5 keys to better cash management
January 22, 2019
Focusing solely on sales and profits can create a surprise for any business when there is not enough cash to pay the bills. Here are five key principals to improve your cash management.
- Create a cash flow statement and analyze it monthly. The primary objective of a cash flow statement is to help you budget for future periods and identify potential financial problems before they get out of hand. This doesn't have to be a complicated procedure. Simply prepare a schedule that shows the cash balance at the beginning of the month and add cash you receive (from things like cash sales, collections on receivables, and asset dispositions). Then subtract cash you spend to calculate the ending cash balance. If your cash balance is decreasing month to month, you have negative cash flow and you may need to make adjustments to your operations. If it's climbing, your cash flow is positive.
Bonus tip: Once you have a cash flow statement that works for you, try to automate the report in your accounting system. Or even better, create a more traditional cash flow statement that begins with your net income, then make adjustments for non-cash items and changes in your balance sheet accounts.
- Create a history of your cash flow. Build a cash flow history by using historical financial records over the course of the past couple of years. This will help you understand which months need more attention.
- Forecast your cash flow needs. Use your historic cash flow and project the next 12 to 24 months. This process will help identify how much excess cash is required in the good months to cover payroll costs and other expenses during the low-cash months. To smooth out cash flow, you might consider establishing a line of credit that can be paid back as cash becomes available.
- Implement ideas to improve cash flow. Now that you know your cash needs, consider ideas to help improve your cash position. Some ideas include:
- Reduce the lag time between shipping and invoicing.
- Re-examine credit and collection policies.
- Consider offering discounts for early payment.
- Charge interest on delinquent balances.
- Convert excess and unsold inventory back into cash.
- Manage your growth. Take care when expanding into new markets, developing new product lines, hiring employees, or ramping up your marketing budget. All require cash. Don't travel too far down that road before generating accurate cash forecasts. And always ask for help when needed.
Understanding your cash flow needs is one of the key success factors in all businesses. If your business is in need of tighter cash management practices, now is the perfect time to get your cash flow plan in order.
If you have questions or would like to help developing a cash management plan, call us at (828) 490 - 1942.
Quickbooks Online Updates for October/November 2017
October 26th, 2017
Fall is here, and that means a couple of things: trick or treaters will be ringing your doorbell to grab candy, pumpkin spice lattes are being consumed, and Quickbooks Online has made updates! If you’re currently using Quickbooks Online, here’s a couple updates that Intuit made to their software that you need to know about…
Improved Sales Tax Center in Quickbooks Online
The Quickbooks Online Tax Center now has a new look. Any time that you pay sales tax, you’ll receive an automatic reminder. In addition, manual filing assistance and the ability to make numerous adjustments to returns has been added to the number of features that Quickbooks Online offers.
Just Announced: Quickbooks Online Projects
As with all things money, it’s important to be organized. Now, clients will be able to organize work by project. With Quickbooks projects, you’ll be able to organize all project components in a single location including associated transactions, as well as the amount of time spent per task. This means that it’s easier than ever for businesses and people to organize their work. Running reports, as always, is easy so that users can see real-time data regarding expenses, profit, and billable/non-billable time quick and easy. Users will be able to utilize this feature by clicking Settings à Advanced and selecting the option.
These two updates to Quickbooks aren’t big ones, but they will help speed things along and streamline your accounting needs.
Tick Tock: Tax Reduction Ideas Are Still Available!
October 5, 2017
As the last quarter of the year begins, it’s time to make moves that could minimize your tax liability! Here are 7 ideas to consider:
- Maximize your retirement plan contributions
This includes traditional IRAs, Roth IRAs and SEP IRAs for self-employed. This is a good time to maximize the contribution potential for this year, as well as plan for next year’s contributions.
- Estimate your current and next year’s taxable income
With this estimate, you can determine which year receives the greatest benefit from a reduction in income. By understanding what the tax rate will be for your next dollar earned, you can understand the tax benefit of reducing income in this year versus next year.
- Make charitable contributions
Consider which tax year will benefit most from your charitable giving of cash and non-cash items. Shifting your giving into the year that will provide you the most benefit. The best part about charitable contributions is that you can give and receive at the same time.
- Take capital losses
Each year, you can net capital losses against capital gains. Also, you can deduct up to $3,000 in excess losses against your other income. Start to identify which investments may make sense to sell to take advantage of this. If planned correctly, these losses can offset ordinary income.
