Success Stories

Jason
Age: 43

Objective

Organize cash flows in a manner that supports personal and business needs.

The Situation

Jason's garden products company was successful by most any measure.  Revenues and profits were growing, and even though he was reinvesting into new products & expansion initiatives, cash was still accumulating in his business accounts.  So why did Jason feel like he was living paycheck to paycheck?  He had very little cash in his household bank accounts, felt behind on his retirement and college savings, and even carried a balance on his credit cards.  Jason had plenty of cash sitting in the business and was comfortable paying himself more.  He needed a plan for taking it out in a tax conscious manner.

The Strategy

Jason's company was organized as an S-Corporation, which means that Jason takes a w-2 salary from the company in addition to profit distributions.  Even though the business was making over half a million dollars each year, Jason was only paying himself $10,000 per month.  This was barely enough to cover his family's monthly expenses, leading to his cash flow problems.

To start, we analyzed Jason's family's monthly spending needs by building a household profit and loss statement.  We reviewed all the cash coming into and out of their household over the last three months, and advised them to target an emergency fund of $75,000 in cash on hand at all times.  We then coordinated with Jason's CPA, and agreed that he should increase his salary to satisfy IRS reasonable compensation rules.  It also was enough to cover their monthly household needs after taxes.

Then we discussed Jason's growth initiatives in more detail and reviewed the income statement and statement of cash flows for Jason's business.  We agreed that three months' worth of operating expenses was a sufficient level of working capital to leave in the business, and added to that the total cost of upcoming equipment purchases needed for his expansion.

After setting aside business cash to cover three months' of operating expenses and his upcoming purchases, Jason still had more cash in the business than he needed.  In order to avoid payroll taxes, Jason decided to take the money out as a profit distribution.  He transferred the cash to his household bank account, and had enough to pay off his credit cards, fund his $75,000 emergency fund, and cut the balance of his HELOC in half.

The Results

Not only was Jason able to put an emergency fund together and knock down his debts, he now has more than enough cash coming into his household on a monthly basis.  He and his wise are able to cover their expenses and contribute to retirement accounts and each of their kids' 529 college savings plans.

He also has a framework for handling business cash going forward.  On top of the w-2 compensation he pays himself each month, he now has confidence surrounding how much cash the business needs to operate and grow.  On a quarterly basis he reviews the business bank account balances and takes out anything in excess of the business's cash needs.  Each time this happens he and his wife decide whether to contribute more to their investments, pad the kids' college savings accounts, or pay down debt faster.