The Value of Budgeting

Why should a small business actively use a budget? It seems simple, and it truly is simple. A budget acts as a roadmap for your business. It maps out where you are currently, where you plan to be, and how to cope with roadblocks and detours you will inevitable encounter along the way.

Every business should have a short-term and a long-term budget. If you’re a new business, your budget will probably be very detailed (and included in your business plan), and should show a monthly budget forecast for the upcoming year, as well as a 3-5 year estimation of revenue and expenses. The further into the future you tread, the less reliable the numbers become, but a general plan is enormously helpful when planning for the future. If you’re an established business, the same applies, but the estimates should be based on prior revenue and expenditures, as the best forecast for the future is prior performance.

We recommend a business keeps three versions of the short-term budget: conservative, expected, and optimistic. Your conservative budget is your worst-case scenario and your optimistic budget is your best-case scenario, with the expected budget in the middle. It is extremely important that you create your expected budget with what you truly expect to happen—a budget loses its benefit it you’re not realistic and use too much wishful thinking.

Below are some steps to help you get started:

1. Develop a forecast for the sales and revenue that your business will produce

2. Calculate the number of employees you need to produce the goods or services (Start with last year’s actual expenses – the more detail, the more reliable)

3. Calculate what you will spend and when you will spend it for each expense category

Creating your budget and updating it often (at least monthly) will give you concrete numbers to evaluate how to reach your goals and which areas of your business are over- or under-performing. Remember that it is always okay to revise your expected budget—that’s why the conservative and optimistic budgets are useful. The performance and cash flow of your business should never be a surprise!

In accordance with IRS Circular 230, this newsletter is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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OnAugust 18, 2011, posted in: Tax & Accounting Tips by

Understanding Your Business: The Statement of Cash Flows

The Statement of Cash Flows should be a small business owner’s best friend. It summarizes the operations and well-being of your business on one page. Like the income statement (see blog post here), the cash flow statement is presented for a period of time (month, quarter, year). In a nutshell, the statement of cash flows reports the amount of cash generated and consumed through the operating, investing, and financing activities of a business.
These three categories sum up everything that happens in a business. Operating activities consist of events associated the central, ongoing operation of the business (sales, interest, COGS, wages, utilities). Investing activities consist of events such as the purchase and sale of land, buildings, equipment, and the making and collecting of loans. Finally, financing activities represent events where cash is obtained or repaid to owners and creditors.
The cash flow statement is useful to business owners because profit and loss figures sometimes are misleading, as they can include non-cash items such as depreciation. Small businesses have an important need to know, on a day-to-day basis, how much cash they have now and are going to need in the immediate future. The statement of cash flows helps forecast the cash needs of a business now, and as far in the future as a business is able to predict. In order to pay bills on time, the cash flow statement is vital in any small business owner’s life.
Your CPA can help you learn more about the statement of cash flow, or compile one for you. For more on the statement of cash flows, see the link below!

o Investopedia

In accordance with IRS Circular 230, this newsletter is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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OnAugust 5, 2011, posted in: Tax & Accounting Tips by

Understanding your Business: The Balance Sheet

The balance sheet is a quick way to show what a business owns and what it owes. All accountants live by the accounting equation:

Assets = Liabilities + Equity

The balance sheet is a snapshot of your business – it shows your assets, liabilities, and equity at a specific point in time. Assets are listed in order by liquidity (starting with the most liquid – i.e. Cash), and are listed at original cost. Liabilities show the amount you owe someone else, such as accounts payable or long-term debt. Equity refers to the net assets of a company—what the portion of the company’s assets it owns. Invested capital can come in the form of cash or other assets transferred to the company.

Analyzing your balance sheet is useful, because it shows what your customers owe you, and on the flip side, what you owe to vendors, etc. The balance sheet is helpful when compared to other balance sheet accounts, as well as to income statement accounts (see previous blog post on the income statement). It is important to remember, however, that the balance sheet reports values at historical cost, and not at current market value. In addition, companies can get around reporting things on the balance sheet using ‘off-balance-sheet’ financing, which skews the way a company looks using valid accounting rules.

For more information about the balance sheet, click below:

In accordance with IRS Circular 230, this newsletter is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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OnJuly 28, 2011, posted in: Tax & Accounting Tips by

Understanding your business: The Income Statement

The income statement in its simplest form is a listing of revenue, expenses, and the resulting difference, net income.  It’s measured over a set period of time (month, quarter, year, etc).  The income statement is the best effort at measuring the economic performance of a company for the given period and is often used for projections, tax purposes, to evaluate the company, and to interest investors.

It is important to frequently analyze your business’s income statement because it allows you to evaluate revenue and expenses by area and it allows you to identify problem areas and put solutions in place before these problem areas do irreparable damage to the operations of your business.  As always, analysis of the income statement is more effective when compared to a benchmark—usually past performance, a similar company’s income statement, or your budget.

Most bookkeeping programs can run reports including all of the basic financial statements for various time periods.  If you don’t use a computerized bookkeeping system, the Small Business Administration offers an easy excel form to help you get started – see the link below:

Small Business Adminstration (SBA): http://www.sba.gov/tools/Forms/smallbusinessforms/fsforms/index.html

In accordance with IRS Circular 230, this newsletter is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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OnDecember 20, 2010, posted in: Tax & Accounting Tips by

Financial Statements—We promise they’re useful!

Everyone talks about financial statements—but small business owners usually don’t give them much thought in day-to-day operations.  However, when kept up-to-date and analyzed timely, they can help you figure out where your business and how to achieve your goals.  Well-kept financial statements allow you to evaluate your business’s financial position, set benchmark long and short-term goals, and can be beneficial and save money during tax season.

Basic financials consist of three statements – the Income Statement, Balance Sheet, and Statement of Cash Flows.  In a nutshell, the Income Statement shows revenue, expenses, and net income, the Balance Sheet shows what the business owns and owes, and the Statement of Cash Flows reports the amount of cash generated and consumed through operating, investing, and financing activities.

It’s important to remember that analysis of financial statements becomes the most effective when financial statements are compared to either the company’s past financial statements or the financial statements of another similar company.  Using these benchmarks allow a business owner to predict future profitability as well as uncover problems and identify corrective action.

Look for in-depth analyses of each financial statement coming soon to help you understand your business’s finances and meet your goals!

In the meantime, more information can be found in the SEC’s Beginner’s Guide to Financial Statements:

In accordance with IRS Circular 230, this newsletter is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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OnDecember 20, 2010, posted in: Tax & Accounting Tips by

After much debate, America has a new tax bill. Here’s what it means for you and your business.

Politicians on both sides of the aisle weren’t happy about the tax bill compromise, but it will help most Americans this year on their tax return and in their daily lives.  The bill extends the much-discussed Bush Tax Cuts for two years, adds one-year reduction in payroll taxes of 2 percent, as well as extends various other two-year tax benefits.

What will this mean for your business?  If you’re considering a big purchase in the next two years, there’s a gift included for you—a 100% deduction of the cost of business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012.

For more information and insights, check out the following articles:

In accordance with IRS Circular 230, this newsletter is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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OnDecember 20, 2010, posted in: Tax & Accounting Tips by