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's 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. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you're 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. But 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. But 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 is 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 at a later date. The longer it takes for 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 some time in the near future - "near" meaning 30 to 90 days. Without payables and trade credit, you'd 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 to discuss cash flow management and analysis. We're happy to help you handle your cash surplus effectively and maintain adequate funds to cover day-to-day expenses.

The foregoing is provided by the Bosma Group which specializes in serving small and medium sized businesses.  The Bosma Group was founded with the vision of allowing emerging businesses access to same world-class expertise formerly only available to Fortune 1000 companies.

Internal Revenue Code section 162(a) states that all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business are deductible.

An ordinary expense is one that is common and accepted in a particular field of business, trade or profession, a necessary expense is one that is helpful and appropriate for a particular business trade or profession.

For individual taxpayers, business expenses are usually deducted either on schedule C for sole proprietors’, or single member LLC owners, or on form 2106 attached to schedule A (miscellaneous itemized deductions, subject to 2% of adjusted gross income), for W-2 employees.

In our experience, the most contested business expenses, by the IRS, are travel, meals and entertainment, and automobile deductions.

Action item:

Use a log to track auto, meals, and entertainment deductions.

Meals and Entertainment: The cost of entertainment a client, customer or employee can qualify as an ordinary and necessary business expense. To qualify as a deduction the expenses must be directly related to or associated with the active conduct of a trade or business or for the production or collection of income. The deduction for meals and entertainment expenses are usually limited to 50% of the amounts that would otherwise be deductible.

Travel: Expenses for transportation and lodging are deductible for business travel away from the taxpayer’s tax home. The tax home is the main place of business where most of the time, income or degree of business activity occurs. To deduct lodging costs, taxpayers must be away from their tax home longer than an ordinary work day, and must be away long enough that they cannot reasonable be expected to complete the trip without sufficient sleep or rest. There are also additional rules if the primary purpose of a trip is not business.

Substantiation Requirements: IRC section 274(d) sets forth specific requirements for substantiating deductions for travel, meals and entertainment. Taxpayers are required to maintain an account book, diary, log, trip sheet or similar records as well as documentary evidence such as receipts, cancelled checks. The importance of substantiation cannot be overemphasized, as the IRS puts more weight on contemporaneous documentation than only documenting the item after a taxpayer has been notified of audit.

You might consider a full-featured accounting software to track income and expenses. We highly recommend these programs for small businesses. Using accounting software will help you monitor the health of your company, and provide an audit roadmap for the IRS.

Consider regularly preparing a balance sheet and profit and loss reports. These reports help you analyze how your business is doing, whether you are profitable, and how you are spending your money.

This article was written by Kelsey Hernandez. EA, CPA, a manager at Bosma Group who specializes in small businesses taxation. Bosma Group is a CPA firm dedicated to serving closely held growing businesses. Call Kelsey at 775-786-4900 or by email atkhernandez@thebosmagroup.com.

Many United States citizens earn money from foreign sources. These taxpayers must remember that they must report all such income on their tax return, unless it is exempt under federal law.

U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).

Foreign source income includes earned and unearned income, such as:

• Wages and tips
• Interest
• Dividends
• Capital Gains
• Pensions
• Rents
• Royalties

An important point to remember is that citizens living outside the U.S. may be able to exclude up to $91,400 of their 2009 foreign source income if they meet certain requirements. If married and both individuals work abroad and both meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $182,800 for the 2009 tax year. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S.

Call us for more information, or check out IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

The foregoing is provided by the Bosma Group which specializes in serving small and medium sized businesses.  The Bosma Group was founded with the vision of allowing emerging businesses access to same world-class expertise formerly only available to Fortune 1000 companies.

• Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers' salaries, and depreciation.


• Use the standard mileage deduction and simply multiply 55.0 cents for 2009 travel. (2008's rate was 50.5 cents for first six months and 58.5 cents for the last six months of 2008) by the number of business miles traveled during the year. Your actual parking fees and tolls are separately deductible under this method.

Which method is better?

For some taxpayers, the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.

Tip: The actual method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.

The standard mileage amount includes an allowance for depreciation. Opting for the standard mileage method allows you to by-pass the limits and restrictions and is simpler, but often less advantageous in dollar terms.

Caution: The standard rate may understate your costs, especially if you use the car 100% for business, or close to that percentage.

Caution: Once you choose the standard mileage rate, you cannot later use accelerated depreciation if you opt for the actual cost method in a later year. You may then use only straight line.

Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

How To Make the Most of Your Auto Deductions

Keep careful records of your travel expenses. We won't be able to determine which of the two options is better for you if you don't know the number of miles driven and the total amount you spent on the car.

Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method, you must keep receipts.

Tip: Consider using a separate credit card for business, to simplify your record-keeping.

Tip: You can also deduct the interest you pay to finance a business-use car, if you're self-employed.

Note: Self-employeds and employees who use their cars for business can deduct auto expenses if they either (1) don't get reimbursed, or (2) are reimbursed under an employer's "non-accountable" reimbursement plan. In the case of employees, expenses are deductible to the extent that auto expenses (together with other "miscellaneous itemized deductions") exceed 2% of adjusted gross income.

The foregoing is provided by the Bosma Group which specializes in serving small and medium sized businesses.  The Bosma Group was founded with the vision of allowing emerging businesses access to same world-class expertise formerly only available to Fortune 1000 companies.

You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.

Records help you document the deductions you've claimed on your return. You'll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents - such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property - should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return.

Good record-keeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.

