growth?

Revenue growth is the increase in a company’s total revenue over a designated period (monthly, quarterly, or annually). Businesses typically calculate revenue growth regularly to monitor performance, spot trends, and adjust sales strategies. Public companies report it quarterly, giving investors a consistent basis for comparison.

The growth percentage is known as the revenue growth rate. That figure provides a concise way to track a company’s performance over time. This metric can also be used to evaluate specific revenue streams and the performance of various customer segments, letting you understand which areas of your business are driving revenue growth.

Significant revenue growth is often the result of strategic business decisions, as well as favorable market conditions. It rarely happens by accident. Here are some scenarios when a company could have growing revenue:

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Launching a successful new service or product. A product that fulfills an unmet need or creates an entirely new market could quickly lead to additional revenue streams.
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Expansion into new markets. Whether you’re entering a different geographical region or going after a new target audience, market expansion can boost revenue growth. This requires understanding the new market’s needs and a tailored sales and marketing approach.
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Successful marketing campaigns. A highly effective marketing campaign could increase customer acquisition, leading to a bigger customer base and more revenue—especially when paired with sales teams that convert leads into customers.
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Strategic partnerships. Partnering with complementary businesses (e.g., a software company with a hardware manufacturer) can create bundled offerings and new revenue streams for both sides.
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Increased pricing. If the demand is strong, you can adjust pricing strategies without losing too many existing customers, lifting revenue generated without raising operating costs.
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Why revenue growth is important

Strong revenue growth is important if you want to attract investors, get a loan, or fund new initiatives like expanding research and development or entering new markets. It can also be a sign that a company’s sales and marketing efforts are effective.

Revenue growth may also signify that a business has expanded its market share. For startups and young companies, a high revenue growth rate could be seen as an indicator of product-market fit and ability to scale. For more mature businesses, it demonstrates resilience and the ability to adapt to evolving customer needs as well as changing market conditions.

By closely tracking revenue growth, investors can gauge a company’s competitive strength and its ability to outpace its rivals. Stagnant or declining revenue can be a red flag that signals a company’s growth rate has run into problems because of its business model or market relevance. For commerce businesses, steady revenue growth also funds inventory, fulfillment, and marketing while improving cash flow predictability.

How to calculate revenue growth

The revenue growth formula compares the current period revenue to the revenue of the previous period. The result is then expressed as a percentage.

Revenue growth = (Current period revenue - Previous period revenue) / Previous period revenue x 100

Example

Let’s say a company’s total revenue in 2024 (previous period revenue) was $10 million, and its total revenue in 2025 (current period revenue) was $12 million. The revenue growth calculation would be:

($12,000,000 - $10,000,000) / $10,000,000 x 100

$2,000,000 / $10,000,000 = 0.2

0.2 x 100= 20%

In this example, the company has a revenue growth rate of 20%.

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How to evaluate revenue growth

Evaluating revenue growth involves more than looking at the percentage change. You need to analyze the fundamental drivers and challenges. The metric’s true value is in what it reveals about a company’s financial health and future revenue potential.

Businesses may want to consider analyzing these factors to assess increases or decreases in their revenue growth:

Sales and marketing performance

Taking a deep dive into your sales metrics and marketing campaigns can help you project revenue growth. Ask yourself, “Are sales teams meeting their targets? Are marketing efforts generating high-quality leads?” If the answer to those questions is no, the company should reevaluate its sales strategies and growth tactics.

Sales training can help improve conversion rates, and you can optimize marketing campaigns by reviewing data analytics to target different customer segments. To improve efficiency, you can also implement a unified revenue operations platform, a single, integrated system that centralizes sales, marketing, and customer service data and automates key processes.

Customer acquisition and retention

A business can’t achieve revenue growth without a healthy balance of acquiring customers and retaining existing ones. Analyze your customer acquisition cost compared to your customer lifetime value. If the cost to acquire a customer is too high compared to their value over a lifetime, then you won’t turn a profit. A high churn rate, a sign that you have lost customers, can also affect revenue growth.

To improve this, you can create a more targeted strategy to acquire customers. This might include loyalty programs, providing superior customer service, and personalizing communication. Engage with clients proactively to reduce the churn rate, so you can increase their lifetime value and customer retention rate.

Pricing strategies

A product or service’s pricing strategy directly affects average revenue. Analyzing whether pricing is too high (driving away customers) or too low (leaving money on the table) is key. If you adjust pricing based on market saturation, competitive analysis, and the perceived value of your service or product, it can have a direct impact on your company’s revenue growth.

Conduct a pricing review to make sure it reflects competitive offerings and market demand. Consider trying tiered pricing or value-based pricing, which may capture more revenue potential from different customer segments.

Product portfolio

A strong portfolio ensures that the business is not overly dependent on a single product or service. Could your company have a more diverse range of revenue streams? Is subscription revenue or recurring revenue a significant part of your bottom line? Introducing new products or enhancing existing ones could create new revenue streams and unlock revenue potential.

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Competition and market conditions

External factors, such as the overall health of your industry’s market and the actions of your competitors, can influence a company’s growth rate. Strong revenue growth might be a result of a booming market, or it could be a signal that the company is outperforming its competitors. If that’s unclear, consider performing a market analysis, so you can identify new growth opportunities. Keep a close eye on the sales growth and competitors’ strategies, and look for partnerships that help you enter new markets or counter competitive pressure.

Revenue growth FAQ

What’s the difference between profit growth and revenue growth?

Profit growth measures the increase in a company’s net income, which is calculated by deducting expenses (like operating costs, taxes, and interest) from total revenue. Revenue growth measures how much a company’s revenue increases from sales of services or goods. A healthy business strives for both revenue and profit growth.

What’s the difference between income growth and revenue growth?

The terms “income” and “profit” often are used interchangeably in business. Income growth is the increase in a company’s earnings after all expenses are accounted for. Revenue growth focuses solely on sales growth, not bottom-line profitability.

What does five-year revenue growth mean?

Five-year revenue growth is a long-term metric that shows the compounded annual growth rate of a company’s revenue over a five-year period. It provides a broader picture of a company’s long-term performance than a single-year analysis, which can be affected by one-time events or fluctuations in the economy.

","Revenue growth is the change in your revenue compared to a prior period, and it can be a key indicator of financial performance.","

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Revenue growth is the change in your revenue compared to a prior period, and it can be a key indicator of financial performance.

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QuickBooks is popular accounting software that’s designed to simplify financial management for small and medium-sized businesses. It can be used for everything from creating invoices and processing payments to managing payroll and generating reports. If you’re a new business owner or bookkeeper, you may wonder if QuickBooks is easy to learn. The answer depends on how you plan to use it.