- Consider donating appreciated stock
This strategy gives you a charitable deduction for the market value of the stock, while not having to pay capital gains tax on the charitable gift. If you provide an annual pledge sheet to your church, this can be a great way to maximize your gift while giving needed funds to your church at the beginning of the year.
- Standard or itemized deductions
The standard deduction for 2016 is $12,600 for joint filers, and $6,300 for single filers. If your itemized deductions are close to these amounts, consider shifting the deductions into next year. You can then maximize the benefit of itemizing into one tax year.
- Retirement plan distributions
If you are age 70 ½ or older, take your required minimum distributions for the year. If you are retired, but younger than 70 ½, consider taking tax efficient distributions from your retirement accounts. By paying some tax now, you may avoid paying higher taxes later when you have to follow the minimum distribution rules.
Is Your HSA a Retirement Tool?
The Good, The Bad, and The Ugly
September 27, 2017
Health Savings Accounts (HSAs) are a great way to pay for medical expenses, and since unused funds roll over from year to year, the account can also provide a source of retirement savings in addition to other plans like 401(k)s or IRAs. But be aware: HSAs can also come with significant disadvantages and less flexibility when compared with other retirement investment tools.
HSAs work best when they are used for their designed purpose: to pay for qualified medical expenses. Neither your original contributions to an HSA nor your investment earnings are taxes when used this way. This make HSA funds valuable, given that medical costs are one of our largest expenses as we age. The Employee Benefit Research Institute estimates the average 65-year-old couple needs $264,000 to pay for medical care over the course of their retirement. Being able to cover that amount with pre-tax dollars greatly extends the value of retirement savings. In addition, unlike other retirement plans, there is no required distribution of funds after you reach age 70 1/2.
First, you can only contribute to an HSA if you have a high-deductible health plan. That means you will pay more out of pocket each year when you need to use health services, which could make it difficult to build a balance within your HSA. Second, contributions are limited. Currently, annual contributions to HSAs are limited to $3,400 a year for individuals and $6,750 a year for families. These limits get bumped up by $1,000 for people aged 55 or older. You also may only contribute to an HSA until your retirement age. Finally, HSAs typically have fewer investment options compared with other investments tools including 401(k)s and IRAs. The accounts often have high management and administrative fees. All this makes building HSA earnings tough to do.
The worst thing about HSAs: before you reach age 65, non-medical withdrawals from HSAs come with a whopping 20 percent penalty. Plus, non-medical withdrawals are taxed as income. Even after age 65, both contributions and earnings are taxed when they are withdrawn for non-medical expenses. In this way, HSAs compare unfavorably with 401(k)s and IRAs, which end their early withdrawal period earlier, at age 59 1/2. They also have lower early withdrawal penalties of just 10 percent.
HSAs are a powerful tool to help manage the ever-rising costs of health care. Knowing the rules and the costs associated with using these funds outside of medical expenses can help you get the most of our an HSA and avoid costly missteps.
Top 7 Tips for Early Retirement
September 11, 2017
When would you like to retire? Even if the answer is later versus sooner, most of us would like the freedom to decide. To do this, consider what it would take to create financial independence in retirement. Here are some ideas to help plan for an early retirement...
- Start early: Establish your desire to retire early as soon as possible. Have a discussion with your spouse and loved ones to ensure you have the same retirement date goal. With this stated goal, meeting savings targets and establishing spending priorities gets much easier!
- Know what you want to do: Have you always wanted to visit national parks? Do you have a passion for art? If you have a dream that can be fulfilled in retirement, it makes any hardships to get there more tolerable. Once you set retirement goals, creating a plan to get there will have more meaning.
- Pay yourself first: People who retire early have a higher savings rate than most of us. Consider saving in excess of 10% of your earnings. To do this might mean holding off on a big vacation once in while, or delaying a major home improvement or purchase. While a hardship, knowing the long-term dividend makes it worthwhile. The larger your savings become, the more flexible you can be in acquiring assets that generate more wealth for you.
- No debt and credit cards paid in full: It's hard to retire early if you're making large loan payments. Having a mindset to save money before you buy something versus taking out loans is the way to go for prospective early retirees. Why pay the credit card company interest when you could use that money during your non-working days?
- Financial indepdence mindset: Save enough to not have to worry about Social Security or other government programs to take care of you. Said another way, never over-spend your own resources as you will need to depend on yourself and not others for your financial independence.
