Small Businesses & Cash Flow Management
Jun 25, 2015
The entrepreneurial spirit that compels people to start their own business does not necessarily translate into them being good business managers and this can lead to a stumbling block for many small business owners.
One of the most troubling aspects of running a small business can be learning how to manage cash flow. Understanding the basics of cash flow can help owners plan for large and small upcoming events in their business.
Cash is what you have at any given time to meet your daily expenses. The cash that you spend to buy inventory or business equipment is cash that is an asset on your balance sheet, but that cannot be easily converted to pay monthly expenses. Profit on an income statement does not equate to cash in the bank if you have accounts receivables waiting to be paid. You cannot spend profit. A profit on the income statement does not always indicate financial health unless the company also has a positive cash flow that correlate to those profits.
Many business owners use a cash flow statement to help them understand the movement of cash in their business. A cash flow statement will tell them the sources and uses of their cash. A typical statement has three areas:
Operating Cash Flow – The cash generated from the day-to-day operations of the business including the sales of products, the collection of accounts receivable, and the payments of vendors.
Investing Cash Flow – The cash that is used to purchase equipment.
Financing cash flow – The cash from outside normal business operations, money from lenders or shareholders. A new loan or the repayment of a loan creates the cash inflow or outflow.
Good cash flow management requires the business owner to be forward thinking – when and how will cash be needed. How will I acquire the cash needed? Through better accounts receivable collection or from a bank in the form of a loan?
Adapting to cash flow management could mean the difference the success or failure of a business.William Vaughan Company has the skills and expertise to help our clients with all aspects of their business management. Contact us today to find out more about how cash flow management can help your business.
Categories: Healthcare & Dentistry
Practical vs. Theoretical Capacity
Jun 24, 2015
At one of our recent seminars, a participant asked about theoretical and practical capacity and their uses. You may have heard these terms if you work in any kind of manufacturing environment. To start, we should probably understand what each one means. Practical capacityis a manufacturer’s level of output (often expressed in machine hours, barrels, pounds, etc.) which is less than its theoretical or ideal capacity. In order to better understand this definition, you must recognize the significance of theoretical capacity.
Theoretical capacity is the level of a manufacturer’s production that would be attained if all of its equipment and operations performed continuously at their optimum efficiency. Theoretical capacity is also referred to as ideal capacity.
In summary, practical capacity is the most realistic to occur based on the machines, people, and space. Theoretical capacity the perfect world scenario with everything being fully utilized. Obviously, theoretical capacity is virtually unobtainable.
There are different occasions when each would be appropriate to apply. However, like most costing principles, you cannot always use one or the other. Circumstances can vary and most often “it depends”.
When you are determining a make vs. buy calculation and want to know if you can replace lost capacity if you decide to buy a product, you may view your options in multiple ways. One way could be with practical capacity. Do you have the capability to replace the lost work, and is it realistic. If you are above full practical capacity already can you maintain that? You can also think about theoretical capacity, but cannot assume that is realistic. Things will never be perfect, so planning based on perfection is not a good idea.
In a nutshell, practical capacity is realistic, but do not get stuck in a rut and think you cannot improve upon what you currently are doing. Often times you can aim towards a more theoretical capacity. What are some of the ways you use and consider theoretical and practical capacity?
Categories: Cost Accounting
Ohio Means Internships and Co-ops Grant Program (OMIC)
Jun 23, 2015
The OMIC Grant Program was formed to connect businesses and higher education for the purpose of integrating academic work with experience in the business world. This program has been funded through one-time casino licensing fees.
The OMIC grant is awarded to educational facilities to build internship and co-op programs as they play such an important role in the in the State’s effort to attract, retain and reward students and businesses. The whole goal of the program is to prepare students to be work-ready when they graduate, allow businesses to interact with educational institutions and to help be responsive to the needs of students and businesses.
Student offerings:
- Provides students the opportunity to assess career opportunities in key Ohio industries.
- Allows them to apply the skills and knowledge they have learned in the classroom.
- Exposes students to the work environment and ethics of the business world.
- Means of income while working towards a degree.
Employer Offerings:
- The opportunity to observe the skills and work ethic of potential future employees.
- Creates opportunity for new ideas and creativity.
- Wages are fully paid through the grant so there is not cost to the employer.
