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Cash Flow: The Life Blood of Business
Cash is essential to the success of any business. Cash is the "life blood" that keeps a business operating. If cash drys up, the business fails. Understanding your business' cash flow is a key managerial skill.
Failure to properly plan cash flow is one of the leading causes of small business failures. Understanding the basics will help you better manage your cash flow. Cash flow considerations become even more important as the economy struggles and businesses need to tighten all financial controls.
Your business' monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.
The Operating Cycle
The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash.
For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable credit sales, usually paid 30 days after the original purchase date.
This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, increasing your cash. Now your cash has completed its flow through the operating cycle, and the process is ready to begin again.
Cash and other balance-sheet items that convert into cash within 12 months are referred to as current assets. Typical current assets include cash, marketable securities, receivables and prepaid expenses.
Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flows and will allow adequate time to plan and prepare for the growth of your business.
It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.
Planning a Positive Cash Flow
Your business can increase cash reserves in a number of ways.
How to Get Paid On Time
With the current struggling economic conditions, the collection of accounts receivable is becoming more and more of a challenge each day. Strengthening your collection procedures may allow you to shorten the aging days of your accounts receivable and improve collection rates.
The following suggestions can help your business tighten up its credit and collections policies and improve its cash flow. Although some of the tips discussed here may not be suitable for every business, they can serve as general guidelines to help improve cash flow.
Define Your Policy. It's important to have a clear credit policy. Your sales force should not be able to sell to customers who are not credit-worthy, or who have become delinquent. Define and stick to concrete credit guidelines. You should also clearly delineate what leeway sales people have to vary from these guidelines in attempting to attract customers.
Tell Customers About Your Payment and Collection Policy. Communicate your policy to customers. Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.
Follow Through On Your Payment and Collection Terms. If your policy is that late payers will go into collection after 60 days, then you must stick to that policy. Someone 'not a salesperson' should call all late payers and ask for payment. Accounts of those who exceed your payment deadlines should be penalized and/or sent into collection, if that is your stated policy.
Train Staff Appropriately. The person you designate to make calls to delinquent customers must be apprised of the seriousness and professionalism required for the task. Here is a suggested routine for calls to delinquent payers:
Changes in Tax Brackets and Benefits for 2010
For 2010, personal exemptions and standard deductions will change only slightly to reflect inflation adjustments. Many levels will remain consistent with 2009.
By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result of little inflation, there will be no significant changes for 2010. The following is a brief review of some of the key levels effecting 2010 returns, filed by most taxpayers in early 2011, include the following:
IRS Announces 2010 Standard Mileage Rates
Beginning on January 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
The new rates for business, medical and moving purposes are slightly lower than last year's. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.
The business mileage rate was 55 cents in 2009. The medical and moving rate was 24 cents.
2010 Rules for Roth IRAs
Beginning January 1, 2010, the income and filing status requirements for rollovers (including conversions) to a Roth IRA was eliminated. Additionally, for rollovers to a Roth IRA in 2010 only, a special 2-year option for reporting taxable portions of your rollover apply.
Under the new rules, regardless of your income or filing status, you can roll over (convert) the following to a Roth IRA:
For rollovers and conversions to a Roth IRA in 2010 only, you have the option of reporting the taxable portion of your rollover in your gross income for 2010, or reporting half in 2010 and half in 2011.
Previously, to roll over to a Roth IRA, both of these requirements needed to be met; your modified AGI was less than $100,000 and your filing status was not married filing separate.
For additional information on the effect of the 2010 changes on your retirement accounts, please contact us.
Filing Requirements for Dependents
Whether a dependent had to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind.
Note: A dependent may have to file a return even if his or her income is less than the amount that would normally require a return.
Even if you do not have to file, you should file a federal income tax return to get money back if any of the following apply:
IRS Publication 929 provides worksheets to help you determine the need to file for dependents. Contact us for further information.
Receive Your Refund Faster with Direct Deposit
It is tax time! Want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 61 million people had their tax refunds deposited directly into their bank accounts last year. It's a secure and convenient way to get your money in your pocket faster.
To request direct deposit, follow the instructions for 'Refund' on your tax return.
Want an even faster refund? Try e-file! Taxpayers who file electronically get their refunds in about half the time as those who file paper returns.
