Archive for April, 2008

Building Cash Reserves

Building a financial cushion for your business is never easy. Experts say that businesses should have anywhere from six to nine months worth of income safely stored away in the bank. If you’re a business grossing $250,000 per month, the mere thought of saving over $1.5 million dollars in a savings account will either have you collapsing from fits of laughter or from the paralyzing panic that has just set in. What may be a nice well-advised idea in theory can easily be tossed right out the window when you’re just barely making payroll each month. So how is a small business owner to even begin a prudent savings program for long-term success?

Realizing that your business needs a savings plan is the first step toward better management. The reasons for growing a financial nest egg are strong. Building savings allows you to plan for future growth in your business and have ready the investment capital necessary to launch those plans. Having a source of back-up income can often carry a business through a rough time.
When market fluctuations, such as the dramatic increase in gasoline and oil prices, start to affect your business, you may need to dip into your savings to keep operations running smoothly until the difficulties pass. Savings can also support seasonal businesses with the ability to purchase inventory and cover payroll until the flush of new cash arrives. Try to remember that you didn’t build your business overnight and you cannot build a savings account instantly either.

Review your books monthly and see where you can trim expenses and reroute the savings to a separate account. This will also help to keep you on track with cash flow and other financial issues. While it can be quite alarming to see your cash flowing outward with seemingly no end in sight, it’s better to see it happening and put corrective measures into place, rather than discovering your losses five or six months too late.

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Filed under Cash Reserves, Investing and financing : Comments (0) : Apr 30th, 2008

What are Other Ratios Used in Financial Reporting

The dividend yield ratio tells investors how much cash income they’re receiving on their stock investment in a business. This is calculated by dividing the annual cash dividend per share by the current market price of the stock. This can be compared with the interest rate on high-grade debt securities that pay interest, such as Treasure bonds and Treasury notes, which are the safest.

Book value per share is calculated by dividing total owners’ equity by the total number of stock shares that are outstanding. While EPS is more important to determine the market value of a stock, book value per share is the measure of the recorded value of the company’s assets less its liabilities, the net assets backing up the business’s stock shares. It’s possible that the market value of a stock could be less than the book value per share.

The return on equity (ROE) ratio tells how much profit a bus8iness earned in comparison to the book value of its stockholders’ equity. This ratio is especially useful for privately owned businesses, which have no way of determining the current value of owners’ equity. ROE is also calculated for public corporations, but it plays a secondary role to other ratios. ROE is calculated by dividing net income by owners’ equity.

The current ratio is a measure of a business’s short-term solvency, in other words, its ability to pay it liabilities that come due in the near future. This ratio is a rough indicator of whether cash on hand plus the cash to be collected from accounts receivable and from selling inventory will be enough to pay off the liabilities that will come due in the next period. It is calculated by dividing the current assets by the current liabilities. Businesses are expected to maintain a minimum 2:1 current ratio, which means its current assets should be twice its current liabilities.

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Filed under Accounting, Business, Financial Reporting, Investing and financing : Comments (0) : Apr 29th, 2008

Revenue and Receivables

In most businesses, what drives the balance sheet are sales and expenses. In other words, they cause the assets and liabilities in a business. One of the more complicated accounting items are the accounts receivable. As a hypothetical situation, imagine a business that offers all its customers a 30-day credit period, which is fairly common in transactions between businesses, (not transactions between a business and individual consumers).

An accounts receivable asset shows how much money customers who bought products on credit still owe the business. It’s a promise of case that the business will receive. Basically, accounts receivable is the amount of uncollected sales revenue at the end of the accounting period. Cash does not increase until the business actually collects this money from its business customers. However, the amount of money in accounts receivable is included in the total sales revenue for that same period. The business did make the sales, even if it hasn’t acquired all the money from the sales yet. Sales revenue, then isn’t equal to the amount of cash that the business accumulated.

To get actual cash flow, the accountant must subtract the amount of credit sales not collected from the sales revenue in cash. Then add in the amount of cash that was collected for the credit sales that were made in the preceding reporting period. If the amount of credit sales a business made during the reporting period is greater than what was collected from customers, then the accounts receivable account increased over the period and the business has to subtract from net income that difference.

If the amount they collected during the reporting period is greater than the credit sales made, then the accounts receivable decreased over the reporting period, and the accountant needs to add to net income that difference between the receivables at the beginning of the reporting period and the receivables at the end of the same period.

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Filed under Accounting, Business, Revenue and Receivables : Comments (0) : Apr 27th, 2008

Bank Secured Credit Cards

Even though there are many types of credit cards out there for consumers, there are few for those with bad credit. Those who are looking to repair their credit have a few options available, one of which is the bank secured credit card. This credit card can help you to repair your credit, as it works in conjunction with your savings or checking account.

Bank secured credit cards look and work just like traditional credit cards, although they use your bank account as collateral. Anytime you aren’t able to pay your credit card bill at the due date, the bank will take the money out of your account. This way, there is always money there for the bank, in the event that you are unable to make your payment.

Bank secured credit cards are also ideal for those who have a bankruptcy or simply don’t qualify for a line of credit due to bad credit or no credit history. These credit cards show your bank that you are able to pay your monthly dues, and that you are taking the necessary steps in rebuilding or building your credit. Over time, if you remain responsible and pay your bill on time, your bank may give you an unsecured line of credit – known as a standard credit card with no collateral.