For some, the automations of QuickBooks Online may help simplify your business operations. For others, the software might complicate things if not used correctly. Here’s what to know about learning QuickBooks, so you can decide if it’s the right solution for you.

Table of contents

Is QuickBooks easy to learn?

QuickBooks is easy to learn if you want to use it for simple workflows. If you lack a basic understanding of accounting, however, some features might not make sense or be complicated to learn. For example, you might not know how to categorize certain transactions or properly reconcile accounts.

Many different types of businesses use QuickBooks, from solo entrepreneurs and small business owners to full-fledged accounting professionals. Intuit, the company behind QuickBooks, has a variety of products, including QuickBooks Online, QuickBooks Desktop, and QuickBooks Solopreneur (formerly QuickBooks Self-Employed), each tailored to different business needs.

You don’t need to be an accountant or have a business degree to get started. QuickBooks offers a user-friendly interface along with automated features like linking bank accounts and credit card accounts for automatic transaction downloads. These features speed up tasks like processing payments and tracking expenses. Also, the internet is filled with QuickBooks tutorials, QuickBooks courses, and guides, so you can learn at your own pace.

Having a foundational understanding of accounting principles and best practices, along with bookkeeping knowledge, will allow you to get the most out of the software. Knowing the difference between accounts receivable and accounts payable, or how to perform a bank reconciliation, will help you interpret your financial data and ensure your financial records are accurate.

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How long does it take to learn QuickBooks?

How long it takes to master QuickBooks will depend on your financial literacy and goals:

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For the basics. A few hours to a few days of hands-on practice can be enough for a small business owner to get a handle on the essentials, such as setting up a company file, creating invoices, and entering bills.
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For proficiency. If you want to handle all your business finances and manage regular bookkeeping tasks through QuickBooks, it might take a few weeks of consistent use. This includes exercises like reconciling accounts, handling accounts payable, and payroll basics.
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For expertise and certification. If your goal is to become an accounting professional or earn a QuickBooks certification, you can expect to spend several months studying and practicing to become an online accountant or QuickBooks ProAdvisor. This level of expertise involves understanding advanced features like job costing, financial reporting, and even payroll tax forms.
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What do you need to know to learn QuickBooks?

To make the most of this powerful accounting software, you need a blend of theoretical and practical knowledge. You don’t need formal training, but an understanding of fundamental concepts is a huge advantage. This includes knowing how to use basic accounting principles like debits and credits and the chart of accounts and how to read financial reports, such as a balance sheet and income statement.

You also need to know how to perform tasks within the software. This involves setting up your company file, connecting bank accounts, managing customer and vendor lists, creating invoices, tracking expenses, and generating reports. You must know how to properly use the bank feed to categorize transactions and reconcile accounts to ensure your financial records are accurate.

How to learn QuickBooks

There are many ways to learn the software, whether you prefer a structured course or a self-paced approach.

Watch QuickBooks tutorials

Videos are an excellent way to see the software in action. Here are two examples:

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QuickBooks Learning Center. Intuit offers its own learning portal (accessible within the QuickBooks Online Accountant platform) featuring videos, articles, and guides for different versions of the software. This is a great place to start, since the information comes directly from the software’s creators.
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YouTube. A free and massive resource for QuickBooks tutorials, YouTube offers videos on almost any topic, from getting started to tasks like managing payroll and tracking inventory. Hector Garcia, CPA, offers hundreds of free videos on both QuickBooks Online and QuickBooks Desktop that are focused on resolving common issues.
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Take a QuickBooks class

If you’re interested in a more structured approach, another option is to enroll in a class where you can work through real-world scenarios in a guided environment. QuickBooks training sessions can be live, instructor-led courses or self-paced courses that take place online or in person. A typical curriculum will cover setting up a company file, managing your chart of accounts, handling sales and expenses, and other functions. Many courses also include a component on preparing for the QuickBooks certification exam.

If you want to take a QuickBooks class, some platform options include:

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Udemy. This platform lets you choose from a selection of QuickBooks courses at various price points. On Udemy, you can find everything from comprehensive bundles that cover all the basics to specialized courses on topics such as payroll taxes or advanced reporting.
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LinkedIn Learning. With its high-quality professional training, LinkedIn Learning has several courses on QuickBooks Online and QuickBooks Desktop. Experts in the industry teach these courses, which often come with practice files.
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Coursera. In partnership with Intuit, Coursera offers professional certificate programs that teach you how to use the software and give you a solid grounding in accounting principles. These courses are a useful way to gain skills, especially if you’re seeking a QuickBooks certification.
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Certstaffix Training.Certstaffix provides both self-paced courses and instructor-led classes for multiple versions of QuickBooks.
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How to gain experience with QuickBooks

No matter how many tutorials you watch or courses you take, nothing will advance your skills faster than hands-on practice. It’s like the difference between knowing the theory of driving a car and getting behind the wheel. QuickBooks offers ways to practice without worrying about making mistakes on your actual financial records.

Start with a sample company

QuickBooks provides a sample company file that is prepopulated with data. This is an invaluable tool for beginners to practice creating invoices, entering bills, and customizing reports without impacting their own business’s data. It’s a good place to learn more about the software’s capabilities and feel more at ease with its functions.

Simulate real-world scenarios

Challenge yourself with practical exercises. Set up a sample company and enter a month’s worth of fake transactions, then try to reconcile accounts and run a statement of cash flows. This kind of focused practice lets you understand the entire flow of money in and out of a business, from recording expenses to receiving payments.

Practice new skills

Consistent, practical application is one of the best ways to become proficient with QuickBooks. By routinely performing core functions, you build muscle memory and an understanding of how each action impacts your financial data. This can prepare you to manage your own business finances with accuracy.

QuickBooks FAQ

Is QuickBooks good for beginners?

Yes, QuickBooks is good for beginners who want to use it for basic workflows. The software is designed with a user-friendly interface that simplifies many financial tasks, such as tracking income and expenses, making it an excellent option for those new to accounting.

Can QuickBooks be self-taught?

Absolutely, you can teach yourself how to use QuickBooks. Thanks to the wealth of free learning resources, including QuickBooks tutorials, the QuickBooks Learning Center, YouTube, and self-paced courses, it’s possible to learn how to use QuickBooks on your own and at your own pace.

Do you have to be good at math to use QuickBooks?

No, you don’t have to be good at math to use QuickBooks. The software handles all the calculations, from adding expenses to calculating payroll taxes. What you do need is the ability to pay attention to detail to make sure your financial data is accurate.

Are there classes to learn QuickBooks?

Yes, there are many classes available to learn QuickBooks. You can find options ranging from free YouTube videos to professional QuickBooks courses available through platforms like Udemy, LinkedIn Learning, and Coursera.

","QuickBooks might be a bit more complex than tracking finances in a spreadsheet, but it’s far more powerful and will set your business up for successful accounting.","

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QuickBooks might be a bit more complex than tracking finances in a spreadsheet, but it’s far more powerful and will set your business up for successful accounting.

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The cash conversion cycle (CCC) is one of the most revealing metrics in finance, offering a view of a company’s inner workings that goes deeper than its sales figures. Think of the cash conversion cycle as your company’s financial metabolism—the speed at which the business turns investments in inventory and operations into usable cash.

Learn what the cash conversion cycle is, how to calculate it, and practical ways to improve it—so you can strengthen cash flow and fund growth.

Table of contents

What is the cash conversion cycle?

The cash conversion cycle measures the number of days a company takes to turn cash spent on inventory and other business operations into cash from customers. A shorter cash conversion cycle shows that a company is managing its working capital efficiently, generating cash quickly from its sales. Faster conversion makes it possible to use the company’s cash for strategic investments, funding future growth, or paying down debt. A longer cash conversion cycle suggests that a company takes more time to recoup its investments, which has the potential to strain its cash position and require more external financing.

A negative cash conversion cycle means the company receives payment from its customers before it has to pay its own suppliers. This lets the business use customer cash to fund its inventory and day-to-day operations. While most companies aim for a short, low cash conversion cycle, a negative CCC is the goal for many businesses. This is especially true in retail and ecommerce, where rapid inventory turnover is common. A negative CCC lets the company build up a significant accounts payable balance as a form of free, short-term financing.

A “good” or “bad” CCC is relative—always evaluate it in the context of your industry. A CCC that is high for one sector, such as machinery manufacturing, might be standard for another sector due to different supply chains. Therefore, a cash conversion cycle analysis is most effective when comparing a company’s CCC to industry competitors or when analyzing its performance over several quarters to identify trends. A CCC of 80 days might be excellent for a large manufacturing company, but concerning for a software company with no physical inventory.

\n\n

How the CCC works

You can calculate your CCC by combining three working capital metrics. Each metric measures a different stage of the conversion cycle and derives from a company’s income statement and balance sheet. Let’s look at these three components and how they relate:

Days inventory outstanding (DIO)

DIO measures the average number of days for a company to sell inventory. A high DIO could indicate ineffective inventory management, slow-moving stock, or decreased customer demand. Companies with a high DIO are at greater risk of inventory obsolescence or spoilage, which can lead to markdowns and reduced profitability.

The DIO formula is:

DIO = (Average inventory / Cost of goods sold) x 365 days

Days sales outstanding (DSO)

This measures the average number of days for a company to collect payment after a sale. It reflects a company’s credit and collection processes. A high DSO means the company is slow at collecting receivables, which could create a cash flow crunch and require short-term borrowing.

The DSO formula is:

DSO = (Average accounts receivable / Revenue) x 365 days

Days payable outstanding (DPO)

Days payable outstanding (DPO) measures the average number of days a company takes to pay its suppliers for purchasing inventory. Unlike DIO and DSO, a higher DPO is generally beneficial for a company’s financial health, meaning the business is holding onto its cash for longer. This cash provides a free source of short-term financing.

The DPO formula is:

DPO = (Average accounts payable / Cost of goods sold) x 365 days

Bringing it all together

The cash conversion cycle formula links these three metrics together to show the full cycle. It starts when a company buys inventory (paying suppliers), accounts for the time it takes to sell that inventory (DIO), and then for the time it takes to collect payment from the sale (DSO). By subtracting the DPO, we get a net figure that represents the amount of time cash is tied up.

How to calculate your CCC

The cash conversion cycle formula brings the three components together:

CCC = DIO + DSO - DPO

Let’s take a hypothetical company, Widgets & Things, with the following financial data for a year:

\n
Average inventory: $200,000
\n
\n
Cost of goods sold (COGS): $1,500,000
\n
\n
Average accounts receivable: $120,000
\n
\n
Revenue: $2,000,000
\n
\n
Average accounts payable balance: $100,000
\n

First, calculate each component:

DIO = (Average inventory / Cost of goods sold) x 365 days

($200,000 / $1,500,000) x 365 = 0.13 x 365 = 48.7 days

DSO = (Average accounts receivable / Revenue) x 365 days

($120,000 / $2,000,000) x 365 = 0.06 x 365 = 21.9 days

DPO = (Average accounts payable / Cost of goods sold) x 365 days

($100,000 / $1,500,000) x 365 = .07 x 365 = 25.6 days

Now, we can perform the cash conversion cycle calculation:

CCC = DIO + DSO - DPO

48.7 + 21.9 - 25.6 = 45 days

This means that it takes Widgets & Things 45 days to convert its investments in inventory and resources into cash. For this company to improve its CCC, it could focus on reducing its DIO and DSO, or increasing its DPO—perhaps by keeping less inventory on hand, collecting customer payments more rapidly, or taking longer to pay vendors.

Strategies to improve the CCC

There are a few strategies to improve a company’s cash conversion cycle. The goal is either to reduce the time it takes to generate cash or increase the time the company holds cash. Here are some strategies to improve each of your CCC’s core metrics:

Improving days inventory outstanding

A lower DIO means faster inventory turnover:

\n
Implement just-in-time (JIT) inventory. A JIT system helps a company receive goods only as they are necessary for production or sale, reducing the need to hold large stockpiles.
\n
\n
Improve demand forecasting. Better forecasting helps avoid overstocking slow-moving items and understocking popular ones, ensuring the company can sell inventory more efficiently.
\n
\n
Streamline supply chains. Working closely with suppliers and optimizing logistics can reduce the time it takes for inventory to move from purchase to sale.
\n

Improving days sales outstanding

Reducing DSO means a company will collect cash faster:

\n
Offer early payment discounts. This is an incentive for clients to pay early. For example, the commonly used “2/10 net 30” offers a 2% discount if the invoice is paid within 10 days, even though the business has a maximum of 30 days to pay.
\n
\n
Automate invoicing and collections. Electronic invoicing and automated reminders can help speed up payment collection.
\n
\n
Tighten credit policies. Although it might risk losing some customers, a stricter credit policy can reduce the risk of late payments and bad debt.
\n

Improving days payable outstanding

Extending DPO lets a company hold onto its cash longer:

\n
Negotiate favorable payment terms. Companies can negotiate longer payment terms with suppliers. This is a delicate balance, because it’s crucial to maintain good relationships with vendors.
\n
\n
Use dynamic discounting. This offers a discount to a supplier for early payment calculated on a sliding scale based on how soon the payment is made, rather than using a fixed rate. The supplier can accept the discount to get paid sooner, or decline it and wait to receive the full payment on the original invoice due date. This gives the buyer flexibility in managing its cash.
\n
\n
Centralize accounts payable. Centralizing the accounts payable process can lead to better controls, optimized payment schedules, and reduced errors.
\n

Cash conversion cycle FAQ

What is the formula for CCC?