You can also electronically direct your refund to multiple accounts. With the new "split refund" option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions. The split refund option, using Form 8888, is also available for paper returns.
QuickBooks 2010 Review
Every QuickBooks upgrade has something for everyone, but some releases raise the bar more than others. QuickBooks 2010 is one of them. New features in the Pro and Premier versions help you:
So if you're using an earlier version, you should consider treating yourself to a present that will pay for itself quickly and help you better promote and manage your company in less time.
Modifiable Company Snapshot
The Company Snapshot-a one-page screen of key reports and graphs-is the best first place to look when you fire up QuickBooks in the morning. In the past, its content has been static, but now you can choose from myriad reports and customize this printable page to meet your needs.
Figure 1: The Company Snapshot in QuickBooks 2010 can now be modified.
Add/Edit Multiple List Entries
This new feature solves two common problems. First, it lets you-in just a couple of steps-add or edit multiple customers, vendors, services, inventory items, and non-inventory items. Second, it lets you easily copy and paste Excel list data into QuickBooks. To get started, go to Lists|Add/Edit Multiple List Entries and follow the instructions.
Attach Documents to Forms
Good software should minimize your use of paper. A new feature in QuickBooks 2010 helps you do just that. You can scan documents from within QuickBooks and attach them to forms and records, storing them on Intuit's online servers. You can store up to 100 MB for free; monthly subscription plans start at $4.95/month. Of course, you can also attach files stored on your local drives.
Figure 2: You can easily attach and manage documents from your local drives or an online inbox.
Manage Checks Better
Paper checks can be the bane of your existence, whether you're producing them or receiving them. QuickBooks 2010 includes tools to help with both processes.
First, you can now add an electronic signature to checks you create and print in QuickBooks. It's easy; you simply go into the printer setup tool and designate the correct graphic file.
Second, Intuit Check Solutions can help you get paid faster. Instead of ferrying incoming checks to the bank every night, you can either scan them or take the information over the phone, and then transmit the financial data to the bank.
You must have a merchant account to use the service, which Intuit can help you acquire. Intuit Check Solutions costs $59.95 for setup, with a monthly fee of $19.95. There's also a 23-cent charge for each check transmission.
Customize Forms for a More Polished Image
QuickBooks has always offered limited customization of forms, but the 2010 adds new tools to help you present a uniform, professional look to your outgoing documents. For one thing, you can now build a design and apply it simultaneously to multiple forms.
QuickBooks also includes several free background designs that will work with QuickBooks forms. A layout preview window lets you see how your changes will look as you make them, as shown in Figure 3. To find these tools, click Customize on any form screen.
Figure 3: New design tools help you impress your customers with customized, uniform forms.
Beef Up Your Marketing Efforts
QuickBooks had already made inroads into supporting your marketing efforts in earlier versions, like its Website services and local listings. The 2010 release offers even more tools with its Marketing Center.
The new Marketing Center pulls your data in from QuickBooks and analyzes it, and then makes recommendations for email marketing campaigns that you could implement. You select the design and content, and QuickBooks automatically fills in contact information and displays your results so you can see what worked and what didn't.
A free trial gives you up to 500 emails. After that, prices start at $15 for up to 1,000 pieces.
Figure 4: QuickBooks 2010 helps you build targeted email marketing campaigns based on your customer data.
Find Reports Faster
Finally, Intuit has revamped QuickBooks' reporting tools so they're easier to find and open quickly. You can choose between list, grid, and graphical carousel views, and tab quickly among memorized, favorite, and recently viewed reports.
This tweaking, along with all of the other new features listed here (and more), make QuickBooks 2010 the best small business accounting software upgrade to come down the pike in awhile.
Create a Financial Plan and Monitoring System
If you haven't already done so, prepare a financial plan and a budgeting system for monitoring your income, expenses, assets and liabilities. The information you collect will enable you to start planning for retirement or other major life events. Use last year's information to establish a budget for the coming year.
Setup an Effective Filing System
If you haven't already done so, set up a filing system for storing your important documents and records.
Prepare for Taxes
Start getting ready for preparing your tax return for the preceding year. As you receive Forms W-2, 1099 and other tax documents, file them immediately. This will reduce time looking for them later.
Request a social security number for any child regardless of age who does not already have one.
Tax Due Dates for January 2010
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