Due to the fact that bank secured credit cards only allow you to spend what have in your account, you don’t need to worry about debt. When you can’t make a payment, the bank simply takes the money out of your account. Although this is a great back up plan, you should always pay your bill and never let this happen.

Just like other credit cards, bank secured credit cards do have disadvantages that can hit you like a ton of bricks should you use the card irresponsibly. Anytime you don’t pay your bill on time, the bank can hit you with high interest charges and late charges. These charges and fees can get higher and higher if you don’t start paying your bill, which can eventually cause you to drain your account that you set aside. If you pay your bill on time though, you won’t have to worry about being hit with these types of charges.

For those who have bad credit or need to start building credit, a bank secured credit card is a great place to start. These cards can lead you to an unsecured credit card, providing you pay your bill on time. Almost all banks offer these credit cards, all you have to do is ask. Once you have kept your credit card in good standing for a period of time – you’ll have the satisfaction in knowing that you are taking the right steps in rebuilding your credit.

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Filed under Credit Cards : Comments (0) : Apr 24th, 2008

How is accounting used in business?

It might seem obvious, but in managing a business, it’s important to understand how the business makes a profit. A company needs a good business model and a good profit model. A business sells products or services and earns a certain amount of margin on each unit sold. The number of units sold is the sales volume during the reporting period. The business subtracts the amount of fixed expenses for the period, which gives them the operating profit before interest and income tax.

It’s important not to confuse profit with cash flow. Profit equals sales revenue minus expenses. A business manager shouldn’t assume that sales revenue equals cash inflow and that expenses equal cash outflows. In recording sales revenue, cash or another asset is increased. The asset accounts receivable is increased in recording revenue for sales made on credit. Many expenses are recorded by decreasing an asset other than cash. For example, cost of goods sold is recorded with a decrease to the inventory asset and depreciation expense is recorded with a decrease to the book value of fixed assets. Also, some expenses are recorded with an increase in the accounts payable liability or an increase in the accrued expenses payable liability.

Remember that some budgeting is better than none. Budgeting provides important advantages, like understanding the profit dynamics and the financial structure of the business. It also helps for planning for changes in the upcoming reporting period. Budgeting forces a business manager to focus on the factors that need to be improved to increase profit. A well-designed management profit and loss report provides the essential framework for budgeting profit. It’s always a good idea to look ahead to the coming year. If nothing else, at least plug the numbers in your profit report for sales volume, sales prices, product costs and other expense and see how your projected profit looks for the coming year.

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Filed under Accounting, Business : Comments (0) : Apr 20th, 2008

Foreclosure Is Not The End Of Home Ownership

As you may already know, many people throughout the country are facing foreclosure. It’s gotten so bad that some believe the government needs to step in and help. Others believe that irresponsible lending practices is the main cause of the problem and it’s best to allow what’s happening to run its course, rather than spend tax dollars on repairing what corporations screwed up.

I lean more towards the latter of the two options. This is mainly because in reality our government is broke. The national debt is well over 9 trillion dollars and increases by around 1.4 billion dollars each day. If the government interferes, it will only put the country deeper into debt and this will only make matters worse for all of us.

Don’t get me wrong. I understand how painful it is to go through a financial crisis. I’ve been in foreclosure before. If the government stays out of the issue, what will most likely happen is that the bank owned properties will be auctioned off to the highest bidders who will then either lease the property or owner finance it.

That’s right, owner financing… And what does this mean to you if you’re in foreclosure? Don’t count yourself out of the home ownership world just yet!

Many investors who buy rental property are also open to the idea of providing owner financing. This means they will act as the bank and your monthly payment will go towards paying for your home. It works exactly the same as if you were dealing with a major corporate bank. The difference is that your lender will be someone you’ve probably met.

This is a great way to rebuild your credit. Let the investor you’re dealing with know that you want to make sure you get credit for making payments on time with the credit institutions (Equifax, Transunion, Experian.) After being current with your investor / lender for a few years there’s a good chance you’ll be able to qualify for a loan with better rates and terms through a larger lender and refinance.

Right now, the best thing to do if you’re in foreclosure is to determine whether or not you can keep your home. If you cannot, do whatever it takes to avoid your property foreclosing. Just because you have decided to give your property back to the bank, it doesn’t mean that you will have a foreclosure on your record.

Once you’ve resolved the issue with your bank, you may need to rent a while. Sign a short contract (no greater than six months.) Even though you may be in a pinch, there’s a good chance that whoever you decide to rent from is in great need to find a tenant so use this to your advantage and negotiate the best possible short-term rental agreement. You can always reaffirm the contact for another 6 months if you do not find a buying situation by then.

Next, get busy working and saving money. You’ll need the money for a down payment with whoever you decide to do an owner finance with. Keep you eye out for investors who offer owner finance options and let them know who you are. Stay in touch with them while you save and they will be on the lookout for good deals that will work for both of you.

When you’re ready to buy again, before you sign on the dotted line make sure YOUR attorney reviews the closing documents. By law, the buyer is entitled to pick the closing attorney. Don’t side step this advice or you will be sorry.

Tell your attorney to review the closing documents to make sure there’s no b.s. going on. Better yet, have your attorney create the docs for you. An honest seller will not have a problem with this. There will probably be a few revisions and your goal at the end of the day is to have an agreement that everyone can be happy with.

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Filed under Business, Foreclosure : Comments (0) : Apr 19th, 2008