How to Prepare a Cash Flow Table

Activity

Activity

In this activity, you are a financial planner

Your clients are Craig and Lisa Robertson. Craig, age 36, and Lisa, age 34, come to see you. They have two children, Dylan, age 7 and Stephen, age 6.

Craig

Craig is a self-employed computer programmer. His assessable income was $150,000 in the 2012/13 financial year. He works from an office a couple of blocks away from his and Lisa’s home. He spends on average $600 per week on rent, electricity and other office expenses. He is able to claim $10,000 for work related travel expenses as he usually travels to his clients’ offices and works from there.

In the 2012/13 financial year he contributed $12,000 to his superannuation fund, and paid $500 in premiums for income protection insurance, $400 for death and total and permanent disablement (TPD) cover, and $200 for a separate trauma insurance policy.

Craig’s superannuation account balance is $80,000.

Lisa

Since Dylan’s birth, Lisa has been working two nights per week as a nurse, earning $450 per week. She looks after Dylan, Stephen and also her older sister, Fiona, who has been diagnosed with terminal cancer. Fiona lives in the same suburb.

Lisa owns Australian shares which she purchased for $25,000. They are currently valued at $30,000 and she receives fully franked dividends of $2100, with imputation credits of $900.

Her superannuation account balance is $50,000.

Lisa made a tax deductible donation of $200 to the Cancer Council last year.

Other

Currently their household expenses average $700 per week. Their credit card debt is $8000, outstanding for the past 12 months (at 17% p.a. interest).

They have adequate insurance for their cars as well as home, contents and private health cover.

The premiums for these insurances total $3000 p.a. The rebate offered for private health cover is taken as a reduced premium. They have no other insurance or investments.

Assets

Craig and Lisa’s jointly owned cash management trust (CMT) account balance is $20,000 and earns 4% p.a. in interest. They hold a joint cheque account with a balance of $5000 for emergency funds. Their house is worth $670,000, with a mortgage of $500,000 and repayments of $2500 per month. Their contents are worth around $60,000. They have two cars valued at $30,000 and $5000 respectively. 

Analysing a client’s cash flow is one of the important elements in understanding a client’s financial position. If conducted properly and accurately, a wealth of information can be obtained which will assist a planner in formulating the right strategy for clients.

Assumptions

In an orderly way it can disclose such things as how income is derived and from where, what expenses are incurred, what the tax position of the client is and, importantly, whether a client is spending more than is being received as income. Conversely, it will reflect how much discretionary savings the client has which could be used for either investment or debt reduction.

A cash flow table is an important tool in understanding the client. There are normally two cash flow exercises to be completed when preparing advice for clients. One is for the client’s present situation that reflects where they are currently, and the second reflects the outcome of changes that the planner has recommended — the future situation.

The future cash flow statement/table reflects the client’s cash flow situation following the implementation of the recommended strategies.

Preparing a cash flow table can be straightforward, provided you follow these four steps: Who, When, What and How? 

Assumptions

• Their cheque account pays no interest.

• As Craig is self-employed, his $12,000 contribution to superannuation is tax deductible.

• Income from shares must include any available imputation credits.

To calculate an imputation credit, the following equation can be used:

Subsequently, the amount of the imputation credit is an offset and subtracted from the total tax.

Step 1: Who?

Who are you preparing the cash flow for?

For example, is it being prepared for one person, two separate non-related people or a couple?

Do those people have company, trust or superannuation structures which they hold assets through?

Each entity (i.e. a person, company, trust or superannuation fund) is taxed separately, so you must initially consider each separately for tax purposes. There may be an opportunity to combine them, at a later stage, for cash flow purposes.

In our case, we are preparing a cash flow table for Craig and Lisa.

Step 2: When?

You will need to identify the period of time for which the cash flow table is being prepared. It might be for a number of weeks, months or years. In the case of Craig and Lisa, it is for a year. It is important to differentiate between a financial year (i.e. 12 months from 1 July to 30 June) and a calendar year

(i.e. 12 months from 1 January to 31 December). A financial year is also the year used for taxation purposes.

So, in Craig and Lisa’s case, we will need information over the 12 months from 1 July 2012 to 30 June 2013.

