Cash Flow Analysis
Investigation and analysis of cash flow is an area where we can provide assistance to our clients and their attorneys. This can be structured as a cash flow analysis of a spouse which is used to determine appropriate child or spousal support. Also, a business cash flow analysis is critical in developing an accurate valuation of the subject business.
In marital dissolutions cases, a key component of our work is to develop a report of gross controllable cash flow for one or both spouses. The report generally includes all elements of income available for support. This could include the following reported income:
- Interest and dividend income
- Income from rental properties or partnerships
- Income from businesses wholly or partially owned by the spouse
In addition to including the reported amounts of income per the tax returns and financial statements, we also many times investigate other elements of a cash flow available to the spouse. If the spouse owns a closely-held business, an important step in our investigation is an analysis of perquisites paid for by the business. Some common perquisites are personal expenses the business pays for related to automobile costs, travel expenses, entertainment, accounting or legal costs not related to the business such as personal tax
return preparation or divorce-related fees.
In some cases there may be an indication of unreported income or hidden assets. In these cases, we may do a lifestyle analysis. This is an analysis which compares reported income to the spending and savings patterns of the person earning the income. Another method of investigation is a net worth analysis, reconciling the increase in overall net worth over a specific period of time with the income available for savings during that time.
Cash flow analysis is also critical to an accurate valuation of a business. In the case of a closely-held business, there are many ways for the business owner to impact the reported income or cash flow. They can pay personal expenses through the business; choose to not report all of the income or cash received; or pay themselves a salary far below or well above the market pay for their position, or pay friends or family members that do not work in the business. Through a thorough investigation and analysis, and based on adequate documentation we make adjustments to "normalize" the earnings from the business. These normalized earnings are then used in our calculations of value under various methodologies.