As we inch closer to tax day on April 18th, you may be asking yourself
Where did all the cash go?
Why do I not have adequate cash necessary for my tax obligations that are due on April 18th?
It is important to understand the relationship between Profit, Tax Liability and Cash Flow. Remember that for every dollar we earn in profit some portion is due to the tax agencies for federal and in some cases state taxes.
In his best selling book, “Simple Numbers, Straight Talk, Big Profits!” Greg Crabtree taught us about what he calls the “four forces of cash flow.” The are as follows:
- Paying taxes
- Re-paying debt
- Reaching your core capital (liquidity) target
- Owner distributions
The four forces of cash flow refer to the four items that consume your generated cash flow in order of importance. What does this mean for you the business owner?
Start with your profit. Once you have your profit in dollars, then you have to meet the four forces of cash flow before you the owner can expect to harvest the remainder of the cash in distributions. Here is an example:
Tax (assume 20%) – $200
Debt (assumption 20%) – $200
Capital target – $200
Growth Investments – $200
The mistake some business owners make is harvesting the profit and not setting aside cash for to cover their obligations. Remember it is important to set aside cash from your profits to cover your tax and debt. Then build a healthy level of liquidity, make investments to continue to grow your business, then and only then are you able to harvest the fruits of your labor. Companies that follow these principles build healthy financially stable companies that are successful for the long term.
ACTION – go see your accounting team and ask them to calculate your Four Forces based on the example above.
If you want to discuss this example, want to learn more about how we are helping growth companies “Scale Up” using our scaling up principles including a free copy of our “One Page Strategic Plan” contact me directly at firstname.lastname@example.org or just call. My personal number is 360.901.8742.