For more information on what kinds of records to keep, call us or see IRS Publication 552, Recordkeeping for Individuals.

The foregoing is provided by the Bosma Group which specializes in serving small and medium sized businesses.  The Bosma Group was founded with the vision of allowing emerging businesses access to same world-class expertise formerly only available to Fortune 1000 companies.

The vast majority of Americans get a tax refund from the IRS each spring, but what do you do if you are one of those who received a tax bill? Here are eight tips for taxpayers who owe money to the IRS.

Each year, many taxpayers overlook tax credits, even though they often qualify for one or more of them. Though both tax deductions and credits save you money, they do it in different ways. A deduction lowers the income on which tax is figured. The tax credit is even better because it lowers the tax itself. Take time now to review your records and see if you qualify for one of these tax credits; many are new or expanded for the 2009 tax filing year.

First-time Homebuyer's Credit

A credit limit of $8,000 for qualified first-time homebuyers is available in 2009. Further, long-time residents who owned and used the same principal residence for any 5 consecutive years of the last 8 years prior to purchasing a subsequent new principal residence, may now qualify for a tax credit of up to $6,500. Contact us for further information regarding this credit.

Energy Improvements Qualify for Expanded Tax Credits

People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the Residential Energy Property Credit and the Residential Energy Efficient Property Credit.

• Residential Energy Property Credit: The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.
• Residential Energy Efficient Property Credit: This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.

American Opportunity Credit Helps Pay for First Four Years of College

More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

New Vehicle Purchase Incentive

New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1, 2010.

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) helps low- and moderate-income workers and working families. Working families with incomes below $48,279 (married filing jointly in 2009) and childless workers with incomes under $18,440 often qualify. Ordinarily, you must have earned income as an employee, independent contractor, farmer or business owner. Some disability retirees are also eligible. There is only a slight increase in these income levels for 2010; for example, working families with incomes below $48,362 (married filing jointly) and childless workers with incomes under $18,470, may quality in 2010.

Child Tax Credit

If you have a dependent child under age 17 at the end of 2009, you probably qualify for the child tax credit. This credit, which can be as much as $1,000 for each qualifying child, is in addition to the regular $3,650 personal exemption for 2009 you can claim for each dependent. A change in the way the credit is figured means that more low- and moderate-income families will qualify for the full credit on their 2009 returns. Don't confuse the child tax credit with the child care credit.

Note: In IRS Publication 972, there is a Child Tax Credit Worksheet to help you determine if you can claim the tax credit.

Credit for Child and Dependent Care Expenses

If you pay someone to care for your child so you can work or look for work, you probably qualify for this credit. Normally, your child must be your dependent and under age 13. Though often referred to as the child care credit, this credit is also available if you pay someone to care for a spouse or dependent, regardless of age, who is unable to care for himself or herself. In most cases, you need to obtain the care provider's social security number or taxpayer identification number and enter it on your return.

Note: Form 1040 filers claim the credit for child and dependent care expenses on Form 2441. Form 1040A filers claim it on Schedule 2.

Saver's Credit

The saver's credit helps low-and moderate-income workers save for retirement. You probably qualify if your income is below certain limits and you contribute to an IRA or workplace retirement plan, such as a 401(k). Income limits for 2009 are $27,750 for singles and married filing separately, $41,625 for heads of household and $55,500 for joint filers. These income limits are adjusted annually for inflation, however, will remain unchanged for 2010.

The credit, up to $1,000, is based on a percentage (10-50%) of each dollar placed into a retirement plan, up to the first $2,000. The lower the adjusted gross income, the higher the credit percentage; resulting in the maximum credit of $1,000 (50% of $2,000).

Tip: Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply. You still have time to put money in an IRA and get the saver's credit on your 2009 return. 2009 IRA contributions can be made until April 15, 2010. Use Form 8880 to claim the saver's credit.

Caution: Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Though the maximum saver's credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.

Other Credits Available

IRS.gov has information on these additional credits:

• Foreign tax credit, claimed on Form 1040 Line 47
• Credit for the elderly or the disabled, claimed on Form 1040 Schedule R
• Adoption credit, claimed on Form 8839
• Alternative motor vehicle (including hybrids) credit, claimed on Form 8910
• Credit for prior year minimum tax, claimed on Form 8801

Tax Credits Can Save You Money

These credits can increase your refund or reduce the tax you owe. Usually, credits can only lower your tax to zero. But some credits, such as the EITC and the child tax credit, can actually exceed your tax. Though some credits are available to people at all income levels, others have income restrictions. These include the EITC, saver's credit, education credits and child tax credit.

Tip: If you qualify, you can claim any credit, regardless of whether you itemize your deductions. Any credit can be claimed on Form 1040.

Tax credits help you pay part of the cost of raising a family, going to college, savings for retirement, or getting daycare so you can work or go to school.

Some common examples of items that are not included in your income are:

• Adoption Expense Reimbursements for qualifying expenses
• Funding of your Health Savings Account with a one-time direct transfer from your individual retirement plan, health reimbursement account or health flexible spending account.
• Child support payments
• Gifts, bequests and inheritances
• Workers' compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer

Examples of items that may or may not be included in your income are:

• Life Insurance.
  • If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant.
  • If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

These examples are not all-inclusive.

Please call us for more information about what income is taxable.

The foregoing is provided by the Bosma Group which specializes in serving small and medium sized businesses.  The Bosma Group was founded with the vision of allowing emerging businesses access to same world-class expertise formerly only available to Fortune 1000 companies.