Many small business owners pay too little attention to their financial statements. This is due in part to not understanding just what the statements have to offer. In fact, many may not be able to tell you the difference between a Balance Sheet and an Income Statement.
Think of them this way. The Balance Sheet is like a still picture. It shows where your company is at on a specific date, at month-end, or at year-end. It is a listing of your assets and debts on a given date. So Balance Sheets that are a year apart show your financial position at the end of year one versus the end of year two. Showing how you got from position one to position two is the job of the Income Statement.
Suppose I took a photo of you sitting behind your desk on December 31, 2013. And on December 31, 2014, I took a photo of you sitting on the other side of your desk. We know for a fact that you have moved from one side to the other. What we don’t know is how you got there. Did you just jump over the desk or did you run all the way around the building to do it? The Income Statement tells us how you did it. It shows how many sales and how much expense was involved to accomplish the move.
To see why a third kind of financial statement called a Funds Flow Statement is useful, follow this case. A printer has started a new printing business. He invested $20,000 of his own cash and borrowed $50,000 from the bank to buy new equipment. After a year of operation, he has managed to pay off the bank loan. He now owns the equipment free and clear. When he is told his net profit is $50,000, he can’t believe it. He might tell you that he took nothing out of the business and lived off his wife’s wages for the year. And since there is no cash in the bank, just where is the profit? The Funds Flow Statement will show the income as a “source of funds” and the increase in equipment is an “application of funds.” The Funds Statement is even more useful when you have several assets to which funds can be applied and several sources of funds such as bank loans, vendor payables, and business profit or loss.
Don’t be afraid to ask your accountant questions about your financial statements. The more questions you get answered, the more useful you will find your financial
Breakeven analysis is an important and useful tool in business. Whether starting a new business, expanding current operations, contemplating an acquisition, downsizing, or approaching banks and other potential lenders, one should know what the breakeven is.
Breakeven is simply the point at which costs equal income – no profit, no loss. It’s an excellent starting point for finding out where the business is and where it can go. It’s the first step in planning future growth. It shows how much sales volume is needed to cover fixed and variable expenses. Once a company has reached breakeven, all gross profit beyond that point goes directly to improving the bottom line.
There are certain limitations for the use of breakeven analysis. It ignores the importance of cash flow and makes the assumption that fixed and variable expenses will stay within the parameters used to calculate the breakeven. Sound business assessment will overcome these shortcomings.
- Calculating breakevenVariable expenses are the cost of goods sold and other costs of sales, such as direct labor and sales commissions.Knowing selling price and variable costs allows you to compute gross profit percentage. The rest is pure arithmetic. Divide your fixed costs by your gross profit percentage to arrive at breakeven. For example, if you have fixed costs of $10,000 and your gross profit percentage is 25%, your breakeven point is sales of $40,000 ($10,000 ÷ 25% = $40,000).
- Call us; we would be happy to assist you with calculating your business’s breakeven point and evaluating your profit structure.
- There are, of course, some costs that are, or seem to be, part fixed and part variable. One must use good business judgment to split these items into reasonable proportions.
- Breakeven is relatively easy to understand and use. First, review the annual financial statement in order to figure out fixed and variable expenses. Fixed expenses are those that don’t generally vary in relation to sales volume. Rent, for example, usually stays constant, whether sales are $400,000 or $500,000. The same is generally true for depreciation, utilities, insurance, and so on.
A good domestic worker can help take care of your children, assist an elderly parent, or keep your household running smoothly. Unfortunately, domestic workers can also make your tax situation more complicated.
Domestic workers of all types generally fall under the “nanny tax” rules. First, you must determine whether your household helper is an “employee” or an “independent contractor.” If you provide the place and tools for work and you also control how the work is done, your helper is probably an employee. For example, at one end of the spectrum, a live-in housekeeper is probably an employee. At the other end of the spectrum, a once-a-month gardening service may qualify as an independent contractor.
