Cash Flow - The Pulse of Your Business
Many small business owners do not fully understand their cash flow statement. This is surprising, given that all businesses essentially run on cash, and cash flow is the lifeblood of your 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! That's hard to swallow, but 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. But if you fail to have enough cash to pay your suppliers, creditors, or employees, 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. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, 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.
Cash Flow Versus Profit
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.
Theoretically, 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.
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:
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.
Planning For Retirement: Withdrawals
Are you thinking of retiring soon, or changing jobs? You may face a major financial decision: what to do about the funds in your retirement plan.
Take a Partial Withdrawal
Partial withdrawals are withdrawals that aren't rollovers, annuities, or lump sums. Because they are partial, the amount not withdrawn continues its tax shelter (see below).
A partial withdrawal will usually leave open the option for other types of withdrawal (annuity, lump sum, rollover) of the balance left in the plan.
Tax Planning. A partial withdrawal is usually taxable and can be subject to the penalty tax on withdrawals before age 59-1/2 except under certain situations (see below) and when the distribution consists of after-tax contributions, such as nondeductible IRA contributions.
Exceptions for early distributions from IRAs and other qualified retirement plans include direct rollovers to a new retirement account, you were permanently or totally disabled, you were unemployed and paid for health insurance premiums, you paid for college expenses for yourself or a dependent, you bought a house (certain criteria must be met), or you paid for medical expenses exceeding 7.5 percent of your adjusted gross income. In addition, there are several less common situations where you might be exempt from paying taxes and early withdrawal penalties. Please call us if you would like more information.
Preserving the Tax Shelter. Your funds grow sheltered from tax while they are in the retirement plan. This means that the longer you can prolong the distribution - or the smaller the amount you must withdraw - the more your assets grow. Some people choose to defer withdrawals for as long as the law allows to maximize assets and shelter them for the next generation.
Withdrawal Before You Reach Age 70-1/2
Until you reach 70-1/2, you do not need to take money out of your retirement account - unless your employer's plan requires it. In fact, there will usually be a 10% early-withdrawal penalty if you make withdrawals before age 59 1/2. This is on top of the regular income tax you owe - at any age - on amounts you withdraw (though there's no tax on after-tax contributions you made, as we discussed above).
Once You Reach Age 70-1/2
Once you hit 70-1/2, withdrawals must begin. Technically they can be postponed until April 1 of the year following the year you reach 70-1/2 - say April 1, 2012 if you reach 70-1/2 in 2011. But waiting until April 1 means you must withdraw for two years - 2011 and 2012 - in 2012. To avoid this income bunching and a possible higher marginal tax rate, we may suggest withdrawing in the year you reach 70-1/2. Call us to evaluate your situation.
The rules allow you to spread your withdrawals over a period substantially longer than your life expectancy. Under these rules, the taxpayer (say, an IRA owner) first determines how much he's saved as of the end of the preceding year. Then he consults a (unisex) IRS table to find the number for his age. The number corresponds to how long he may spread out the withdrawals. The owner then divides that number into the retirement asset total. The result is the minimum amount he must withdraw for the year.
The number in the IRS table assumes distribution over a period based on your life expectancy, plus that of a beneficiary 10 years younger than you. If your designated beneficiary is a spouse more than 10 years younger than you, his or her actual life expectancy is used to figure the withdrawal period during your lifetime.
Contact us now if you'd like assistance figuring out how much your withdrawal should be, because getting those numbers right can make a big difference in the quality of your retirement.
Credit Reports: What You Should Know
How do lenders determine who is approved for a credit card, mortgage, or car loan? Why are some individuals flooded with credit card offers while others get turned down routinely?
Because creditors keep their evaluation standards secret, it is difficult to know just how to improve your credit rating. It is important, however, to understand the factors and to review your credit report periodically for any irregularities, omissions, or errors. Reviewing your credit report annually can help you protect your credit rating from fraud and ensure its accuracy.
Credit Evaluation Factors
Many factors determine your credit. Here are some of the major factors considered:
These factors may be used, and weighted, in determining credit decisions. Credit reports contain much of this information.
Obtaining Your Credit Reports
Credit reports are records of consumers' bill-paying habits. Credit reports are also called credit records, credit files, and credit histories and are collected, stored, and sold by three credit bureaus, Experian, Equifax, and TransUnion.
Recent changes to the Fair Credit Reporting Act (FCRA) require that each of the three credit bureaus provide you with a free copy of your credit report, at your request, every 12 months.
If you have been denied credit or believe you've been denied employment or insurance because of your credit report, you can request that the credit bureau involved provide you with a free copy of your credit report - but you must request it within 60 days of receiving the notification.
Disputing Errors in Your Credit File
The Fair Credit Reporting Act (FCRA) protects consumers in the case of inaccurate or incomplete information in credit files. The FCRA requires credit bureaus to investigate and correct any errors in your file.
