Cash Flow Compartmentalization Guide

Every successful business owner, entrepreneur and professional knows where their cash is going, how to manage it and how to make it available when they need it.

In order to accomplish that, you need to use a cash flow compartmentalization spreadsheet to keep track of gross income, net income, retirement savings, and taxes. This tracking is done on an Excel spreadsheet and it breaks down where all your money should go so you can track it and use it for your benefit. In short it gives you financial choices simply and easily.

Before we begin, make sure to download the free spreadsheet. Download it here.

The Spreadsheet Process

Each week when you cycle, simply enter one piece of information into the spreadsheet in line one – “Gross Income for Your Business”. Once entered, the spreadsheet takes care of the rest automatically.

Before you start you’ll need to determine the following numbers:

  • Projected weekly business expenses.
  • Your personal wages before income taxes.
  • Contributions to your savings or retirement.

The spreadsheet will automatically break out:

  1. Gross wages including taxes (This is what you will live on).
  2. Projected business expenses (This is what you spent last year in business expenses).
  3. Contributions to savings or retirement.
  4. Surplus Pre-Tax balance (gross wages minus items 2) and 3)
  5. Expected taxes at 40% of Pre-Tax balance
  6. Remaining balance left in business or personal account.

Next, set up four bank accounts at the same bank. This is necessary for organization and understanding how much money you really have to work with. This allows you to transfer from one account to the other with ease.

The four accounts are:

  1. Main Business Account: All of your business’ income should be deposited into your business account. All funds are transferred from this account.
  2. Personal Account: You will determine exactly how much wage you will take weekly, monthly, annually. This is a preset amount that you will pay yourself first and live on. These funds include taxes.   Consider using a payroll service to pay your taxes and transfer the money you will live on into this personal account.

    (Note: You must calculate your business expenses from the previous year and add any new expenses you think you may have. If you do not have a previous year, project them by preparing a budget. Business expenses come out of the main business account as needed and are deductible)

  3. Retirement/Savings Account: Remove savings, pension or non-qualified fringe benefit contributions from the main business account and transfer into this account for retirement contributions.
  4. Tax Holding Account: Set aside taxes on the surplus funds at 40% of the total surplus. Each week as you fill out the spreadsheet, this number will be calculated for you.

Whatever is leftover after transferring funds from the Main Business Account to the other three accounts is your net surplus.  You will use this as discretionary income for additional business or personal expenses.

It is critical that you maintain this spreadsheet ongoingly in order for this tracking method to work properly!. (You must transfer the money that is calculated on the spreadsheet each week into each account). Without breaking a sweat, you can accomplish this in 20-30 minutes once a week (if set up properly).

By transferring the appropriate amounts of cash from your main business account into the other three accounts, you know at a glance approximately how much tax you will owe at the end of the year, how much you have saved for retirement and, perhaps most importantly,  you’ve made sure to pay yourself first. This simple practice can revolutionize the way you run your business and take you to a new level of success.

If you want to contribute to a savings account and a retirement account as separate accounts, adjust the spreadsheet and add another category.