Running the finances of a US small business: three statements, one cash plan and the records the IRS expects

Out of every hundred American businesses that opened in March 2021, about 79 were still operating a year later and 47 after five years, according to the Bureau of Labor Statistics. Most of the ones that closed did not lack customers. They ran out of cash, mixed personal and business money, or met their tax bill as a surprise. Europeans who build a company here usually arrive with good accounting habits from home. What changes is the calendar, the vocabulary and a few US rules that turn sloppy books into penalties.

Three statements, three questions

Every set of books produces three reports. Your accountant in Europe calls them by other names, but they answer the same questions.

The income statement is the one owners read. The balance sheet is the one banks read. The cash flow statement is the one that tells you whether you will make payroll in March. A business can show a profit on the first and still be in trouble on the third, because profit counts sales when they are made and cash counts them when the customer pays.

A small company does not need audited statements. It does need monthly statements that are closed on time, reconciled to the bank and read by the owner. Our guide to US LLC bookkeeping covers the software and routines that produce them.

Profit is an opinion, cash is a fact

Here is a pattern we see every year with new US companies of European groups. The numbers are invented, the mechanics are real.

A Texas LLC sells equipment to American distributors. In April it delivers $120,000 worth of goods at a 30 percent gross margin. The income statement shows $36,000 of gross profit. But:

• the distributors pay on terms of net 60, so the $120,000 arrives in June;
• the goods themselves, $84,000, were paid to the supplier in March;
• rent, payroll and software of $25,000 went out in April as usual.

On April 30 the company is profitable on paper and $109,000 short in cash compared with the start of March. If the next order is bigger, the gap grows with it. Growth eats cash; that is why fast-growing companies so often need financing that profitable slow ones never do.

The remedy is a simple 13-week cash forecast: a spreadsheet with one column per week, starting with today's bank balance, listing the cash you expect in (from customers, on the dates they actually pay) and the cash going out (payroll, rent, suppliers, taxes, loan payments). Update it every Monday. When a week turns negative six weeks out, you have six weeks to act: negotiate terms with the supplier, ask a customer for a deposit, draw on a credit line or slow a hire. When you find out on the day, you have none. If the forecast says you will need outside money, read our guide to funding a US startup without a bank loan before the need is urgent.

Seven numbers worth a monthly look

A full ratio analysis is for lenders and investors. For running the business, a short list is enough. We ask clients to put these seven on one page and look at them every month, in the same order.

1. Cash on hand and weeks of runway. Cash divided by average weekly net outflow. Below 13 weeks, the forecast deserves daily attention.
2. Gross margin. Falling margins mean pricing, purchasing or product mix has moved. Catch it in month one, not at year end.
3. Days sales outstanding. Receivables divided by revenue, times the days in the period. American customers tend to pay on their own schedule unless your invoices state terms and you follow up.
4. Current ratio. Current assets divided by current liabilities. Below 1, the bills due within a year exceed what will turn into cash within a year.
5. Debt service. Loan and lease payments as a share of cash from operations. Lenders look at this, and so should you before you sign the next one.
6. Owner draws against profit. In an LLC, money taken out is not a salary. If draws exceed profit for months, you are spending the company's capital.
7. Tax reserve. The amount set aside for federal and state taxes, compared with what the year so far will cost. More on this below.

Revenue is missing from the list on purpose. It is the number everyone watches anyway, and it tells you the least about whether the business is healthy.

The US tax calendar belongs in the cash plan

In much of Europe, taxes on business profit come after the year, sometimes long after. The US expects them during the year. The IRS requires estimated tax payments:

• from a corporation that expects to owe $500 or more for the year;
• from individuals, including the owners of a single-member LLC, partners and S corporation shareholders, who expect to owe $1,000 or more.

The year is divided into four payment periods. For individuals, the underpayment penalty can generally be avoided by paying at least 90 percent of the current year's tax or 100 percent of the prior year's tax, whichever is smaller. For a corporation, the federal rate is a flat 21 percent of taxable income, which makes the reserve easy to estimate.

Other dates that move cash:

• Payroll taxes, deposited on a fixed schedule once you have employees. Our article on FUTA covers the unemployment part.
• Information returns. For payments made after December 31, 2025, the base threshold for reporting payments to contractors and other payees under Section 6041 rose to $2,000, under the One Big Beautiful Bill Act. Collect a W-9 or W-8 form before the first payment, not in January.
• State taxes, such as the Texas franchise tax report every May 15, explained in our guide to the Texas franchise tax.

We tell every client the same thing: open a separate savings account for taxes, and move a fixed share of every customer payment into it on the day it arrives.

Cash or accrual: choosing the method

Under the cash method, income counts when you receive it and expenses when you pay them. Under the accrual method, income counts when it is earned and expenses when they are incurred, whether or not money has moved. The IRS lets most small businesses choose. For tax years beginning in 2026, a corporation or partnership may use the cash method if its average annual gross receipts for the three prior years do not exceed $32 million. A business that has to account for inventory generally needs an accrual method for purchases and sales, although qualifying small businesses may use simplified rules.

The tax method and the management method do not have to be the same. Many of our clients file on the cash method because it is simpler and defers tax on unpaid invoices, while their monthly management reports run on accrual so that the European parent sees revenue and costs in the month they belong to. Group reporting under IFRS or a European GAAP is accrual anyway, so the bookkeeper keeps the adjustments in a separate schedule.

For a corporation, the size of the return grows with the business. A corporation whose total receipts and total assets are both under $250,000 does not have to attach the balance sheet and the reconciliations of book income to the federal return. Above that, the balance sheet on Form 1120 must agree with your books, which is one more reason to close them properly. Our page on annual financial statements for a US corporation describes the year-end work.

Records: what to keep, and for how long

IRS Publication 583 gives two pieces of advice we repeat to every new client: open a business checking account, and keep it separate from your personal account. Supporting documents such as invoices, receipts, deposit slips and bank statements must be kept in an orderly way, and electronic storage is fine as long as the system can reproduce legible records and give the IRS complete access.

The extra rule for foreign-owned companies

A US corporation with a 25 percent foreign owner, and a single-member LLC owned by a foreign person, must file Form 5472 to report transactions with related parties. The LLC files it attached to a pro forma Form 1120. The company must also keep records sufficient to establish the correctness of its return and the treatment of related-party transactions. The penalty for failing to file, or failing to keep those records, is $25,000, with another $25,000 if the failure continues more than 90 days after an IRS notice. Every transfer between you and your LLC, including the first capital contribution, belongs in the books. Our page on Form 5472 explains the filing.

Five mistakes we fix most often

Paying personal costs from the company account

It blurs the books, makes the tax return harder to defend and weakens the separation between you and your company that the LLC or corporation is meant to provide. If you need money personally, take a documented draw or salary, then pay from your own account.

No tax reserve

The first profitable year ends with a bill nobody planned for, often combined with a first estimated payment for the following year. See the savings account rule above.

Using suppliers and the IRS as a credit line

Paying suppliers late damages the relationships you need when you grow. Paying payroll taxes late is far worse: those amounts are held in trust for the government, and the IRS treats them that way. If cash is short, solve it with financing, not with withheld taxes.

Treating intercompany balances casually

A US subsidiary that buys from its European parent ends up with an intercompany payable that grows every month. It needs a written agreement, prices that hold up under the transfer pricing rules on both sides of the Atlantic and regular settlement. Exchange rate movements on those balances also need to be booked.

Reading revenue instead of margin

Sales growth with a falling gross margin is a business buying its customers. Look at margin by product and by customer at least once a quarter.

When the first real profit arrives

The first year with genuine surplus cash raises the question of what to do with it. We do not give investment advice, but the sequence most well-run small companies follow is consistent:

1. Fund the tax reserve in full, including the estimated payments for the coming year.
2. Build an operating reserve. Three to six months of fixed costs in cash is a common target for a small company; seasonal businesses need more.
3. Pay down expensive short-term debt, such as card balances or merchant cash advances.
4. Reinvest where the numbers show the best return: a hire that frees the owner's time, equipment that lifts margin, marketing that has proven to work.
5. Take money out in the way that suits your structure.

The last step depends heavily on the legal form. Profit of a single-member LLC owned by a European is taxed in the owner's hands whether or not it is distributed, so taking it out is mostly a banking question. A C corporation pays 21 percent first, and a dividend to a foreign shareholder then faces US withholding tax, reduced by the treaty with your home country. Our guide to taking profits out of a US corporation works through the options, and a bank that knows your business is the starting point for everything else; see the US LLC bank account.