Category Archives: Accounting

CASH FLOW: THE PULSE OF YOUR SMALL BUSINESS

cashflowCash flow is the lifeblood of any small business. Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, then you’re out of business!

What is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers, but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.

Cash Flow versus Profit

While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

Analyzing your Cash Flow

The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.

The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the more important components to examine are:

  • Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
  • Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
  • Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
  • Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
  • Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable at some point in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Need assistance? We can help you analyze and manage your cash flow more effectively and make sure your business has adequate funds to cover day-to-day expenses.

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FIVE BASIC TAX TIPS FOR NEW BUSINESSES

business-owner-stockxpertcom_id17260461_jpg_9d244c0f32209ba041e058fccd912e101If you start a business, one key to success is to know about your Federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure.  As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company (LLC). You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method.  An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

If you would like to start a new business or have questions about starting up a new business, please call our office today. We specialize in helping people just like you who want to enjoy the freedom and flexibility of owning their own businesses.

Source: IRS Summertime Tax Tip 2014-09

HAVE A BUDGET FOR YOUR BUSINESS — AND USE IT

operatingbudgetAn annual operating budget captures your firm’s expected revenues and expenses over a 12-month annual period. You can use this year’s financial data as a starting point in putting together a budget for 2015. Then update those figures by getting numbers in advance for as many of your costs as possible and by forecasting your sales. Predicting how the numbers would play out under different assumptions — best case, worst case, and average — can help you to identify potential problems and give you the opportunity to adjust your planning if necessary. Although the word “budget” implies a lack of flexibility because you’re trying to control costs, a budget should be rigid and inflexible. As you monitor your actual results against your budget during the year, you may find that you have to adapt your plan to take advantage of new opportunities or changing economic conditions. If you need help in setting up a budget for your business, please give our office a call today.

ACCOUNTING CONCEPTS THAT EVERY BUSINESS OWNER SHOULD KNOW

confusedYou may have just opened your business, but your business is D.O.A. without an understanding of accounting and recordkeeping requirements. Here’s a primer of twenty accounting concepts that every business owner must know: 

#1: Account Types

There are six Account types that are used in every business:

Asset – An item that your company owns.  Current Assets include those items that can be converted to cash within one year, such as Checking and Savings Accounts, Inventory, and Accounts Receivable.  Fixed Assets include those items that are not expected to be converted to cash during one year of normal business operations, such as Loans Receivable, Machinery, Equipment, and Furniture and Fixtures.

Liability – A debt that your company owes.  Current Liabilities include Accounts Payable, Credit Card Liabilities, Sales Tax Payable, and Payroll Taxes Payable.  Long Term Liabilities include Loans Payable, Notes Payable, and Mortgage Payable.

Equity (or Capital) – The net worth of your company.  Equity comes from two sources: money invested by owners or shareholders, and profits and losses earned by your business.

Revenue– Money that comes into the company and earned from sales or services.

Cost of Goods Sold – The cost of goods and materials held in inventory and then sold.

Expense – Money that is being spent by the company on business-related items.

#2: Financial Statements

There are two Financial Statements that are important to every business.

Balance Sheet – A report that summarizes the financial position of your company.  It shows the value of your company’s assets, liabilities, and equity as of a specific day.  It is called a Balance Sheet, because the value of the Assets is always exactly equal to the combined value of the Liabilities and Equity.

Profit and Loss Report – A report that summarizes your income and expenses for the month,  so that you can tell whether you’re operating at a profit or a loss.  The report shows subtotals for each Income or Expense account that has been set up.  The last (bottom) line shows your Net Income or Net Loss for the month.

#3: Petty Cash

A signed and approved petty cash voucher is always needed in order to reimburse the Petty Cash Fund. When a check is written to reimburse the Petty Cash Fund, the account number(s) to use for the expense account distribution should be all the expense account numbers and amounts based on the petty cash receipts.   Ex.-“Office Expense” $49.16; “Auto Expenses” $14.75; “Meals”  $36.09.  These three individual expense accounts should be listed as the expense accounts, and not Petty Cash.

#4: NSF, Credit Card, and Misc. Fees

These fees are often overlooked and are not subtracted from the company’s checkbook balance.  When they aren’t subtracted, the checkbook balance is incorrect and you may run the risk of overdrawing your account by writing checks and not having sufficient funds to cover them.  These fees should be recorded immediately as deductions in the bank account register.

#5: Purchase of Machinery, Equipment, and Furniture

Those specific items that will be used by the business for over one year should be coded to the specific asset account entitled “Machinery,”  “Office Equipment,”  or “Furniture and Fixtures.”  They should not be coded to the expense accounts entitled “Office Expense,”  “Repairs and Maintenance,” or  “Shop Supplies” etc.  The bottom-line invoice amount (which includes sales tax and possible delivery charges) should be entered.