Be aware that credit bureaus are not obligated to include all of your credit accounts in your report. If, for example, the credit union that holds your credit card account is not a paying subscriber of the credit bureau, the bureau is not obligated to add that reference to your file. Some may do so, however, for a small fee.
Fair Credit Reporting Act (FCRA)
This federal law was passed in 1970 to give consumers easier access to, and more information about, their credit files. The FCRA gives you the right to find out the information in your credit file, to dispute information you believe inaccurate or incomplete, and to find out who has seen your credit report in the past six months.
Understanding Your Credit Report
Credit reports contain symbols and codes that are abstract to the average consumer. Every credit bureau report also includes a key that explains each code. Some of these keys decipher the information, but others just cause more confusion.
Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor.
If the report includes accounts that you do not believe are yours, it is extremely important to find out why they are listed on your report. It is possible they are the accounts of a relative or someone with a name similar to yours. Less likely, but more importantly, someone may have used your credit information to apply for credit in your name. This type of fraud can cause a great deal of damage to your credit report, so investigate the unknown account as thoroughly as possible.
We recommend an annual review of your credit report. It is vital that you understand every piece of information on your credit report so that you can identify possible errors or omissions.
If you need help obtaining your credit reports or need assistance in understanding what your credit report means, give us a call.
Paying Off Debt the Smart Way
Being in debt isn't necessarily a terrible thing. Between mortgages, car loans, credit cards, and student loans - most people are in debt. Being debt-free is a great goal, but you should focus on the management of debt, not just getting rid of it. It's likely to be there for most of your life - and, handled wisely, it won't be an albatross around your neck.
You don't need to shell out your hard-earned money for exorbitant interest rates, or always feel like you're on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay it off faster.
Know Where You Are
First, assess the depth of your debt. Write it down, using pencil and paper, a spreadsheet like Microsoft Excel, or a bookkeeping program like Quicken. Include every financial situation where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.
Record the day the debt began and when it will end (if possible), the interest rate you're paying, and what your payments typically are. Add it all up, painful as that might be. Try not to be discouraged! Remember, you're going to break this down into manageable chunks while finding extra money to help pay it down.
Identify High-Cost Debt
Yes, some debts are more expensive than others. Unless you're getting payday loans (which you shouldn't be), the worst offenders are probably your credit cards. Here's how to deal with them.
Save, Save, Save
Do whatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.
Do Away with Unnecessary Items to Reduce Debt Load
Do you really need the 800-channel cable option or that dish on your roof? You'll be surprised at what you don't miss. How about magazine subscriptions? They're not terribly expensive, but every penny counts. It's nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.
Never, Ever Miss a Payment
Not only are you retiring debt, but you're also building a stellar credit rating. If you ever move or buy another car, you'll want to get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.
Do Not Increase Debt Load
If you don't have the cash for it, you probably don't need it. You'll feel better about what you do have if you know it's owned free and clear.
Shop Wisely, and Use the Savings to Pay Down Your Debt
If your family is large enough to warrant it, invest $30 or $40 and join a store like Sam's or Costco. And use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride. Use coupons religiously. Calculate the money you're saving and slap it on your debt.
Each of these steps, taken alone, probably doesn't seem like much. But if you adopt as many as you can, you'll watch your debt decrease every month.
Protect Your Business With The Right Insurance
Starting a business is expensive and the capital that you've poured into your company can disappear in an instant if a major weather event damages your offices or one of your products injures someone.
Having the right kind of insurance is critical to your business and multiple insurance policies should be in place before you even open your doors for business. And, they should be reviewed every year or when a business change occurs such as stocking new products or moving to a new location.
Commercial Business Insurance
Commercial Property Insurance policies are either all-inclusive or risk specific and protect your office and its contents from damage caused by natural disasters, fires, or vandalism.
Product Liability Insurance is necessary if you manufacture or sell products. Product Liability Insurance safeguards you if a product defect causes injury to someone.
For protection against lawsuits related to negligence claims, you need to consider both General Liability Insurance and Professional Liability Insurance as well.
Other types of insurance your business might need include:
Workers' Compensation Insurance (administered by individual states) and Unemployment Insurance (under certain conditions) are mandatory in the United States. Some states require employers to provide other types of insurance. For example, if any of your employees are located in California, Hawaii, New Jersey, New York, Puerto Rico, or Rhode Island you will be required to provide Disability Insurance. Disability Insurance is a benefit provided to employees who are unable to work because of illness or injury.
Employers are not required to provide Life, Medical, and Dental Insurance for employees.
Don't under-insure, but don't over-insure either.
Your insurance company will be your ally if you encounter legal problems because of an accident or injury that happens to someone on your property, to an employee doing business for you, or if a service you provide causes harm to someone.
Avoid lawsuits by making sure you have the right insurance for your business. If you need help figuring out which insurance is right for you, then give us a call now.
Tax Benefits for Job Seekers
Some folks - especially these days - are polishing their resumes and attending career fairs in search of employment. If you are searching for a job this summer, you may be able to deduct some of those expenses on your tax return.
