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Cash Flow - The Pulse of Your Business
Unfortunately, many small business owners do not fully understand their cash flow statement. This is shocking, 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.
Please call us to discuss cash flow management and analysis. We're happy to help you handle your cash surplus effectively and maintain adequate funds to cover day-to-day expenses.
Planning 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. This article will discuss partial withdrawals and full withdrawals.
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 taxable (and can be subject to the penalty tax on withdrawals before age 59-1/2) except to the extent it consists of after-tax contributions, such as nondeductible IRA contributions.
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, 2011 if you reach 70-1/2 in 2010. But waiting until April 1 means you must withdraw for two years - 2010 and 2011 - in 2011. 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.
Please be in touch if you'd like assistance figuring out proper withdrawal amounts. 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. They are collected, stored, and sold by credit bureaus.
Credit reports are also called credit records, credit files, and credit histories. Under federal law, you are allowed access to free credit reports. There are three major credit bureaus and thousands of smaller ones where you can obtain a credit report.
These credit bureaus offer free credit reports, as well as monthly credit reports and services for a fee.
If you have been denied credit, you can request that the credit bureau involved provide you with a free copy of your credit report - but you must request it promptly. Otherwise each of the bureaus will provide you a copy of the report for a fee. You can request a copy from their websites (see links above) or toll-free numbers (also listed above).
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 have any questions about how to obtain your credit report or how to interpret what's in your report, 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.
Homebuyer Credit Closing Deadline Extended
Good news! Eligible taxpayers who contracted to buy a home, qualifying for the first-time homebuyer credit, before the end of April now have until Sept. 30, 2010 to close the deal.
The Homebuyer Assistance and Improvement Act of 2010, signed by the President in July, extended the closing deadline from June 30 to Sept. 30 for any eligible homebuyer who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010. The new law addresses concerns that many homebuyers might be unable to meet the original June 30 closing deadline.
Taxpayers need to know that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties' names and signatures (if required by local law), the property address, the purchase price, and the date of the contract.
Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:
Besides providing a tax benefit to first-time homebuyers and purchasers who haven't owned homes in recent years, the law allows a long-time resident of the same main home to claim the credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for five consecutive years during the eight-year period ending on the purchase date of the new home.
Homebuyers claiming this credit can avoid refund delays by attaching documentation covering the five-consecutive-year period:
There are three options for claiming the credit on a qualifying 2010 purchase:
The Homebuyer Credit can be complicated - but we're happy to help. For more details on claiming the credit, give us a call or send us an email.
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 2009 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.
Please call us for more information on how to file a tax return for a prior year.
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:
As always, we're here to help sort out your tax responsibilities. Give us a call today if you're starting a new business.
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 earned this summer season.
Banish Security Fears: Use QuickBooks's Protection Tools
If there's one application that you don't want compromised by a security breach, it's the one that contains all of your financial information. Recognizing that, Intuit has built a number of security features into QuickBooks that are designed to safeguard your debits and credits.
Tip: QuickBooks integrates with Microsoft Internet Explorer for some of its work. We'll discuss some of its safety tools, but you may want to check with us to see if your larger system is well-protected against malware, viruses, etc.
Fortunately, QuickBooks is open for integration with many outside applications that complement QuickBooks's native capabilities and extend its usefulness. But you should make sure that your system is set up to accommodate the features you want to use.
To do this, click Edit | Preferences | Integrated Applications. Then click on the tab labeled Company Preferences. Here you'll be able to indicate that:
This window also displays a list of applications that are currently integrated with QuickBooks. Highlight one, then click Remove if you want to break the link. Click Properties, and you'll see the window shown in Figure 1.
Figure 1: QuickBooks lets you specify who gets in, and what they can do.
Check the top box if this outside application should be allowed in, and make decisions about the other options here. If you have any questions, give us a call and we'll make sure your choices suit your business.
Broaden Your Horizons
QuickBooks relies on the Internet for many of its functions, which makes the program much more versatile. You can use this Web connection to update your copy of QuickBooks, receive payroll updates, download financial institution transactions, and access myriad business resources.
If your copy of QuickBooks is not yet integrated with Internet Explorer, click on the Help menu, then Internet Connection Setup. Work through the wizard to specify the correct connection to use, as shown in Figure 2.
Figure 2: To make sure your QuickBooks/Internet Explorer integration is working securely, specify the correct Internet connection.
Click on Edit | Preferences again, then click Service Connection. Under the My Preferences tab, you'll be asked to decide whether:
Check or uncheck the appropriate boxes.
Click the Company Preferences tab. Here, you'll tell QuickBooks whether it should automatically connect to Web services (other than Payroll or Online Banking; these have their own passwords) or if a password will be required. You'll also specify whether service updates from Intuit should be automatically downloaded, as shown in Figure 3.
Figure 3: In the window, you can specify your preferences for password requirements and background downloading of service updates.
To ensure that you'll be able to see all QuickBooks-related content on the Web, open Internet Explorer. Click the Tools menu, then Internet Options. Click the Security tab, and make sure the level is set to Medium, as suggested by Intuit.
Of course, QuickBooks offers internal tools to prevent unauthorized employees from reaching sensitive information. To access these, click Company | Set Up Users and Passwords | Set Up Users. You must be the Administrator to enter this are.
The window that opens gives you several options. You can add, edit, delete, or view a user. Click the Add User button, and assign a user name and password on the next screen. Click Next, and in the next window, choose whether to give the individual access to all areas of QuickBooks, or just a subset (the External Accountant option lets your accounting professional enter most areas of the program).
Choose Selective Access and click Next in the window shown in Figure 4.
Figure 4: QuickBooks lets you specify which areas and functions individual users can access.
On each page in this wizard, you can assign no, full, or selective access to tasks for each employee. Other functional areas include Payroll and Employees, Time Tracking, and Sensitive Accounting Activities. When you're done, click Finish.
Keep It Safe
Remember, too, that Intuit employs high-level encryption that secures your sensitive financial information. And it of course recommends that you back up frequently to further protect your data.
If this all seems like too much poking around in QuickBooks, give us a call and we'll help you make the right security choices.
Prepare a Post-Mortem Letter
Get Your Social Security Statement of Benefits
Review Your Budget vs Actuals for July
Estimate Your Tax Liability
Tax Due Dates for August 2010
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