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 is 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. However, if you fail to have enough cash to pay your suppliers, creditors, or employees, you are 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.

Note: An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.

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. However, 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.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. However, what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

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 are the key to cash flow management.

Some of the more important components to examine are:

• Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay later. The longer it takes your customers to pay on their accounts, the more negative the effect on your cash flow.
• Credit terms. Credit terms are the time limits you set for your customers' promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
• Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy - neither too strict nor too generous - is crucial for a healthy cash flow.
• Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
• Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable sometime in the near future - "near" meaning 30 to 90 days. Without payables and trade credit, you would have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

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 at 562-912-4334 to discuss cash flow management and analysis. We are happy to help you handle your cash surplus effectively and maintain adequate funds to cover day-to-day expenses.

AUGUST 2010 TAX BRIEFING

Adequately Disclosing a Gift for Limitation Purposes:
If a gift is not adequately disclosed on a gift tax return, gift tax can be imposed on the gift at any time under IRC Sec. 6501(c)(9) . According to Reg. 301.6501(c)-1(f)(2) , a gift to a trust is adequately disclosed if the gift tax return (or a statement attached to the return) includes the trust's tax identification number and brief description of the terms of the trust, or in lieu of that description, a copy of the trust instrument. Under the facts of this informal emailed advice, the IRS lawyer concluded that the taxpayer can file an amended gift tax return for the year in question and include the additional information that he believes is necessary to adequately disclose the gift. The IRS will then decide whether to audit the gift tax return. CCA 201030029 .

Defined Benefit Plans Using Special Funding Rules:
A pair of related notices provide guidance on the availability of special funding rules for (1) single-employer defined benefit plans under IRC Sec. 430(c)(2)(D) when Form 5500 (and Schedule SB) has been filed for that year, and (2) multi-employer defined benefit plans under IRC Sec. 431(b)(8) when Form 5500 (and Schedule MB) has been filed for that year. Notice 2010-55 , 2010-33 IRB, and Notice 2010-56, 2010-33 IRB .

HIRE Act Employment-related Tax Breaks:
Thanks to the HIRE Act, employers are exempt from their share of the Social Security tax on wages paid to eligible employees and can also claim a tax credit of up to $1,000 on wages paid to qualified new employees. The IRS recently updated its series of Frequently Asked Questions (FAQs) on these temporary tax breaks on www.irs.gov . The new FAQs address (1) the new hire retention credit and who it applies to, (2) the period of employment eligible for the credit, (3) Alternative Minimum Tax (AMT) implications, (4) eligible workers, and (5) the rules for calculating and claiming the credit. The FAQs note that an employer can claim the payroll tax exemption and the new hire retention credit for the same worker as long as the requirements for each are met.

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

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:
• Age
• Residence
• "Authorized user" payment history
• Checking and savings accounts
• Bankruptcy
• Charge-offs (Forgiven debt)
• Child support
• Closed accounts and inactive accounts
• Jobs
• Payment history
• Recent loans
• Collection accounts and charge-offs
• Cosigning an account
• Credit limits
• Credit reports
• Debt/income ratios
• Department store accounts
• Payment history/late payments
• Finance company credit cards
• Income/income per dependent
• Mortgages
• Revolving credit
• Name/alias
• Number of credit accounts
• Fraud
• Inquiries

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.
• Experian Credit Bureau: 888-397-3742 (cost: free or $14.95 monthly)
• Equifax Credit Bureau: 800-685-1111
• Trans Union: 877-322-8228 (cost: $11.95 monthly)

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.

Tip: If you find any incorrect or incomplete information in your file, write to the credit bureau and ask them to investigate the information. Under the FCRA, they have about thirty days to contact the creditor and find out whether the information is correct. If not, it will be deleted. 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.

• Don't use them. Don't cut them up, but put them in a drawer and only access them in an emergency.
• Identify the card with the highest interest and pay off as much as you can every month. Pay minimums on the others. When that one's paid off, work on the card with the next highest rate.
• Don't close existing cards or open any new ones. It won't help your credit rating.
• Pay on time, absolutely every time. One late payment these days can lower your FICO score.
• Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club you've never used? Look for line items you don't need.
• Call your credit card companies and ask them nicely if they would lower your interest rates. It does work sometimes!

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.