A cash flow statement is a financial document that summarizes the amount of cash flowing into and out of your business. Cash flow analysis includes all company income from operations and investment sources. It also consists of all money from your business for activities and investments during a defined period. Cash flow statements can be made monthly, quarterly, or annually depending on how you want your books done. We recommend at least monthly, so you can always have a handle on the financial health of your business. 

How Does Cash Flow Differ from Budget

You might think a budget is sufficient, but a budget will never show you the cost of paying for debt, saving for a rainy day (or taxes), and paying yourself from profit. A cash flow analysis is a plan for the money flowing in and out of your business. You want to ensure that your money is working for you, and cash flow analysis creates a plan for every cent that flows in and out of your business. 

For example, if you have a budget with a net income of 10k per month. Your cash flow analysis will help you determine how much of that $10k is sitting in your bank account and what you want to do with that money, whether that is savings, loan payments, taxes, payrolls, etc. 

If you are working on your budget, here are some helpful articles:

Different Types of Business Budgets

How A Business Budget Leads to Success

4 Corners CFO Cash Flow Analysis Method

Traditional cash flow statements are hard to follow, even for accountants. We don’t use traditional cash flow statements at 4 Corners CFO. We view your cash flow as an extension of your budget and use our knowledge of your revenue, expenses, goals, and timing to build a cash flow forecast that shows you where you are AND where you’re going. We work with our clients on monthly, quarterly, and annual timelines based on their needs. Start with the budget…but remember your budget does not include some of the most important details. 

Your budget will not include the following: 

• Debt and Payments on Debt
• Savings
• Profit Distributions
• Tax Savings

These items aren’t technically considered an expense in accounting terms. They only affect your balance sheet, which means they will only show up in your cash flow. Debt, savings, and profit distributions will not hit your profit and loss statement or budget, but it’s absolutely critical that you track these items for your business’s financial health. When forecasting cash flow, these are the main items that we bring attention to so our clients can make sound financial decisions. 

Important Analysis Numbers

Taxes

The first thing we focus on in the analysis is taxes. We always want our clients to be relaxed about paying taxes, so we are thinking about it year-round. We work with your tax CPA/Attorney/EA to determine your effective tax rate or use a baseline of 25% to set aside money for your tax bill. Our goal is for you to easily pay the tax bills and give yourself a bonus after taxes are paid. 

Savings

Next, we want to build up a savings account with at least two months of operating expenses. Many businesses do not have consistent revenue; whether cyclical or seasonal, income often lulls. Having a minimum of two months of expenses allows you to weather any downturns or lulls in revenue. Two months is the minimum, but we recommend working toward six months of expenses on hand. 

Debt Paydown

After accounting for taxes and savings, we focus on paying down any debt in your business. We first want to ensure we have cash on hand to make the minimum payments to all creditors. Anything above can be allocated to reduce balances. Many people are familiar with the snowball method that many personal finance gurus use to pay down debt. Start with the smallest balance and create momentum by paying things off. However, our clients have the added benefit of accountability through our team. You don’t have to be responsible for your own momentum. In that case, we recommend starting with credit card debt, which is often the highest interest rate; after it is paid off, turn to your lines of credit and term loans. 

Profit Distribution

Finally, your cash flow analysis should include all profit distributions. Your budget will cover payroll, but many of my clients don’t use payroll for their entire “paycheck.” You deserve to pay yourself what you’re worth, and that means you must ensure profit distributions are considered and met. 

Think of your cash flow statement as your ongoing roadmap for the financial health of your business. It is a continuously updated reflection of what is happening financially and allows you to make sound decisions on a day-to-day basis. If you need assistance creating a cash flow, get in touch! We help our clients daily and would happily assist you!