Here are six things you need to know about deducting costs related to your job search.
If you'd like more information about deducting expenses related to your job search, let us know. We'll guide you through the process.
What to Do If You Haven't Filed Your 2010 Return
The failure to file a federal tax return can be costly - whether you end up owing more or missing out on a refund.
There are several reasons taxpayers don't file their taxes. Perhaps they didn't know they were required to file. Maybe they just kept putting it off and simply forgot.
Whatever the reason, it's best to file the return as soon as possible. If you need help, even with a late return, we are ready to assist you.
Here are some things to consider:
Whether you must file a tax return depends on a number of factors, including your filing status, age, and gross income.
Still need to file a tax return for 2010? Call us today. We can help you file your return and avoid additional fines and penalties.
Basic Hints to Help New Small Businesses
Folks starting a small business are often challenged by their new tax filing requirements. It can be overwhelming to learn about federal tax responsibilities.
The following is a list of basic tips to avoid potential problems:
Starting a new business? Give us a call today. As always, we're here to help sort out your tax responsibilities.
Seven Tax Tips for Students with a Summer Job
Are you a student with a summer job? Here are seven things you should know about the income you earn during the summer months.
A summer work schedule is sometimes a patchwork of odd jobs - which makes for confusion come tax time. Contact us if you have any questions at all about income your child earned this summer season.
Using the Add/Edit Multiple List Entries Feature
Data entry and modifications in QuickBooks can be tedious. Beginning with QuickBooks 2010 Pro Edition and above, that job got a lot easier. The Add/Edit Multiple List Entries tool does just what its name implies: It lets you add entries to your lists of customers, vendors, services, inventory parts, and non-inventory parts. It also makes changing one or several of them quick and easy.
Using this feature, you can:
There are myriad applications for this tool. You could use it, for example, when you're changing Preferred Vendors for a group of items and you don't want to have to edit each individual item record. Or when the area code for select customers or vendors has changed. You could use it if you're adding an inventory item that's just slightly different from another, or when your accountant tells you to change the name of an account.
Building the perfect view
To get started, click Lists | Add/Edit Multiple List Entries. In the screen that opens, click the arrow next to the List box and select the type of data you want to see, like Customers. Then select the group that you want displayed by dropping the View list down. Click the Customize Columns button. This window opens:
Figure 1: Make sure your columns are correct and in the right order.
The list on the left represents all possible column labels. To make the list on the right reflect what you want to see in your table, highlight the correct item and use the Add or Remove buttons and the Move Up or Move Down buttons. When you're satisfied, click OK. The table will change to display those columns in that order.
TIP: You may have a lot of empty space between columns. To close those gaps, put your cursor on the faint vertical line that separates two column names. A cross-like symbol will appear. Drag it left or right until the columns are positioned well.
Let's say that a customer commissions a new job. Since so much information will remain the same as in previous jobs, you can duplicate her record. Highlight the last entry in her list of jobs and right-click. Select Duplicate Row. The new entry will contain her default information, except the name will change to DUP [NAME OF PREVIOUS JOB]. Change that phrase to the name of the new job and click Save Changes if you're done.
Figure 2: It's easy to duplicate an entry's information.
You may occasionally want to make the same change to a subset of records. Say a city's zip code changed and you want to find the customers affected. You'd open the Customers list, click on the View arrow and select Custom Filter. Then:
Figure 3: You can search for a group of entries that share a common characteristic.
Figure 4: The Copy Down command changes all entries in a column to match the top one.
When you select Copy Down, all of the entries duplicate the first one in the list.
Anything you change in these views, as long as you click Save Changes, will be reflected throughout QuickBooks, wherever that record appears. If you've made an error, like using a dollar sign, you'll get a message telling you to fix it.
You can use Add/Edit Multiple List Entries in other ways. For example, it's a good way to see how thorough your recordkeeping is. Take a look at your lists occasionally to spot missing data. Or say you were at a trade show and signed up new customers, but you didn't have QuickBooks on your laptop so you entered them in Excel. Once you've made sure that your column names and order in Excel match those displayed in Add/Edit Multiple List Entries, you can just copy and paste the new customers in.
This feature is easy to use, but be cautious. We can help with complex modifications. Add/Edit Multiple List Entries is one of the ten best features QuickBooks has incorporated in recent years. It's an easy way to get a birds' eye view of your lists, and a great time-saver.
Tax Due Dates for August 2011
Copyright © 2019 All materials contained in this document are protected by U.S. and international copyright laws. All other trade names, trademarks, registered trademarks and service marks are the property of their respective owners.
At LVS CPAs & Associates, P.C., we've been serving the accounting needs of Zeeland, MI and the surrounding areas for years. If you need help managing any aspect of your home or business's finances, we want to hear from you.
Please fill out this form and let us know how we can be of service. We will happily offer you a FREE initial consultation to determine how we can best serve you.
Thank you for visiting. We look forward to working together!