- Use common sense when investing: Many investment alternatives may no longer make financial sense when compared to the income potential of the underlying asset or property. For example, if you own rental property, determine if the cash flows create a reasonable rate of return for the price you paid for the property. If you use common sense, more of your investments may help generate income in retirement.
- Other resources: Go through a retirement planning process with a qualified expert. This exercise can help you understand what your projected financial needs will be during your retirement years. Project your potential savings. Look into other sources of projected income from pension plans and retirement savings accounts. Create an estimate of possible Social Security benefits. Understand what other resources will be available to you during retirement.
While this list is not meant to be all-inclusive, it should help start the conversation toward your early retirement dream. Remember to ask for help to understand your situation and to develop your own personal plan!
Understanding Your Social Security Statement
August 23, 2017
The Social Security Administration sends earnings reports by mailing paper statements to workers every five years beginning at age 25. The reports are also available online. These reports recap historic earnings and contain an estimate of potential benefits. When you receive your report, spend a few minutes reviewing the statement. Here are some suggestions on how to do this:
- Review your earnings history. Towards the back of the report is a recap of your earnings record. This should accurately reflect reported earnings on your tax return. This number is a summary of all your earnings subject to Social Security as reported by your employer on your W-2 forms. But if you are self-employed or have many employers, you must make sure that the income properly reflects what you earned. If you are and employee, make sure the totals match your W-2s. If you are Self-employed: Pull out your tax return and confirm totals match.
- Review your potential retirement benefits. The Social Security statement will provide you with an estimate of your benefit amount using current dollars and current work history. The value of your benefit will show three benefit amounts. One for the minimum retirement age of 62, one for the maximum amount if you start your benefits at age 70, and one for your full retirement age between the ages of 65 and 67. Consider these monthly benefit amounts in terms of your retirement plan to help create a realistic picture of what you will have available to you when you retire.
- Note other benefits. Remember, Social Security is not just about your retirement benefits. There are also estimates presented for disability and surviving family benefits. Please review these estimates to understand the potential benefits these programs may provide.
Remember current benefits are just estimates. The benefits noted on this statement are estimates. Actual benefit amounts rise with inflation, change with tax laws, and adjust with your future earnings. Your benefit statement will show you the assumptions used in creating your estimated amounts. Review the assumptions used by the Social Security Administration. Pay special attention to the future earnings used by them to create the benefit amounts. If you do not think they are accurate, you may need to create revised estimates with more accurate assumptions.
If you find any errors in the statement correct them immediately. The last page of the statement provides a means for doing this.
Maximize Your Business Tax Savings
By: Vanessa Freund, cpa
August 16, 2017
In general, new business owners are not naturally inclined to think about the tax and accounting needs of their business until they face an immediate need such as filing income tax returns. This part of their business is often overlooked until when it may be too late to benefits of a well-stablished system.
To maximize tax savings, it is important to plan ahead. In the beginning stage of your business, spend some time researching and analyzing what is the best business structure and developing an accounting system that will allow you to obtain the information you need to make the decisions that will realize the tax savings.
If you have been in business for a while, re-evaluate your current setup. Either way, find the help of a competent, experienced advisor. That is key, since they can provide you the necessary information and simplify the implementation process.
Make sure that the advisor you chose has extensive expertise in tax savings strategies and accounting system implementation matters.
We, at Vanessa Freund, an Asheville CPA, help new and stablished business owners find and implement the most efficient tax and accounting solutions. Feel free to contact us for an assessment of your individual needs.
Tips on How to Increase Cash Flow
By: Vanessa Freund, cpa
August 4, 2017
When it comes to business success, cash flow is king. A business may be profitable, yet still fail if the incoming cash is not enough to cover the expenses it incurs.
As business owners, we must keep a close eye in our cash flow to make sure there is enough money available to cover the cost of operations. Here are some basic suggestions on how to increase your business cash flow:
- Review your processes. Analyze if there are tasks that can be performed by an outside contractor that will save you labor costs.
- Refinance debt for lower interest rate ones.
- Do a detailed analysis of your cost of supplies. See if cost savings can be achieved by eliminating waste.
- Establish internal controls to avoid abuse from careless employees.
- Encourage prompt payment by customers by establishing a late payment penalty and / or interest fee.
- If possible, collect payment in advance or request a deposit before starting work. If you are a service provider consider making this deposit non- refundable.
At Vanessa Freund, an Asheville CPA, we can help you identify opportunities to maximize your cash flow and achieve sustainable growth for your business.