Login or signup
36
ACCOUNTING

The Tax-Wise Cash Monitor
 

A close-up look at a balance sheet, complete with comments on how to use it for maximum effectiveness.
Advertisement

Once, Tom Buschman couldn't pay his company's taxes on time. That will never happen again, thanks to a custom cash-flow report he sees every week

Like many entrepreneurs, Tom Buschman has learned some of his most important lessons from business crises.

Buschman, the owner and chief executive of Buschman Corp., a $3-million manufacturer of parts for paper machinery, based in Cleveland, had an especially sobering experience early in the company's development: "We were in a position where we had a lot of cash, and I thought everything was going well. So I made a decision to spend some money on expanding our production facilities," he says.

That proved to be a big mistake. "We always did our taxes at the last minute," Buschman recalls. "That year I got a call from our accountant on April 14 telling us we owed $15,000 to the IRS -- and we didn't have the cash because we had spent it on our expansion." Making matters worse, Buschman's biggest customer had recently filed for bankruptcy.

"I was really scared. We didn't have a credit line. I didn't know how we'd pay off that tax bill, even if we filed for an extension. I didn't know if we'd survive." Aided by a strong flow of orders, Buschman pulled the company through by the skin of his teeth, getting the hoped-for tax extension and stretching other accounts payable.

Since then, the 18-year-old business has grown apace (it recently made it onto the Inc. 500 list of the nation's fastest-growing private companies), thanks in part to Buschman's painfully learned lesson on the importance of comprehensive number crunching. "Every week, our company does a complete cash and tax analysis," he explains. The numbers are committed to a two-page form, which, says Buschman, "tells me everything I need to know to run my business."

Highlighting normally obscure features such as tax liabilities -- something few entrepreneurs monitor religiously -- the form has helped Buschman meter expenditures more carefully. A recent purchase of three machines (total cost: about $100,000) was postponed for four months because the form had signaled a period of marginal profitability.

How unorthodox is Buschman's approach? Well, his wife, Kib, who has no formal position at the company and no formal financial background, designed the form from scratch because, as Tom Buschman says, "most financial statements are designed just to give accountants what they need to fill out IRS or SEC reports." He elaborates: "I needed a form that would give me easy answers to questions such as, Are we making money this week? Do we have spare cash that I can spend on a new piece of machinery? Do we have the money we'll need to pay our taxes? This form does that."

Actually, it does much more, says the form's designer. "The act of coming up with these numbers weekly is very important for our financial staff," says Kib Buschman. "We go through an elaborate process of reconciling all the parts of the business -- accounts receivable, payables, checking-account balances, and other numbers -- so that by the time this report is finished, we're certain everything balances out the way it should. When it doesn't, that's a signal that something is wrong; it might mean we've paid an invoice twice or failed to accurately record a collection." Information comes from many sources; the weekly process takes an accounting staffer a day and a half to complete.

In a world of look-alike cash-flow reports, Buschman's monitor offers three very important features:

? "Scanability": Changes are easy to identify, thanks to a simple three-column format. "It takes me just a minute or two to figure out everything I want to know," he says.

? Practicality: Few cash-flow reports accord this much space to payroll-tax and corporate-income-tax liabilities.

? Timeliness: "If I found out how we were doing only at the end of the month -- well, our company is just growing too rapidly for that to make sense," says Buschman, who keeps the weekly reports in a loose-leaf binder, arranged chronologically so he can readily identify and chart cash-flow trends.

Sample balance sheet:

BALANCE SHEET FOR ONE WEEK, DATE ENDING AUGUST 5, 1994

Bills Payable Last Period 3,257.79
Bills Payable New This Period +21,242.35 /+21,242.35
Checks Written Against Bills Payable (18,650.22)
= PRESENT BILLS PAYABLE 5,849.92 /+5,849.92
Payroll Payable Last Period 7,855.43
Payroll Payable New This Period +8,203.17 /+8,203.17
Checks Written Against Payroll Payable (7,855.43)
= PRESENT PAYROLL PAYABLE 8,203.17 /+8,203.17
Payroll Tax Payable Last Period 5,314.00
Payroll Tax Payable New This Period +4,717.97 /+4,717.97
Checks Written Against Payroll Tax Payable (3,065.73)
= PRESENT PAYROLL TAX PAYABLE 6,966.24 /+6,966.24
MISCELLANEOUS EXPENSES (3,285.90) /+3,285.90
TOTAL CHECKS WRITTEN THIS PERIOD =32,857.28
TOTAL EXPENSES INCURRED THIS PERIOD /=37,449.39
TOTAL PAYABLES /=21,019.33

