Cash Flow Analysis

1. Profit is an Opinion, but Cash or
lack thereof is Cold Hard Reality
Dennis L. Thompson, CPA, CFE
206-390-9432
www.dlthompsoncpa.com
@dennislt

2. Common Question By Owners
• If I am making so much money, how come I
don’t have any cash?

3. Agenda
• Types of Accounting
• Breakeven Analysis & Ratio Analysis
• Operating Cycle – Cash to Cash
• Mechanics of Projecting Cash Flow
• Drains on Cash
• Solutions

4. Underlying Themes
• The Importance of a Basic Understanding
of Accounting
• Having Accurate Accounting Information is
Critical
• Being Able to use Your Accounting
Information to Make Business Decisions

5. What is Financial Accounting
• Production of Financial Statements
– Income Statement
– Balance Sheet
• Bookkeeping
• Used for Tax Returns
• Designed for External Audience
– Bankers
– Tax Collectors
– Creditors and Investors
• Backword Looking

6. What Is Management Accounting
• Analysis of Costs - Breakeven
• Projection of Cash Flows
• Budgets
• Ratio Analysis
• Designed for Internal Audience
• Forward Looking
• The Information comes from your
Accounting System and Reports

7. Cash vs Accrual

8. Financial Statements-Compass
For Your Business
• Think of Your Business as a Small Plane
• Think of Your Accounting System as an
Instrument Panel
• Two Potential Problems
– Your Accounting Info is Wrong
– You Don’t Use Your Accounting Info

9. Categories of Financial
Statements
•Income Statement
– Where You Have Been
•Balance Sheet
– Where You Are Now
•Cash Flow Projection & Budgets
– Where You Are Going
• Statement of Cash Flows
• Do You Have a Viable Company

10. Profit & Loss - Comparison

11. Balance Sheet - Comparison

12. Balance Sheet - Comparison

13. Statement of Cash Flows
Increase
Increase
Increase
Decrease
Decrease

14. Analysis of Costs - Breakeven
• Sales Price Per Unit or Service
– How much Gross Income per product or
service.
• Variable Cost Per Unit or Service
– What are the Directs Costs associated
with the product or service
• Fixed Costs (Overhead)
– Costs that need to be paid whether you
make a Sale or not, e.g. Rent, Insurance

15. Breakeven - Example
• Sales Price Per Unit $10
• Variable Cost Per Unit 7
• Contribution Margin Per Unit $3
• Fixed Costs $15,000
• Units Sold 5,000
• Contribution Margin Ratio
– $3/$10 = 30%
• Sales to Breakeven = Fixed Cost/CM Ratio
• $15,000/30% = $50,000
• $50,000 - $35,000-$15,000 = $0

16. Breakeven Schedule

17. Breakeven Graph

18. What is Ratio Analysis
• Comparing different line items of the
Balance Sheet and Income Statement to
each other.
• For example, Current Ratio = Current
Assets/Current Liablilities

19. Ratio Analysis – Why Care
• Banks use Ratio Analysis in deciding to
extend Credit
• Ratio Analysis can serve as an Early
Warning System for your company
• It is useful to compare your Ratios to
Industry Standards

20. Ratio Analysis - Categories
• Profitability – e.g. Return on Equity
• Activity – e.g. A/R Turnover
• Leverage – e.g. Debt to Equity
• Liquidity – e.g. Current Ratio

22. Operating Cycle – Cash to Cash

23. Cash Flow Defined
• Beginning Cash Balance
• Add Money from:
– Cash Sales
– Collections of Receivables
– Proceeds from Loans
– Proceeds from Sales of Assets
– Owner’s/ Shareholder’s Contributions

24. Cash Flow Defined
• Less Money to:
– Cash Purchases
– Payments on Accounts Payable
– Loan /Credit Card Payments
– Draws/Distributions to Owners
• Ending Cash Balance

25. Sample Cash Flow Projection P1

26. Sample Cash Flow Projection P2

27. Drains on Cash-Clients Not
Paying On Time

28. Drains on Cash
• Growing Too Fast
– Puts strain on company
– Increases in Fixed Costs
– Hiring Inexperienced Employees
– Increased Risk of Fraud

29. Drains on Cash-Employee Fraud
• Christine Sylvester

30. Windish RV - Colorado
•40 Year Old Billing Clerk
•Embezzled $951k
•Fraud Lasted Three Years
•Created a Shell Company
– Wrote duplicate checks
– Deposited into Shell Business Account
•Plead guilty to felony theft
•Sentenced to 5 years

31. Drains on Cash-Employee Fraud
• Desiree Herrera

32. Payless Hardware-California
• 36 Year Accounts Receivable Clerk
– Worked from 2002 to 2009
– Embezzled $1.43 Million
• Skimmed Receivables
– Handled bank deposits
– Laundered money
• Convicted on 58 Felony Counts
– 1 count of grand theft
– 3 counts of filing fraudulent tax returns
– Sentenced to 10 years
– Husband sentenced to 1 year for money
laundering

33. Solutions to Improve Cash Flow
• Have a Basic Understanding of Accounting
and Taxes
– If you want to play the game, you need
to know how to keep score
• Have Accurate and Up to Date Accounting
Information
– Use Cloud Accounting
– Don’t Manage Your Business out of Your
Checking Account

34. Solutions To Improve Cash Flow
• Get Deposits Upfront
• Be Careful in Incurring Fixed Costs
• Don’t Pay Early Unless You Get a Discount
• Credit Reports on Customers
• Background Checks on Employees
• Reconcile Your Bank Account
• Don’t Spend Trust Funds – Payroll and
Sales Taxes
• Use Budgets
• Purchase Commercial Theft Insurance

35. Budgets
• Why Budget?
– Forces you to think strategically about
your business and goals
– Can help you anticipate problems
– Can help detect Fraud
– Sets Expectations for Employees

37. Never Run Out of Cash

38. Never Run Out of Cash-
Philip Campbell

39. • Looking at Accrual Financial Statements
• Collection Problem with A/R
• Not All Cash Expenditures are Expenses
• Embezzlement of Cash
• Not Making Cash Flow Projections
• A Large Proportion of Expenses are Fixed
• Your Profit Margins are Shrinking
If I Am Making So Much Money, How
Come I Don’t Have Any Cash?

40. • Xero Online Accounting
– www.xero.com
• QuickBooks Online
– http://quickbooks.intuit.com/cms/online/
• Wave Accounting
– http://www.waveaccounting.com/free-
accounting-software/
• Bill.com
– http://www.bill.com/
Resources

41. • Peace of Mind Cash Flow Schedule
–http://www.neverrunoutofcash.com/peaceofminddownload.htm
• Cash Flow Seminar Slide Deck
• https://docs.google.com/file/d/0BxrfhMfSp-
qlbUFxQzFhNFEwQUU/edit?usp=sharing
Resources