Cash Flow and Budgeting
Good cash management can improve a company's liquidity, reduce costs, and increase profitability. Allied Tax and Consulting LLC can help you maintain optimal cash flow levels by tracking sources and uses, forecasting, and budgeting accordingly.
To a business entity, cash flow is something that can make or break the business' ability to survive. We can help you analyze your spending, re-balance your budget and/or debts for an optimal cash flow to support your business' success. This balance plan would be revisited if and when there were any major changes in your business structure to ensure that you are operating at an optimal level.
Cash Flow Statement
A cash flow statement is one of the most important financial statements for a business owner. It is a listing of the flows of cash into and out of the business. Think of it as your checking account at the bank. Deposits are the cash inflow and withdrawals (checks) are the cash outflows. The balance in your checking account is your net cash flow at a specific point in time. A cash flow statement is a listing of cash flows that occurred during the past accounting period. A projection of future flows of cash is called a cash flow budget.
Working capital is an important part of a cash flow analysis. It is defined as the amount of money which represents operating liquidity available to a business. Net working capital is calculated as current assets (cash or cash equivalents) minus current liabilities (liabilities due within 12 months). If current assets are less than current liabilities, the company has a working capital deficiency and may lack the ability to pay maturing or short term obligations.
REASONS FOR CREATING
A CASH FLOW BUDGET
Cash Flow
Cash is the key to a smooth business operation. By creating a cash flow budget, you can identify cash deficit periods in advance so you can take corrective actions to alleviate the future deficit. This may involve a change in the timing of certain transactions or when money will be borrowed and how much.
Periods of excess cash can also be identified so that excess cash may be used to draw interest. This excess revenue can be used to pay down additional debt principal.
Cash Flow is not Profitability
People often believe that a cash flow statement will show the profitability of a business. Cash flow and profitability are closely related but are completely different. A cash flow statement shows cash inflows and outflows while the income statement shows income and expenses. A cash flow statement reports on the liquidity of the business while an income statement reports on the profitability of the business.
Many income items are also cash inflows. The sales of items are usually both income and cash inflows. As long as a check is received and deposited in your account at the time of the sale the income and cash inflow is the same. Many expense items are also cash outflow items. The purchase of supplies (cash method of accounting) is both an expense and a cash outflow item. Again, as long as a check is written at the time of the purchase the expense and the cash outflow are the same.
However, there are many cash items that are not income and expense items, and vice versa. For example, the purchase of a capital asset is a cash outflow if you pay cash at the time of purchase.
However, if money is borrowed for the purchase using a term loan, the down payment is a cash outflow at the time of purchase and the annual principal and interest payments are cash outflows.
A capital asset has a life of more than one year and must be expensed (used up) as it declines in value due to wear and obsolescence. This is called "depreciation". Depreciation is expensed each year in accordance with IRS tables for the type of asset and is a non-cash expense.
With our help and guidance, you will always be on top of your finances and ready for the future
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We are always available to spend time with you so that you fully understand how to interpret and utilize the financial information and tax advise we provide. Consultations are available by appointment and appropriate fees will apply.
