Reading the Story of a Financial Statement


This post is in: Business
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10-27-2010-1

What is your personal cash flow pattern? Does income flow in and out, never using debt or building assets? If so, you might have the cash flow pattern of the poor.

If you don’t build assets, but build debt, you’re working way harder then you should have to. You’ve got the cash flow pattern of the middle class. Even though the middle class has the ability to get loans, the loans make it even harder for them, never building assets that put money in their pockets.

If you build true assets that create passive income, then you have the cash flow pattern of the rich.

But, what about your business? It has a cash flow pattern too.
There are some businesses that are nothing more than one person’s knowledge, skills and hard work, all wrapped up in a business structure. It’s not really a business, it’s a job. But it’s a job where you “work for yourself.”

At the end of the day, though, you haven’t built any assets, so you have a cash flow business habit just like the cash flow pattern of the poor above. You aren’t building assets or liabilities. Money comes in and goes out.

There are some types of professionals who really are nothing more than money making machines. You could make $300,000 or more per year with this type of business model. Will you be rich? Maybe. If you can take that money you make and invest it in assets that create income. Otherwise, if you spend $299,999 of the $300,000, then you have a cash flow pattern just like the poor.

There are some businesses that don’t build assets, but are able to get loans based on the income stream they have from their businesses. This could come from factoring accounts receivable or by getting loans on depreciating property for the business. Just like with you personally, your business can have good debt or bad debt.

The good debt within a business allows you to expand your business to new markets or products. It allows you to invest in assets that bring the business more money. The bad debt goes to buy things that might be necessary for the business (like a new computer) but are really a depreciating asset. They don’t bring in cash for the business, just create a further liability if you finance them.

And there is a cash flow pattern for the rich business. The rich business has maximized its assets to create more income. Often the business will create intangible property such as Intellectual Property (trademarks, patents and systems) or databases that are held in other entities. The separation is generally done for asset protection purposes. But it’s still part of the same general business when it comes to looking at what your business’s cash flow pattern is.

What Is Your Business’s Cash Flow Habit?

  • Pay the owner first
  • Build depreciable “assets”
  • Create multiple streams of income

n Part 2 of Understanding Financial Statements (available as part of the USTaxAid Coaching program), we go over these concepts and patterns in more detail, plus give you the opportunity to review two publicly traded companies with your new found information.


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