Receivables Last Period 265,647.13
Receivables New This Period +42,156.15
Bak Deposits Applied Against Receivables (38,942.90)
= PRESENT RECEIVABLES 268,860.38
Ending Checking Balance Last Period 28,392.50
Deposits Applied Against Receivables +38,942.90
Other Deposits to Checking (see notes)* +72.84
Checks Written This Period (from above) (32,857.28
Transfers (To)/From Savings Account (5,000.00)
= SUBTOTAL OF CHECKING ACCOUNT 29,550.96
Checks for Tax Liability Incurred This Period
(transfer to tax account) (2,353.38)
= CHECKING ACCOUNT BALANCE 27,197.58
QTD Tax Liability Last Period...... 18,186.44
Tax Liability New This Period...... +2,353.38
= QTD TAX LIABILITY (transferred to tax acct.) 20,539.82

PAYABLES (21,019.33)
RECEIVABLES +268,860.38
= PRESENT RECEIVABLES 268,860.38
SUBTTL CK ACCT +29,550.96
ADJUSTMENT (Prior year/s) (181,970.13)
ADJUSTMENT (Prior Qtr/s This Yr) (92,528.68)
TAX LIABILITY + 18,186.44
SAVINGS BALANCE + 20,000.00
QTD SUBTOTAL (Before Tax) 41,079.64

QTD SUBTOTAL (above) 41,079.64
QTD Tax Liability (50%) (20,539.82)
QTD TOTAL (After Tax) 20,539.82

*(Account details from back of balance sheet not shown)

Tom Buschman tells how his form helps him fend off financial catastrophe:

"I need a short form that I can scan quickly. If we were looking at financial changes over a longer period -- maybe a month -- I'd be afraid we couldn't compress all that information into one or two pages."

Think of the first-column numbers as an exercise that keeps the company's accounting staffers abreast of all internal financial changes. "In each subcategory we basically update the carryover balance from the end of last week to our current position at the end of this one, factoring in any related checks we've written or received."

Since Buschman's main focus is how cash flow changes from week to week, he scans this third column for unusual signs in the numbers. "After you've looked at enough of these forms, you instantly grasp whether the results seem typical or extraordinary enough that you need to investigate further."

"Many companies consider their tax liabilities only when they pay them, but I think that's crazy. Although there's nothing we can do to control payroll taxes, I want them included in the weekly payables number I see. Otherwise, it wouldn't be accurate."

["Receivables last period" is] a subcategory that gets Buschman's attention. "I want to make certain that, if any of these numbers suddenly gets much larger or smaller than normal, it doesn't reflect a slowdown in our collection efforts or the possibility of a cash-flow crunch later on, maybe because of a customer's payment problems."

Although Buschman doesn't pay much attention to [his checking account balance], his financial staff does because it's "the key to reconciling everything that's gone on inside this company in the past week. We want to make certain that our weekly cash position balances against all the cash-flow transactions that occurred during the past week."

"One of the most important ways in which we've upgraded the form is to include more of a breakdown of our corporate-income-tax liabilities. We now update our quarterly tax liability based on our profit or loss for the week, which we calculate according to the formula 'Sales for the week minus expenses (including payroll tax)."

"["QTD total"] is the only number I really care about, because it's the one that tells me if we made or lost money last week. It affects everything, from our major expenditures and expansion efforts to the monthly bonus we pay based on corporate performance."

This "highlights" box -- a kind of mini balance sheet -- is another recent change to the form. Although it adds to the page's clutter, it "brings together all our important weekly results and shows how we get to the one really important number: 'Quarter-to-Date Total, After Tax."

Buschman sometimes finds it useful to refer to the breakdowns of the figures for categories such as new "Payables," "Miscellaneous Expenses," and "Other Deposits to Checking Account" that are listed on the back of each report.

Last updated: Jan 1, 1995




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Comment and share features
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: