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.

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

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 isconcerned 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.

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 isrepeated 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, thesegaps 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 some time 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 flowanalysis, 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.

Note: As you will see, the rules on retirement withdrawals are quite complex. They are offered here only for your general understanding. Please call us before taking withdrawals or making other major changes 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.

Note: Before retirement, partial withdrawals are fairly common with profit-sharing plans, 401(k)s, and stock bonus plans. After retirement, they are fairly common in all types of plans (though least common with defined-benefit pension plans).

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.

Example: Your retirement account totals $100,000, which includes an after-tax investment of $10,000. You withdraw $5,000. $500 of the withdrawal is tax-free ($10,000 / $100,000 x $5,000).

Note: The tax-free portion is computed differently for plan participants who have been in the plan since 5/5/86. Contact us for details.

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.

Note: The law has specific rules about how fast the money must be taken out of the plan after your death. These rules limit the ability to prolong a tax shelter.

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.

Example: Joe reaches age 70-1/2 in October of this year. Retirement plan assets in his IRA totaled $600,000 at the end of last year. The IRS number for age 70 is 27.4. Joe must withdraw $21,898 ($600,000/27.4) this year.

Example: Two years from now, Joe is 72 and his IRA was $602,000 at the end of the preceding year (when Joe reached age 71). The IRS number for age 72 is 25.6. Joe must withdraw $23,516 ($602,000/25.6) when he's 72.

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.

Caution: You can always take out money faster than required - and pay tax on these withdrawals. However, the tax code is strict about minimum withdrawals. If you fail to take out what's required, a tax penalty will take 50% of what should have been withdrawn but wasn't.

Financial Calculator: Required Minimum Distribution
The IRS requires that you withdraw at least a minimum amount - known as a Required Minimum Distribution - from your retirement accounts annually, starting the year you turn age 70-1/2. Determining how much you are required to withdraw is an important issue in retirement planning.

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:

• Age
• Residence
• "Authorized user" payment history
• Checking and savings accounts
• Bankruptcy
• Charge-offs (Forgiven debt)
• Child support
• Closed accounts and inactive accounts
• Jobs
• Payment history
• Recent loans
• Collection accounts and charge-offs
• Cosigning an account
• Credit limits
• Credit reports
• Debt/income ratios
• Department store accounts
• Payment history/late payments
• Finance company credit cards
• Income/income per dependent
• Mortgages
• Revolving credit
• Name/alias
• Number of credit accounts
• Fraud
• Inquiries

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.

Tip: If you find any incorrect or incomplete information in your file, write to the credit bureau and askthem to investigate the information. Under the FCRA, they have about thirty days to contact the creditor and find out whether the information is correct. If not, it will be deleted.

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 forexorbitant interest rates, or always feel like you're on the verge of bankruptcy. You can pay off debt the smartway, while at the same time saving money to pay it off faster.

KnowWhere 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 everyfinancial situation where a company has given you something inadvance of payment, including your mortgage, car payment(s), creditcards, tax liens, student loans, and payments on electronics or otherhousehold items through a store.

Recordthe day the debt began and when it will end (if possible), the interestrate you're paying, and what your payments typically are. Add it allup, painful as that might be. Try not to be discouraged! Remember, you're goingto break this down into manageable chunks while finding extra moneyto help pay it down.

IdentifyHigh-Cost Debt

Yes,some debts are more expensive than others. Unless you're gettingpayday loans (which you shouldn't be), the worst offenders areprobably your credit cards. Here's how to deal with them.

• Don'tuse them. Don't cut them up, but put them in a drawer and onlyaccess them in an emergency.

• Identifythe card with the highest interest and pay off as much as you can every month. Pay minimums on the others. When that one'spaid off, work on the card with the next highest rate.

• Don'tclose existing cards or open any new ones. It won't help yourcredit rating.

• Payon time, absolutely every time. One late payment these days canlower your FICO score.

• Goover your credit-card statements with a fine-tooth comb. Are youstill being charged for that travel club you've never used?Look for line items you don't need.

• Callyour credit card companies and ask them nicely if they would loweryour interest rates. It does work sometimes!

Save,Save, Save

Dowhatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financialobligations. Substitute free family activities for high-cost ones.Sell high-value items that you can live without.

Do Away withUnnecessary Items to Reduce Debt Load

Doyou really need the 800-channel cable option or that dish on yourroof? You'll be surprised at what you don't miss. How about magazinesubscriptions? They're not terribly expensive, but every pennycounts. It's nice to have a library of books, but consider visitingthe public library or half-price bookstores until your debt is undercontrol.

Never, Ever Miss a Payment

Not only are you retiring debt, but you're also building a stellar creditrating. If you ever move or buy another car, you'll want toget the lowest rate possible. A blemish-free payment record will helpwith that. Besides, credit card companies can be quick to raiseinterest rates because of one late payment. A completely missed oneis even more serious.

DoNot Increase Debt Load

Ifyou don't have the cash for it, you probably don't need it. You'llfeel better about what you do have if you know it's owned free andclear.

ShopWisely, and Use the Savings to Pay Down Your Debt

Ifyour family is large enough to warrant it, invest $30 or $40 and joina store like Sam's or Costco. And use it. Shop there first, then atthe grocery store. Change brands if you have to and swallow yourpride. Use coupons religiously. Calculate the money you're saving andslap it on your debt.

Eachof these steps, taken alone, probably doesn't seem like much. But if you adopt as many as you can, you'll watchyour 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:

• Coverage that protects Directors and Officers from personal liability
• Key Executive Life Insurance
• Business Interruption (covers lost profits and expenses)
• Commercial Vehicle Insurance
• Website Insurance (protects you from legal claims)

Employer-Related Insurance

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.

Some Tips:

• Assess your liability risk honestly and thoroughly.
• Ask your lawyer for advice.
• Get quotes from several companies.
• Talk to your insurer about how you can minimize risk and premiums.

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.

1. To deduct job search costs, the expenses must be spent on a job search in your current occupation. You may not deduct expenses related to looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of a resume to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the time spent looking for work is important in determining whether the trip is primarily personal or is related to your job search. (If you have questions about how to figure this, call us.)
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.

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:

• Failure to File Penalty. If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the "late filing" penalty, and interest charges. The longer you delay, the more these charges grow.

• Losing Your Refund. There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. The deadline for claiming refunds is three years after the original due date.

• Earned Income Tax Credit. Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file.

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:

• Classify workers properly as employees or independent contractors as determined by law, not the choice of the worker or business owner.

• Deposit federal employment taxes, called trust fund taxes, according to the appropriate schedule.

• Start making estimated quarterly payments to cover your own income tax and Social Security self-employment tax liability.

• Keep good records to protect your personal and financial investment and to make tax filing easier.

• Consider a tax professional to help you with Schedule C.

• File and pay your taxes electronically. It's fast, easy, and secure.

• Protect financial and tax records to ensure business continuity in the event of a disaster.

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.

1. All taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, call our office.
2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable and is therefore subject to federal income tax.
3. Many students do odd jobs over the summer to make extra cash. If this is your situation, keep in mind that earnings you receive from self-employment are subject to income tax. This includes income from odd jobs like baby-sitting and lawn mowing.
4. If you have net earnings of $400 or more from self-employment, you also have to pay self-employment tax. (Church employee income of $108.28 or more must also pay.) This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay - such as pay received during summer advanced camp - is taxable.
6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:
• You are in the business of delivering newspapers.
• All your pay for these services directly relates to sales rather than to the number of hours worked.
• You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.
7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

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.

Tax Due Dates for August 2011

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