How Cash Flow & Budgeting Analysis Relate to Employee Costs

Is your business spending too much on payroll? Could you afford to spend more if you wanted to expand? What spending areas should you focus on if you need to make budget cuts? Cash flow and budget analysis helps answer these questions and more. 

In very general terms, cash flow and budget analysis is a method of tracking the way money comes into, moves through and leaves your organization. This kind of deep analysis helps business leaders get a 360-degree view of the way that real spending is aligned with budgetary goals. Tracking cash flow and digging into what your cash flow statements tell you is like giving your business a financial checkup. You should be able to see some warning signs in the analysis if any worrying trends are developing so you can make adjustments that keep your cash flow healthy. 

Cash flow and budget analysis can guide your decision making across many parts of your organization, but it can be especially helpful in relation to hiring, downsizing and payroll issues. 

Specifically, there are several key ways that this kind of analysis can help an organization optimize its employee-related costs. 

 Cash flow and budget analysis can help you balance staffing levels. 

The last few years have clearly demonstrated how devastating staffing challenges can be to a business’s ability to function. We have all seen local restaurants and other businesses that have cut their hours, slashed their services or closed altogether because of staffing shortages. Your organization can not operate at peak efficiency when one person is trying to do the job of two or three people at once. You also can not afford to overspend on payroll by paying two people to work when you really only need one person to get the job done.

A deep analysis of your cash flow can help your organization fine-tune its staffing strategies. It could provide useful clarity about how many employees you need working at any given time to maximize productivity without exceeding your payroll budget. 

Cash flow and budget analysis helps a new business establish some financial baselines. 

Planning a budget for a new or growing business requires some educated guessing. It is hard to predict your real operating expenses and payroll costs before you actually start doing business. A cash flow and budget analysis for a new organization can be a reality check. Is your business plan working? Are you meeting your budgetary goals? What do the projections tell you about next year’s growth? 

Cash flow and budget analysis also tell you how much of your operating budget is going to employee expenses (primarily payroll). Maybe through studying the data you realize you can afford to spend a little more on salaries and benefits than you had originally budgeted. Or, you might realize you are going to have to pull back on pay raises and freeze hiring because the budget is way overextended. 

Whether the news is good or bad, young organizations can not afford to neglect cash flow and budget analysis. Acting on the information revealed by this kind of research can help a burgeoning business get on track with its financial goals so it can survive those first few bumpy years and eventually flourish.  

Cash flow and budget analysis can identify spending trends and inefficiencies. 

Because bookkeeping software has made it easy for businesses to track a huge amount of data, cash flow and budget analysis can reveal big trends and dig into the fine details. Employers may be able to look at things like which departments, shifts or even specific employees are contributing the most to profits and providing the best ROI on their payroll expenses. This kind of analysis can also help employers make informed, data-based decisions about letting go of employees or eliminating entire jobs because they are not generating enough results. Cash flow analysis may even uncover employee theft or other signs of fraud. 

Cash flow and budget analysis help you strategize for future growth. Ultimately, analyzing an organization’s recent financial performance can help leaders improve its future financial performance in many ways. Looking specifically through the lens of employee growth, this scrutiny might tell you that you have enough of a budget surplus to invest in new training and equipment, raise salaries to attract/retain high-quality employees or create new positions. 

On the other hand, an in-depth look at your current cash flow health might show that you need to pull back on spending or risk being unable to cover your basic financial obligations. Knowledge is power. Knowing where your weaknesses exist allows you to strategize with leadership, CPAs and other advisors about creative ways to rework your budget, or even overhaul your current processes to operate in a more cost-efficient way. 

L&H’s business services team provides bookkeeping and advisory services that help privately-held business owners maintain healthy cash flow, navigate through budgeting challenges and afford the employees they need to meet their financial goals. How can cash flow and budget analysis benefit your business? Contact me today to learn more. 

Steven J. Haynes, MBA, is an administrative partner at Livingston & Haynes. Steve’s firm, Emerging Business Partners (EBPI), became an affiliate of L&H in 2007. Steve specializes in bookkeeping, payroll, and business advisory services, including tax, M&A, and funding and equity transactions, for technology, entrepreneurial, and emerging growth firms.