#6: Year-End Bonuses

Payroll taxes such as Federal Withholding, Social Security, and Medicare must be withheld from the gross amount of the bonuses.  If you’re in doubt as to what should be the gross amount for, let’s say, a $100 net bonus check, please call us before you write the check.  When we discover that you didn’t withhold payroll taxes from a bonus check, we’ll have to calculate the taxes for you.  You’ll then end up paying the IRS both the employer’s and employee’s portion of Social Security and Medicare tax, which can be avoided.

#7: Loan Payments

When you write a check for a loan or note, the amount paid must be distributed to two accounts—for the loan principal (a liability account) and for the loan interest (an expense account).  The breakdown for these two amounts should be listed on a separate amortization schedule.  If you don’t have this schedule, please call the lender or your CPA. The loan interest is deductible as an expense on your Profit & Loss statement but the loan principal amount is not deductible on your Profit & Loss statement.

 #8: Payroll Tax Payments

When coding the check written for the monthly Form 941 payroll tax deposit, either the account “Payroll Tax Deposits” or else “Payroll Tax Liability” should be used.  Both of these accounts are liability accounts. Payments should never be coded to “Payroll Tax Expense,” an expense account.  (For QuickBooks users: Use the “Pay Payroll Liabilities” feature).

 #9: Credit Card Payments

When coding the check written for the credit card payments, individual expense accounts should be used for the specific items charged – ex. Office Expense, Meals & Entertainment, Repairs & Maintenance, etc.  Personal items charged should always be coded to the account “Distributions” (S Corporation)  or  “Shareholder Loan” (C Corporation).

 #10: Sales Tax Payments

When coding the check for the payment of sales tax liability to the state, the account number for the account “Sales Tax Payable,” a liability account, should be used.  Do not code these payments to “Sales Tax Expense,” an expense account.  (For QuickBooks users: Use the “Pay Sales Tax” feature).

 #11: Checks Written For Personal Expenses

Since these expenses are not business expenses, business expense accounts should never be used.  Instead, these personal expenses should always be coded to the account “Distributions” (if your company is an S Corporation)  or “Shareholder Loan” (C Corporation).

#12: Retained Earnings

Never code any Checks or Deposits to the “Retained Earnings” account.  This account should never be used in a transaction, unless your CPA gives you end-of-the-year journal entries to make that will increase or decrease the “Retained Earnings” account.

 #13: Miscellaneous Expenses

Don’t code any check amounts to “Miscellaneous Expense.”  This is a “hot” item for potential IRS audit.  You may need to create a new account for the specific item.  If you’re unsure of where to code this item, please call your CPA.  It’s always better to be “too specific” than to be “too general.”

 #14: Consistency in Recording Expenses

Always be consistent when coding a specific expense amount that could be considered to be ambiguous.  For example, when you code a check to pay for auto insurance, be consistent in either using the “Auto Expense” account or else the “Insurance” account.  The choice is up to you, but it’s important that you continue to use whatever account that you choose for all other subsequent checks to pay your auto insurance.  Another example where you should use consistency is in recording fees for printing checks.  Be consistent in coding the check to either “Bank Charges” or else “Office Expense.”

 #15: Recording Deposits

When deposits are recorded, be sure to only code receipts from customers as Sales Income.  Any other amounts received should be coded to their specific individual accounts.  For example, amounts put into the business from shareholders should be coded to “Shareholder Loan” and not to “Sales.”  Amounts received as refunds, rebates, loan repayments, etc. should be coded specifically to their specific account.

#16: Recording NSF Checks

If a customer’s check bounces in the current accounting month, then void the customer’s check payment.  However, if the customer’s check bounces in an accounting period following the accounting period that it was recorded as a payment, these steps should be followed: (1) Record the bank charge for the NSF check in the checking account register, (2) Record the NSF check in the checking account register.  Enter the customer’s name as the Payee, the amount of the NSF check in the payment column, and either Accounts Receivable (accrual basis) as the Account to be debited.

 #17: Recording Bad Debts

If a customer’s account becomes uncollectible in the current accounting month and the original sale was recorded in a prior accounting month, a credit memo should be prepared for the specific customer to reverse the customer’s invoice(s).

#18: Non-Deductible Expenses

There are a few business expenses that aren’t deductible when preparing your corporation’s income tax return at the end of the year.  These expenses should be tracked separately and include: (1) Penalties paid to the IRS (not Interest, which is deductible). (2) Business gifts over $25 per person per year.  These non-deductible expenses need to coded to an expense account called “Non-Deductible Expenses” and should be clearly defined as to what they are for.

#19: Vendor Payments

All payments to vendors for services for $600 or more must be tracked because a 1099 form must be given to them in January of the following year.  Be sure to separate amounts paid for services rendered as opposed to amounts paid for reimbursements, materials, or supplies.

#20: Voiding Checks

All checks should be entered in the account register—whether they’ve been used or unused.  Be sure that the monthly numerical sequence of checks is accounted for by including all voided checks and checks held but not yet released.  These checks should be recorded with zero amounts until they are released.

If you’re still confused, don’t panic — call our office today at (727) 391-7373.  We’re only a phone call away.