The formula for the cash conversion cycle is:

CCC = Days inventory outstanding + Days sales outstanding - Days payable outstanding

What is a good cash conversion cycle?

A good CCC is generally a low number. A shorter cash conversion cycle indicates higher efficiency. For many businesses, a good CCC is positive but as close to zero as possible. However, the best measure of a good cash conversion cycle is to compare it to industry peers and your own historical performance, since acceptable ranges vary by business model.

Is negative CCC good?

Yes, a negative CCC is generally considered excellent. It means the company collects from customers faster than it pays suppliers, letting it fund operations with customer cash and strengthening cash flow. Companies like Amazon and Dell famously achieve a negative CCC, letting them scale rapidly and maintain a strong cash position.

","The cash conversion cycle measures how quickly your cash spent on inventory and business operations turns into cash from customers.","

$\"money$

The cash conversion cycle measures how quickly your cash spent on inventory and business operations turns into cash from customers.

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Days sales outstanding, also known as DSO, is a fundamental financial metric a company can use to evaluate its efficiency and financial health. In its simplest form, DSO quantifies the average number of days a company takes to collect payment after making a sale on credit.

For any business, whether it’s a small startup or a large corporation, a firm grasp of DSO can help you maintain a healthy and steady cash flow. On an episode of the Shopify Masters podcast, Jean Wu, cofounder of the insulated bottle business Que, discusses the importance of financial vigilance.

“Not understanding financially how the business is doing, how the business is running, is pretty dangerous,” she says. Understanding metrics like DSO is necessary for a business to be “lean and healthy,” as Jean puts it.

Learn what factors can affect DSO, how to interpret this metric, and strategies for lowering it.

Table of contents

\n\n

What is DSO?

DSO stands for days sales outstanding, and it measures the average collection period for credit sales. In a world where immediate cash sales are not always possible, especially in B2B transactions, companies extend credit to customers, allowing them to pay unpaid invoices later. DSO quantifies precisely how long that process takes.

Days sales outstanding is a key part of working capital management because it affects a company’s liquidity—its ability to meet short-term financial obligations. A consistently low DSO can be a competitive advantage. It demonstrates the company can convert sales into cash quickly, which can be used to fund operations, pay suppliers, or make investments. A rising DSO could be a red flag, pointing to possible issues with client credit quality, inefficiencies in billing, or a faltering collections strategy.

DSO formula

The standard formula financial professionals use to calculate DSO is:

DSO = (Accounts receivable / Total credit sales) x Number of days

\n
Accounts receivable. This is the total amount of money owed to the company by its clients for goods or services already delivered. Accounts receivable represents all invoices at the end of a designated time period that are unpaid.
\n
\n
Total credit sales. This is all sales made on credit during the same time period. It is important to exclude cash sales from this figure to get an accurate representation of the credit collection cycle.
\n
\n
Number of days. This is the number of days in the given period you are analyzing, which could be a month (30 days), a quarter (90 days), or a year (365 days).
\n

For example, if a small business has an accounts receivable balance of $500,000 and credit sales totaling $2,000,000 over a 90-day period, its DSO would be calculated as:

\n
($500,000 / $2,000,000) x 90
\n
\n
0.25 x 90 = 22.5 days
\n

On average, it takes the company 22.5 days to collect receivables from a sale.

Factors that affect DSO

A company’s DSO is not a static number; a combination of internal and external factors influences it. Understanding these influences is the first step toward managing your cash flow effectively:

Credit terms

The payment terms a company offers its clients influence the expected time frame for payment. While generous terms (e.g., net 60 or net 90) could attract more credit sales and higher sales volumes, it inherently increases DSO. Another approach is to use standard terms like net 30, or payment within 30 days.

Some businesses offer discounts for paying early to incentivize prompt payment. A classic example is “2/10 net 30,” which means a client receives a 2% discount if paid within 10 days; otherwise, the full amount is due within 30 days. It’s possible for a company to lower its DSO using this strategy.

Industry standards

An acceptable DSO is highly dependent on the industry standards and the company’s business model. A DSO that is excellent for a software company could be a red flag for a retail business. This is due to variations in payment terms, sales volume, and the complexity of billing.

Here are some examples of DSO trends in various industries, based on how many days is generally acceptable:

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Retail/ecommerce. These industries typically have a very low DSO that ranges from five to 20 days. This is because most transactions are either paid for at the point of sale (cash or credit card) or through automated, immediate online payments.
\n
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Software as a service (SaaS). A good DSO for software-as-a-service (SaaS) companies generally ranges from 30 to 45 days. This is often in line with their monthly or quarterly billing cycles as well as the payment terms they extend to their customers.
\n
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Manufacturing. This sector could have a higher DSO, usually between 45 and 60 days. Factors like longer production cycles, larger transaction values, and the practice of offering lenient credit terms to B2B clients can influence this.
\n
\n
Professional services. For firms like consulting agencies, law firms, and accounting services, a good DSO is usually between 30 and 60 days. The exact figure varies based on the complexity of the project, the size of the client, and the firm’s specific billing cycles (e.g., hourly versus retainer).
\n
\n
Construction. This industry has one of the highest DSOs, often between 60 and 90 days, or even higher. This is due to the industry’s common use of project-based billing, which is often related to the completion of milestones and can involve complex invoicing and payment approval processes.
\n
\n
Health care. Health care providers face a high DSO, with averages frequently ranging from 45 to 70 days. This is primarily because they must navigate a system of third-party payments and insurance claims, often causing significant delays.
\n

Internal collections processes

The most significant factor within a company’s control is its internal collections process. This encompasses everything from the moment it sends an invoice to its final collection of money. An efficient process includes prompt invoicing, clear internal and external communications, and consistent follow-ups.

Jean says her business, Que, uses Zoho, a tool designed for inventory tracking and invoicing.

“You can invoice your customer … and you can also track your inventory, which is important,” she explains.

By automating the company’s cash flow management, Que is able to ensure it’s tracking its sales, sending every invoice, and keeping the entire system well-organized.