Step 3: What?

Clients will ask you what they need to provide you with so that you can prepare the cash flow table. You will need the following:

• Tax returns: A good start is your client’s tax returns. These will provide you with enough information to establish their income after tax. Their income after tax is a key starting point, as this amount tells you what the net cash your client has available to spend, save or invest with. The tax returns also show you where income has been earned.

Step 1: Who?

For example, Lisa owns shares and has been paid dividends on these shares. Craig and Lisa have jobs. Craig is self-employed and therefore has income derived from that self-employment. Lisa is an employee so she has received a salary. In addition, some of their expenses may be tax deductible, which would reduce their taxable income and hence the tax payable on their income. You can review tax returns for such deductible expenses. Further, the latest figures should be used to gain the most recent, up-to-date result.

In our case, we need to ask Craig and Lisa for copies of their 2012/2013 tax returns. The 2012/2013 rates and thresholds will be used.

• Bank and credit card statements: Preparing a cash flow means identifying flows of cash. A client’s bank statements show exactly that information. The statements will show cash inflows (e.g. salary, dividends received) and cash outflows (e.g. mortgage payments which are direct debited). Many people use their credit cards to pay for expenses. Reviewing their statements will help identify recurring expenses

(e.g. rates and taxes, electricity bills, insurance deductions) and lifestyle expenses (e.g. restaurant meals, holidays).

Ask Craig and Lisa for copies of their cash management trust, chequebook, and credit card statements. In addition, the chequebook and credit card statements would disclose to whom payments have been made.

• Listing of assets and liabilities: A list of your client’s assets and liabilities and who owns the assets or has the liability can be very useful, not only from a cash flow perspective, but also in understanding your client’s overall financial situation. From this list, you will be able to determine what assets and liabilities have a cash flow impact. Refer to ‘Table A: Assets and liabilities’ 

Step 4: How?

Once the above has been completed, it is quite straightforward to complete a cash flow table. Most people will use a spreadsheet of some sort, or financial planning software. Use whatever is easiest for you and what you are most familiar with, and follow the steps below:

(a) For each person (in our case, Craig and Lisa), calculate his or her income tax liability. Helpful hint: The easiest way to do this is to use the information provided in the tax return. By reviewing the return, you will be able to identify Craig and Lisa’s taxable income (i.e. their assessable income less expenses which can be claimed as a tax deduction). The tax return will also disclose the estimated tax they would have to pay on the taxable income.

(b) Complete the cash flow table. Some of the information from the tax calculation table is also used in the cash flow table, however, the cash flow table only includes income they actually receive and expenses actually paid. It should be noted that some income for tax purposes is not actually received (i.e. franking credits) and some expenses may or may not have actually been incurred (i.e. travel expenses where a specific formula is used). Note: For Craig, it is assumed his travel expenses have been incurred.

(c) Total the income they have received before any tax has been paid.

(d) Total the expenses they have incurred.

(e) Deduct the total expenses from the total of the income received before tax.

(f) Deduct from the total income received before tax, the tax payable from the tax calculation. In this way, taxation is taken into account for cash flow purposes and is treated effectively as an expense.

This will produce a total net cash flow amount ($25,414 combined), which is available for savings or investment.

Further, where there is a significant cash flow and this is not shown in any savings or investments, it may indicate that there may be expenses that have not been identified. This may prompt questions to your client asking what else they do with their money.

HowtoPrepareaCashFlowTable_v2 © Kaplan Education Pty Ltd. All rights reserved.

 Other assets

Investment property

Now that you have viewed the tutorial, your task is to prepare a cash flow table for Craig and Lisa for the financial year ended 30 June 2013.

Once again, here are the assumptions:

Their cheque account pays no interest.

As Craig is self-employed, his $12,000 contribution to superannuation is fully tax deductible.

Income from shares must include any available imputation credits. To calculate an imputation credit the following equation can be used:

 
Subsequently, the amount of the imputation credit is then subtracted from the total tax.

Try the task now — we suggest you use Microsoft Excel Workbook format (xls).

Compare your cash flow table to the example on the following pages.

This activity demonstrates the tax and cash flow tables used in Kaplan courses.

Income, tax and cash flow