If your household worker is an employee, then you, as the employer, may be required to comply with various payroll tax requirements. For the years 2014 and 2015, the important threshold amount is $1,900. If you pay your employee $1,900 or more during either year, you are generally responsible for paying social security and Medicare taxes on your worker’s wages. In addition to social security taxes, you may be required to pay federal and state unemployment taxes as well as other state taxes. With these taxes go various deposit and filing requirements, including the requirement that you provide your employee with an annual W-2 form that shows total wages and withholding. February 2, 2015, is the deadline for providing W-2 forms to workers to whom the nanny tax applies for 2014.
As you might expect, most people need assistance complying with the nanny tax rules. If you need details about the rules or help in dealing with them, contact our office.
There are many ways to make your business more profitable, and sound credit policies are high on the list. The current slowdown in the economy is a good reason to reexamine your company’s policies. Keep the following items in mind as you review your policies.
* Don’t be so eager to sign on new customers that you neglect to check out their credit history. Take the time to check references, and obtain a credit report to see how they’ve handled other financial transactions.
* Establish collection policies and follow up promptly on delinquent accounts. The more overdue accounts become, the more likely they are to become uncollectable. That cuts into your profits.
* Calculate what it costs to carry credit for your customers. For example, if your business generates $1,000 per day in credit sales, and it takes you an average of 60 days to collect, your cost of providing credit to your customers is $3,000 per year. This example assumes you can borrow money at 5% interest. By speeding up the average collection to 30 days, you cut your carrying costs by half.
* To speed collections, invoice customers when you ship the goods; don’t wait until the end of the month. Make sure your invoice clearly shows your payment terms, including penalties for late payment and the discount, if any, for prompt payment.
* Be aware of the payment cycles for your industry. For example, if contractors typically pay their bills by the 10th of the month, make sure your invoices arrive in plenty of time for them to process your payment.
Call us if you’d like to review your credit policies.
In its final session of the year, Congress extended a long list of tax breaks that had expired, retroactive to the beginning of 2014. But the reprieve is only temporary. The extensions granted in the Tax Increase Prevention Act of 2014 remain in effect through December 31, 2014. For these tax breaks to survive beyond that point, they must be renewed by Congress in 2015.
Although certain extended tax breaks are industry-specific, others will appeal to a wide cross-section of individuals and businesses. Here are some of the most popular items.
- The new law retains an optional deduction for state and local sales taxes in lieu of deducting state and local income taxes. This is especially beneficial for residents of states with no income tax.
- The maximum $500,000 Section 179 deduction for qualified business property, which had dropped to $25,000, is reinstated for 2014. The deduction is phased out above a $2 million threshold.
- A 50% bonus depreciation for qualified business property is revived. The deduction may be claimed in conjunction with Section 179.
- Parents may be able to claim a tuition-and-fees deduction for qualified expenses. The amount of the deduction is linked to adjusted gross income.
- An individual age 70½ and over could transfer up to $100,000 tax-free from an IRA to a charity in 2014. The transfer counts as a required minimum distribution (RMD).
- Homeowners can exclude tax on mortgage debt cancellation or forgiveness of up to $2 million. This tax break is only available for a principal residence.
- The new law preserves bigger tax benefits for mass transit passes. Employees may receive up to $250 per month tax-free as opposed to only $130 per month.
- A taxpayer is generally entitled to credit of 10% of the cost of energy-saving improvements installed in the home, subject to a $500 lifetime limit.
- Educators can deduct up to $250 of their out-of-pocket expenses. This deduction is claimed “above the line” so it is available to non-itemizers.
The remaining extenders range from enhanced deductions for donating land for conservation purposes to business tax credits for research expenses and hiring veterans.
Finally, the new law authorizes tax-free accounts for disabled individuals who use the money for qualified expenses like housing and transportation. Another provision in the law provides greater investment flexibility for Section 529 accounts used to pay for college.