How to interpret DSO

When comparing DSO across your industry, you may notice your own metric is higher or lower than the standard. While a low DSO could indicate an efficient collections process, a high DSO might mean there’s room for improvement. Here’s more information about interpreting a low or high DSO:

Low DSO

A low DSO means a company is excellent at converting sales into cash. This means it has an efficient collections process, good credit policies, and healthy client relationships. A low DSO means liquidity has increased, which allows the business to reinvest its profits, pay off debts, and take advantage of new opportunities without needing to rely on external financing. It’s a clear sign of a well-managed and financially stable operation.

High DSO

It is possible that a high DSO is a symptom of underlying problems. It can indicate a lenient credit policy, inefficient invoicing, or even a client base that struggles to make payments. A consistently high DSO can create a dangerous cycle. It strains the company’s cash flow, which makes it difficult to pay bills, suppliers, or employees on time. This could lead to short-term borrowing, which adds interest costs and further erodes profitability.

How to lower DSO

Lowering your DSO is a strategy to improve working capital. While it requires your dedication, the benefits are worth the effort:

Offer early payment discounts

This is a powerful incentive for clients. By offering a discount for paying early, a business encourages prompt payment. The small discount is often a worthwhile trade-off for getting the funds into your accounts sooner. For example, offering a 2% discount if an invoice is paid within 10 days on a $50,000 invoice is a $1,000 discount for the client, but it gives the company access to $49,000 in cash 20 days sooner than the standard net 30 terms.

Streamline invoicing

The collections process begins as soon as sales occur. To collect receivables efficiently, invoicing must be accurate and timely. An incorrect or late invoice can lead to an inability to collect payment. Automating the invoicing system, such as what Que does with Zoho, ensures invoices are generated and sent immediately upon the completion of a sale. This reduces human error and establishes a clear start to the payment clock.

Free invoice generator

Shopify’s online invoice generator makes your life easier when it comes to billing and collecting money.

\nCreate invoices\n

Enforce credit policies

A robust credit policy is another consideration for maintaining a low DSO. This includes defining payment terms and applying them consistently. When bringing on new clients, consider performing a credit check. For all clients, ensure late payment consequences are clearly outlined in your agreements. This prevents any misunderstandings and gives your company leverage to collect outstanding receivables.

Improve the collections process

The process of following up on unpaid invoices should be systematic and professional. Proactive cash flow management can make the biggest difference in these areas:

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Proactive reminders. Send gentle, automated reminders a few days before an invoice is due.
\n
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Prompt follow-ups. Follow up immediately after an invoice is past due.
\n
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Escalations. Establish a clear process for escalating delinquent accounts. This might involve a phone call from a senior staff member or, as a last resort, using a collections agency.
\n

DSO meaning FAQ

How do you calculate DSO?

You calculate DSO using this formula: (Accounts receivable / Total credit sales) x Number of days. This returns the average number of days it takes for your company to collect payment from credit sales.

What is an acceptable DSO?

An acceptable DSO is one that is in line with your industry norms and your company’s payment terms. If your terms are net 30, a DSO of around 35 days might be considered good. A much higher DSO might signal issues, while a much lower DSO might mean you are being too restrictive with your credit policies and could potentially lose sales.

How can I reduce my DSO?

Strategies for reducing DSO include offering discounts for paying early, streamlining your invoicing with automation tools, and improving your internal collections process. These strategies can assist with collecting receivables more quickly and improving your overall cash flow.

","DSO quantifies the average number of days a company takes to collect payment after making a sale on credit.","

$\"Three$

DSO quantifies the average number of days a company takes to collect payment after making a sale on credit.

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There’s an old business principle that suggests cutting prices can increase sales volume, which can offset the loss in revenue. Whether this is right is determined by CVP analysis, an analytical technique for examining the interaction between costs, volume, and profit and using that information to guide business decisions.

Learn more about the elements of CVP analysis, how it’s calculated, and the insights it provides for strategic planning and improving your business’s operations.

Table of contents

What is CVP analysis?

Frequently referred to as break-even analysis, cost-volume-profit analysis (CVP analysis) is a practical tool helping businesses understand how changes in costs, sales volume, and pricing impact their overall profit. By identifying the exact sales volume needed to cover all costs, CVP analysis makes it possible to determine when your company will break even and report a positive net income.

CVP analysis also lets you forecast profit at different sales levels, set realistic income targets, and choose appropriate pricing strategies. It can help you analyze the role of fixed and variable costs in profitability to pinpoint cost-cutting opportunities and manage resources more effectively. Ultimately, CVP analysis is a tool to support decision-making and efficient planning across your business.

Elements of a CVP analysis

A CVP analysis contains different elements, many of which involve separate calculations. These elements are:

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Fixed costs. Fixed costs remain constant regardless of changes in the level of production or sales, such as rent, insurance, and salaries for permanent staff.
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Variable costs per unit. Variable costs are production costs for materials and labor, changing in direct proportion to the number of units produced or sold.
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Unit sales price. This is the amount a customer pays for one item or a single service.
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Break-even point. Your break-even point is the level of sales at which total revenue equals total costs, meaning your company isn’t losing money from its operations.
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Margin of safety. This indicates the difference between the current or expected level of sales and the break-even point, indicating how much sales can decline before the company starts incurring losses.
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Contribution margin per unit. Your business’s contribution margin per unit is the portion of each unit’s sale price that exceeds its variable production costs. This indicates how much the sale helps cover overall fixed costs and then contributes to profit.
\n
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Contribution margin ratio. This is the percentage of each sales dollar available to cover fixed costs and contribute to profit.
\n

How to perform a CVP analysis

Here are the six steps for performing a CVP analysis:

1. Identify and tally total fixed costs

The key characteristic of fixed costs is their predictability. This means that whether your business makes 10 units or 1,000 units a month, these expenses won’t change. Some examples of fixed costs include monthly website hosting fees, office rent, insurance, and salaried staff. Adding these expenses results in total fixed costs for a specific period, such as a month, quarter, or year.

2. Determine the unit selling price

This step is straightforward, but it has significant implications for profitability. The selling price per unit is the amount of revenue the business receives from each individual sale of its product or service. Considerations when determining the selling price include:

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Cost structure. The selling price needs to cover all costs (variable and fixed) and generate a profit.
\n
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Market demand. Determine market demand to assess how much customers are willing to pay for the same or similar products.
\n
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Competition. Find out what competitors charge for their goods.
\n
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Perceived value. The perceived value and uniqueness of the product influences pricing.
\n
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Pricing strategy. This can vary from a cost-plus pricing, value-based pricing, or competitive pricing strategy.
\n

Choose the right price

Determine your markups and profit margin to set the perfect price and increase your bottom line with our product pricing calculator.

