Boss Talks: Your EOY Cash Flow Checklist
An framework for money decisions.
Greetings! A couple of my lovely clients suggested that I share this money “thoughtflow” as a Boss Talk— below is a basic flow to work through as we wind down the year.
The worst marketing tactic financial advice that never seems to go away is the call to shovel money out the door at the end of the year— buy lots of stuff to save on taxes they say!
Look, it’s blanket advice driven by tax tunnel vision, and ignores the multi-dimensionality of your business. Strategic spending is one lever that sometimes can be helpful to pull, but I’ll say it’s rarely the first one I reach for in my work.
Instead, I look at the full three-dimensional system and peer into the future as much as we can.
But first off. Let’s celebrate your year. Even if it wasn’t as financially fruitful as you wished, or even if it just absolutely sucked financially, things happened, you’re still here. We’re going to celebrate that.
Celebration underway, here’s the thinkflow:
1. How’s your cash on hand?
In other words, how much money is in the bank?
Divide that number by your average monthly expenses for the past year1. This tells you how many months of operating expenses you have in the bank if all revenue grinds to a halt, which, while extraordinarily unlikely, is a useful waterline.
Notice I’m not starting with profit. Profit is related to cash flow— positive profit grows your cash on hand— but it’s not the same thing.
You can have a shitty-ass year and still have a lot of cash if you came into the year with a cushy bank account. Or you can come into the year with paltry sums and exit more robustly. Or you can scrape by on both fronts.
What I absolutely don’t want you to is look at a flashy Net Profit number, pump your fist in the air, and shovel a big old distribution out the door without looking at anything else.
So…
2. What’s Q1 Look like?
Is new business or revenue clear? Murky? Solid?
Seasonality counts too: maybe January reliably brings a windfall, or maybe it’s always your slowest month.
In other words, what’s your cash flow look like for the next couple of months?
The relative clarity here will tell you something about what you might need to hang on to: more if new business is murky or you’re headed into your slow months, less if you’re solid and sure.
3. What’s the context of next year?
Some areas to check:
Are you going to be growing, maintaining, or contracting? (growth, paradoxically, often requires more reserves.)
Are there an investments on the horizon? Will you be making new hires or expanding expenses? Is there equipment that’s going to need replacing?
Have you accounted for taxes?
How’s your client concentration? Any larger clients that might be wrapping up?
Should you rest? Maybe that cash can pay for a slowbattical…
All of the above boils down to: is there something specific you’ll need more cash for?
Another way to frame context is about potential risk. How much risk might you want to anticipate or buffer? Are there planned road bumps or major changes happening?
More risky circumstances can point to leaving more months of operating expense coverage in the bank.
Cash opens up choice, so if you’re anticipating a lot of unknowns, keeping more cash around will provide more future choices.
Alright, a couple of examples…
Business #1: S-Corp partnership with revenues around 1.3 million.
Cash on hand— they had a robust cushion going into the year, and have about $200k on hand end of year.
Ending year with about 10% “real profit”. That’s baseline— good, but not robust.
They’ve been in the process of switching to S corp taxation, so they’ll need to pay all the payroll taxes for two partner salaries all in one go. Ouch.
They’re still figuring out Q1 new business.
They’re order of ops + thinking might go something like:
Work with their accountant to get a firm payroll tax bill.
That amount will surpass their profit for the year, so any further outflows will be coming from cash reserves.
They’re still working on new business, so they decide to keep a larger cash buffer.
Because of the above they skip any further owner profit distributions for the year.
It may be that with the taxes, these folks end up with lower-than-ideal cash on hand— maybe a month or two when their baseline is three minimum. That’s okay! They can work to replenish that cushion in the new year.
Business #2: single owner LLC, $250K in revenue
Cash on hand— a newer business, they entered the year “paycheck to paycheck”, but have been growing. Have about $40K in the bank, a chunk of which is already set aside for taxes.
Because they invested in hiring a couple team members for the first time, the owner kept their own distributions pretty minimal all year.
Q1 looks strong and they set a solid foundation for growth next year.
This owner, looking at Q1, decides they want to prioritize paying themselves a big distribution before the end of the year to make up for being conservative with their salary. They work out the tax savings they want to keep, a small amount of cushion, and then distribute $18K to themselves before the end of the year. And they make sure to increase they’re payroll distros to themselves moving forward.
Despite what your two-dimensional reports might tell you, profit is not a static number, but rather a piece of a dynamic system of moving parts. It’s definitely important! But it’s also more than the number at the bottom at your profit and loss, and so not the best metric alone for making decisions about care, risk, and the near future. You’ll want to look at that number in context.
And then, if you’re experiencing abundance, consider redistributing some of that wealth?
If expenses ramped up significantly at some point in the year, you may want to use more recent months to calculate your average.