\nLearn more\n

3. Calculate variable costs per unit

This step focuses on the costs that can change directly and proportionally with sales or production volumes. If a business sells one more unit, its total variable costs will increase by the variable cost per unit. If it sells one less, total variable costs will decrease by the same amount. Examples of variable expenses include:

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Cost of goods sold (COGS)
\n
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Packaging materials
\n
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Shipping costs per item
\n
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Payment processing fees per transaction
\n

4. Calculate the contribution margin per unit

This calculation determines the remaining revenue after covering the variable costs associated with producing or selling each individual unit. It represents the portion of each sale that contributes toward covering fixed costs and ultimately generating profit.

Use the following formula to calculate the contribution margin per unit:

Contribution margin per unit = Selling price per unit - Variable cost per unit

5. Calculate the contribution margin ratio

This calculation expresses the contribution margin as a percentage of the selling price per unit. It indicates the proportion of each sales dollar available to cover fixed costs and contribute to profit. This ratio is particularly useful for analyzing the profitability of each sales dollar and for calculating the break-even point based on total sales revenue. To calculate the contribution margin ratio, use this formula:

Contribution margin ratio = Contribution margin per unit / Selling price per unit x 100

Multiplying by 100 converts the figure to a percentage.

6. Use the CVP analysis formula to calculate the break-even point

The break-even point is the level of sales at which total revenue equals total costs, meaning your business is neither making nor losing money. This calculation identifies the minimum number of units a business must sell or the minimum sales revenue it must generate to cover all its fixed expenses. Understanding the break-even point is necessary for setting sales targets and assessing the financial performance of the business.

Use the following formulas to determine the sales volume needed to cover all fixed costs:

Break-even point in units = Total fixed costs / Contribution margin per unit

Break-even point in sales dollars = Total fixed costs / Contribution margin ratio

CVP analysis example

Consider Crownpoint Headwear, a hypothetical online ecommerce business that sells custom hats. Relevant data about the company includes the following:

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Total fixed costs per month: $1,500 ($100 for website hosting, $300 for office rent, $50 for utilities, $150 for insurance, $900 for salaries)
\n
\n
Selling price per hat: $30
\n
\n
Variable costs per hat: $12 ($8 cost for materials, $2 for packaging, $1 for shipping, $1 for payment processing)
\n

To calculate contribution margin per unit, deduct the variable cost per unit from the selling price per unit:

Contribution margin per unit = $30 - $12 = $18

To calculate contribution margin ratio, divide the contribution margin per unit by the selling price per unit and multiply that figure by 100:

Contribution margin ratio = 18 / 30 = 0.6 x 100 = 60%

To calculate the break-even point, use the following formulas:

Break-even point in units = $1,500 / $18 = 83.33 (or about 83) hats

Break-even point in sales dollars = $1,500 / 0.60 = $2,500

This means Crownpoint Headwear needs to sell about 83 hats, or generate $2,500 in total sales revenue, each month to cover all its fixed costs and break even.

Assumptions of CVP analysis

The usefulness of CVP analysis depends on several key assumptions, which simplify the complexities of the real world. However, you must understand these assumptions to interpret CVP results accurately and recognize their limitations.

Here are the primary assumptions of CVP analysis:

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Linear costs and revenues. Total revenue and total variable costs increase together at a constant rate, which implies the selling price and variable cost per unit remain unchanged, regardless of how many units are sold.
\n
\n
Cost classification. Costs can be cleanly classified as fixed or variable.
\n
\n
Constant fixed costs. Total fixed costs remain constant.
\n
\n
Units produced equals units sold. There is no net change in inventory levels because of over- or underproduction.
\n
\n
Constant sales mix. If a company sells more than one product, the proportion of each product sold remains constant.
\n
\n
Changes in activity are the only factors. The only factor affecting costs and revenue is the change in sales volume or production levels. This excludes factors like technological innovation and inflation.
\n

CVP analysis FAQ

How to calculate CVP?

CVP is calculated by first determining variable and fixed costs to find the contribution margin per unit and ratio, which are then used to calculate the break-even point and sales needed to achieve target profits.

What are the key factors in CVP analysis?

The key factors in CVP analysis are fixed costs, variable costs per unit, selling price per unit, break-even point, margin of safety, contribution margin per unit, and contribution margin ratio.

What are the limitations of a CVP analysis?

CVP analysis relies on several assumptions that can limit its accuracy and relevance in real-world scenarios. Some of its limitations include the assumption of linear cost and revenue changes, the difficulty of classifying costs as fixed or variable, and the assumption that all units produced are sold.

","CVP analysis helps you determine your break-even point at different sales volumes and product prices, and it’s useful for setting your pricing strategy.","

$\"colorful$

CVP analysis helps you determine your break-even point at different sales volumes and product prices, and it’s useful for setting your pricing strategy.

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If you’re considering structures for your new business, the limited liability company (LLC) has several important benefits—including personal liability protection, relative ease of set up, and flexible tax treatment.

But once your LLC is up and running and generating revenue, you may wonder: How do you pay yourself with an LLC? The answer depends on how your business elects to be taxed. Read on to learn all about the various ways you can pay yourself as the owner of an LLC.

\n\n

Understanding LLC tax treatment

The LLC business structure has the key advantage of flexible tax treatment—meaning you get to choose the business’s federal tax classification. This impacts how you pay yourself. Here’s what you need to know about your options for your LLC’s tax treatment.

Default tax treatment for LLCs

For LLCs, default tax treatments are either sole proprietorship or partnership depending on how many members the LLC has.

\n
Sole proprietorship.Single member LLCs—that is, LLCs with one member—are taxed as sole proprietorships by default. This means the LLC doesn’t pay corporate income tax. Instead, the business’s profits and losses are passed through to the owner. You’ll report your business income on Schedule C (Form 1040).
\n
\n
Partnership. A multi-member LLC has more than one member and is taxed as a partnership by default. Similar to a sole proprietor, the LLC’s profits and losses are passed through to the individual members, who will report their share on their personal tax returns.
\n

LLC members whose businesses are taxed as either a sole proprietorship or partnership are considered to be self-employed. This means they’re obligated to pay self-employment taxes. In 2025, the self-employment tax rate is 15.3%.

Electing corporate taxation

Both single-member and multi-member LLCs can elect to be taxed as either an S corp or C corp. This doesn’t change the business’s legal entity type—just its tax treatment.

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S corp. With this tax classification, the business is still considered a pass-through entity and profits are not subject to corporate income tax. However, owners who are actively involved in the day-to-day operations of the company must be employed by the company on payroll. This means they’re paid a salary that is subject to payroll taxes. Any remaining profits are distributed as pass-through income to the members, which are not subject to self-employment or payroll tax.
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C corp. In this structure, the business itself pays corporate income tax on its profits, and then owners are taxed again on any dividends they receive. This is known as “double taxation” and is less common for small businesses.
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If your business elects to be taxed as a corporation, owners are not considered self-employed. Instead, they’re employed by the company. They’re also shareholders and therefore can receive dividends or shareholder distributions.

Create pay stubs quickly

Use Shopify’s pay stub generator to instantly create accurate paychecks for your employees. Include essential details like year-to-date income and deductions.

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How to pay yourself with an LLC

The method you use to pay yourself largely depends on how your LLC is taxed by the Internal Revenue Service.

Single-member LLCs taxed as sole proprietorships

The most common way for a member of a single-member LLC to pay themselves is through an owner’s draw. An owner’s draw is transferring money from your business bank account to your personal bank account. There’s no formal payroll process or W-2 involved. You can take draws as frequently as your cash flow allows and as you need them for personal expenses.

Just remember: Maintaining separate business bank accounts and personal bank accounts is essential regardless of your payment method. This ensures clear financial records and upholds your limited liability protection.

Because single member LLCs taxed as sole proprietorships are seen as disregarded entities by the IRS, the business’s profits are considered personal income of the owner. You will pay income tax on all profits at your individual tax rate, regardless of whether you physically take the money out as a draw.

Here are the tax requirements for single-member LLCs:

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Income tax: Your LLC’s profits are passed through directly to your personal tax return (Form 1040, Schedule C).
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Self-employment tax: As a self-employed individual, you are responsible for paying your self-employment taxes, which cover Social Security and Medicare contributions. You’ll calculate and report this using Schedule SE (Form 1040).
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Multi-member LLCs taxed as partnerships

Multi-member LLCs that opt to be taxed as partnerships handle owner payments similarly to single-member LLCs—members can take owner’s draws from the LLC’s profits. These profit distributions are usually based on each member’s ownership percentage, as outlined in the LLC’s operating agreement.

In addition to or instead of owner’s draws, multi-member LLCs can make “guaranteed payments” to members for services rendered to the business, regardless of the LLC’s profitability. These are similar to a salary but do not make the member an employee. Guaranteed payments are considered deductible business expenses for the LLC, and are not subject to income tax withholding.

Here are the tax requirements for multi-member LLCs taxed as partnerships:

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Income tax: The LLC’s profits and losses pass through to each member’s personal income tax return. The LLC files Form 1065 (US Return of Partnership Income) and provides each member with a Schedule K-1, detailing their share of the LLC’s taxable income, deductions, and credits.
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Self-employment tax: Each member is responsible for paying self-employment taxes on their distributive share of the LLC’s profits, as well as on any guaranteed payments they receive.
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LLCs taxed as S corporations

For an S corp, owners who actively work in the business must pay themselves a reasonable salary as a W-2 employee. This salary is subject to regular payroll taxes (Social Security and Medicare taxes, unemployment taxes, and income tax withholding). Any remaining profits after paying the reasonable salary can then be paid as shareholder distributions, which are not subject to self-employment or payroll taxes. This is one reason why LLCs may elect S corp status: It can reduce the overall tax burden compared to paying self-employment tax on all business profits.

It is important to note that some states—such as California—levy a corporate tax on S corps. If you elect for that tax treatment, you’ll be subject to any applicable state S corp taxes as well.

Here’s a breakdown of the tax requirements for an S corp election:

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The LLC files Form 1120-S (US Income Tax Return for an S Corporation).
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The reasonable compensation is reported on a W-2, and the LLC is responsible for payroll tax withholdings and employer contributions.
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Distributions are reported on Schedule K-1 and are generally not subject to self-employment tax, though they are subject to income tax.
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You’ll need to run payroll, often through a payroll service provider, to manage the salary and tax withholdings.
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LLCs taxed as C corporations

For a C corp, owners are considered employees and receive a salary (W-2 wages). The LLC can also distribute dividends to shareholders from its after-tax profits.

The tax requirements for a C corp election are:

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The LLC pays corporate income tax on its profits (Form 1120).
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Salaries paid to owners are deductible business expenses for the corporation.
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Dividends paid to owners are generally subject to double taxation: first at the corporate level and then again at the individual level when received by the owner.
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The LLC is responsible for payroll tax withholdings and employer contributions on salaries.
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Paying yourself with an LLC FAQ

How do LLC owners pay themselves?

LLC owners pay themselves primarily through owner’s draws if the LLC is taxed as a sole proprietor or partnership. If the LLC has elected S corp status, owners pay themselves a reasonable compensation as an employee, and any remaining profits can be taken as distributions. For C corps taxed LLCs, owners are paid a salary and may receive dividends.

Can owners of LLCs taxed as sole proprietorships pay themselves a salary?

No, owners of LLC taxed as sole proprietorships cannot pay themselves a salary in the traditional W-2 employee sense. Instead, they can pay themselves through owner’s draws, which are withdrawals of profits from the business for personal use.

What happens if my LLC makes no money?

If your LLC makes no money (or has a loss), you generally won’t pay income taxes on business profits because there are none. However, you typically are still required to file the appropriate tax forms with the IRS. For single-member LLCs, you would still file Schedule C (even if reporting zero income or a loss) with your Form 1040. Multi-member LLCs would still file Form 1065 and issue Schedule K-1s. State filing requirements may also apply, even with no business income.

","The way you pay yourself as an owner (or member) of an LLC—either via an owner’s draw or salary plus distributions—depends on how your LLC chooses to be taxed.","

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The way you pay yourself as an owner (or member) of an LLC—either via an owner’s draw or salary plus distributions—depends on how your LLC chooses to be taxed.

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As a small business owner focused on growing your client base, delivering excellent customer service, and keeping the lights on, you may be putting all your earnings back into the business. You aren’t alone. But treating yourself like an employee—and compensating yourself accordingly—draws a clear line between your personal and business finances. This is key for managing cash flow, tracking expenses, and staying on the right side of the IRS.

Whether you are a sole proprietor or own a limited liability company (LLC) or an S corp, building a habit of paying yourself sets the tone for sustainable business practices. Read on to learn more about how to pay yourself as a business owner.

Table of contents

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How to pay yourself as a business owner

Here’s a breakdown of the most common approaches to paying yourself, their pros and cons, and how they work within different business structures:

Owner’s draw

An owner’s draw is a common method for sole proprietorships, partnerships, and pass-through LLCs. This involves paying yourself via check or direct transfer (such as ACH payment or wire) from your business’s bank accounts.

You don’t pay any taxes at the time of withdrawing the funds. However, you will be responsible for making estimated tax payments on all profits passing through to you. Owner’s draws are subject to income tax and self-employment taxes.

Owner’s draws entail less administrative overhead compared to payroll, because you don’t need a payroll provider to facilitate them. There’s also no specific schedule for owner’s draws, meaning you can take them as your cash flow permits or as you need to. If your business is structured as a partnership or LLC, owner’s draws may be subject to the terms specified in the partnership agreement or operating agreement.

It’s important to carefully record all draws to ensure accurate financial records.

Salary

Paying yourself a regular salary is akin to being a traditional employee of your own company. This method is required for businesses formed or taxed as S corporations or C corporations, as long as the owner is involved in the operations of the company and also receives distributions. The IRS requires owner salaries to be “reasonable”—meaning they’re comparable to the standard in your industry for the amount and type of services you perform.

Salaries are subject to payroll taxes:

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Social Security and Medicare taxes (also known as FICA)
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Federal unemployment (FUTA)
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State unemployment (SUTA)
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For FICA, both the employee and employer contribute, each paying 6.2% for Social Security (up to an annual wage limit) and 1.45% for Medicare (on all wages). FUTA and SUTA taxes, however, are typically paid only by the employer.

For S corps, the wages represent an expense to the business and income to the owner. When you record wages, the amounts offset each other, so there is no effect on total taxable income from the S corp. However, the wages will increase the total taxes paid because they are subject to payroll tax. C corps receive a similar treatment, with the salary a deduction to the corporation and income to the owners.

The easiest way to take a salary from your company is by:

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Establishing a payroll system (either in-house or through a third-party payroll provider)
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Issuing regular paychecks (physical or direct deposit)
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Withholding and remitting the appropriate state, local, and federal taxes
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Your payroll system will need to withhold taxes and file payroll reports like Form 941 (Employer’s Quarterly Federal Tax Return).

Paying yourself with a salary also establishes a clear payroll process, which can be especially helpful if you need to obtain a loan or secure investors.

Create pay stubs quickly

Use Shopify’s pay stub generator to instantly create accurate paychecks. Include essential details like year-to-date income and deductions.

\nCreate paycheck\n

Distributions and dividends

Shareholder distributions are very similar to owner’s draws, but they’re used by S corps and LLCs, which are taxed differently than sole proprietorships or partnerships. Distributions reduce the owner’s equity in the business.

Dividends are used by owners or shareholders of a C corporation. The corporation earns profits and pays corporate income tax on those profits first. After the corporation pays its taxes, any remaining after-tax profits can be distributed to shareholders as dividends. C corps can decide to distribute dividends or to reinvest profits into the business to drive growth.

Determining how much to pay yourself as a business owner

Deciding how much to pay yourself is important, as you must balance your personal financial needs with your business’s current and future health. There’s no one-size-fits-all answer.

Here are several factors to consider to help you determine your compensation strategy:

Figure out how much you need

When determining how much to pay yourself as a business owner, it can help to start with a ballpark estimate of how much you need to earn to support yourself. You can then work backward from there. Figure out the total amount of your personal expenses, including housing, food, transportation, insurance, and car payments. Having a firm grasp of your personal expenses will help you determine your desired compensation.

Project your cash flow

Your compensation should not jeopardize the business’s ability to cover operating expenses. Build a cash flow projection to determine how much cash you expect to flow in and out of the business each month, based on your sales forecasts and expenses. Once you understand how much money the business should have available each month, build your compensation into the model.

Build a cash reserve

Ideally, even after you pay yourself, your business should have profits that go toward a cash reserve. Why? Your business should have a reserve to draw on in case of unexpected events like natural disasters, contract cancellation, or significant price increases in your supply chain. For small retail or ecommerce businesses, it’s important because cash flow can be unstable due to sales fluctuations, seasonality, and unexpected events. Aim for three to six months of operating expenses in a cash reserve.

Plan for growth

Think about the future of your business. Do you plan to hire more employees, purchase new equipment, or expand into different markets? These plans require capital, so you’ll have to decide how much profit to reinvest for growth versus distribute as your pay.

You can set clear profit margins for your business first, then model your compensation as a planned allocation after budgeting for future growth. By treating your pay as a planned outflow within your cash flow model, it aligns with long-term profitability and growth, rather than hindering it.

Special considerations for owners of S corporations

Some business structures and tax statuses require the owner to be paid with W-2 wages, specifically S corps.

Tax considerations

For owners of S corporations or LLCs electing to be taxed as S corporations, your method of compensation affects your tax obligations. This is because the IRS requires S corp owner-employees to pay themselves a reasonable salary for the work they perform. This salary is subject to Social Security and Medicare taxes, which are split between the employee and the business. However, any additional profits you take out as distributions are generally not subject to these payroll taxes.

A tax professional can help you understand the tax implications of your compensation.

Reasonable compensation

For owners of S corporations or LLCs electing to be taxed as S corporations, your salary amount must be considered “reasonable” by the IRS, meaning it can’t be too low. This rule exists because distributions from an S corp generally receive more favorable tax treatment than wages. It aims to prevent owners from paying themselves a minimal salary and taking most profits as tax-advantaged distributions.

According to the IRS, your salary must be equivalent to what a non-owner would be paid if they performed similar services. If the salary is deemed unreasonably low, the IRS may decide distributions should be reclassified as wages. It’s a good idea to research compensation for comparable roles before you pay yourself.

Consult the Internal Revenue Service to learn more about its guidelines for “reasonable compensation” and consult with a tax professional if you’re unsure.

How to pay yourself as a business owner FAQ

How do business owners pay themselves?

For pass-through entities (sole proprietorships, partnerships, some LLCs), simply move funds from your business account to personal bank accounts via an owner’s draw. For S corporations and C corporations, pay yourself a salary via a formal payroll system and shareholder distributions or dividends.

Can you write off your own salary as a business owner?

Yes, if your business is an S corporation or a C corporation, your salary is generally a deductible business expense. However, for a sole proprietorship, partnership, or limited liability company taxed as a pass-through entity, an owner’s draw is not a deductible business expense, as the owner and business are often treated as the same entity for income tax purposes.

What is an owner’s draw?

An owner’s draw is when a business owner withdraws money from their business to compensate themselves. It’s common for sole proprietors, partnerships, and LLCs taxed as such. Unlike a salary, it’s not a business expense or subject to payroll taxes. The owner is still responsible for self-employment taxes on the business’s total net profits.

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Consider the structure of your business and your future financial goals when determining how to pay yourself as a business owner.

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