Employers who qualify for the grant must fall under Ohio’s targeted industry list:
- Aerospace and Aviation
- Automotive
- Advanced Manufacturing
- BioHealth
- Consumer Products
- Financial Services
- Energy
- Information Technologies and Services
Business Functions include:
- Headquarters and Consulting
- Back Office
- Logistics
- Research and Development
The following educational institutions have partnered with the State of Ohio for the OMIC grant program:
The University of Akron Antioch College Bowling Green State University Central State University Cincinnati State Technical & Community College University of Cincinnati Clark State Community College Cleveland State University Cuyahoga Community College University of Dayton Edison Community College The University of Findlay Kent State University Lorain County Community College Lourdes University Marietta College Miami University The Ohio State University Ohio University Owens Community College Rhodes State College Southern State Community College Stark State College Terra Community College Wright State University Youngstown State University
This grant will allow businesses in key Ohio industries to hire students as interns or co-ops at no cost to them, making it a win-win situation for students and businesses. If you have questions regarding your organization’s qualifications, please feel free to contact us or go online to www.ohiomeansinternships.com
By: Amy Slates, CPA
Categories: Other Resources
Scrap Cost Controls
Jun 19, 2015
On a recent job costing assignment, we were working with a manufacturer which had significant portions of raw material that was unable to be used in the final product. This unused product became scrap, and since there was quite a bit, the scrap factor was very high. As a result, management was very interested in how much scrap was being created because even small improvements in the operation could result in significant reductions in product cost.
The high scrap factor combined with high scrap metal prices made accounting for the scrap very cost effective. In this case, management was interested in all types of controls related to the production of scrap and the accounting for scrap. They hoped these controls would maximize the resale value of scrap being created, as well as, help minimizing scrap being produced in the manufacturing process.
They separated the raw material variances from just cost and efficiency to include a standard scrap allowance. This was measured as frequently as were efficiency variances.They also included a process to precisely weigh scrap at the end of each shift. Prior to this, they had approximated scrap weight at the end of a 24-hour period by simply estimating scrap created and disposed of based on the size of the container and the quantity estimated to be in the container.
As part of the new costs process, they instituted a policy of weighing each container of scrap metal at the end of each shift. This allowed them to precisely correlate scrap produced in relationship to product produced. They were then able to estimate the amount of revenue that would be created by the scale of scrap particularly when scrap metal prices were so high.
The entire goal of this process was to improve overall profitability by directly assigning the responsibility of scrap produced to the shift supervision.
A few years ago, we experienced similar circumstance with a much larger food producing client. In this case, the manufacturer had developed a new process for minimizing waste on raw product entering the manufacturing process. This new proprietary process carried with it the hope of significantly reducing the amount of waste created at the start of the process for this product. Substantial resources were expended developing this new process, so management was interested to learn how much savings were to be created. Waste in this process was always reasonably estimated before, so management imposed new restrictions whereby all waste containers had to be weighed as they were being filled and removed from the production line. As a result, the accuracy of the waste counts improved and clearly pointed out the improvements in minimization of waste by this new scrap or waste processes.
Both of these examples point out the need to constantly improve your accounting. Remember what gets measured must get managed.
Categories: Cost Accounting
Mid- Year Tax Planning Ideas
Jun 18, 2015
The earlier in the year you have an opportunity to talk to your accountant about 2015 tax planning opportunities, the more likely you will be able to take advantage of them before the filing season begins. More often than not, accountants only talk to clients at year-end and there have been changes in your life that can affect tax planning. Some of the areas to consider are education planning, retirement, marriage or even divorce.
Education planning is important to parents and their college-bound children. The cost of college is increasing at an alarming rate. The tax-favored 529 plan is an option for both parents and grandparents in planning for tuition. The 529 plan contributions accumulate untaxed and if spent on qualified education expenses are never subject to income tax.
Retirement planning can be beneficial to help you achieve your long-term goals. The maximum 401k contribution for 2015 is $18,000, an increase of $500. The catch-up contribution for those over 50 years old has increased to $6,000. If you are thinking of retiring before being eligible for Medicare, the cost of health care coverage needs to be considered.
When clients are about to get married, financial issues need to be discussed. Review all financial accounts and decide whether they should be jointly registered. The future spouse will need to know where investment accounts are and how to access. Clients should update wills and beneficiaries or even speak with an attorney about a prenuptial agreement. Health insurance and life insurance coverage should be updated. There is also the Medicare surtax on higher income earners. The threshold for being subject to the 3.8 percent surtax on net investment income is $250,000 for married filing jointly. Also, making any needed adjustments to tax withholding to help ensure there is not a huge bill on April 15 or a large overpayment.
Then there is the unfortunate reality of clients getting divorced. The same items discussed when getting married will apply. Financial accounts separated, wills changed and tax planning for a single income. The client may have to restrain spending in the short-term future until matters are settled.
Some clients might come out of a mid-year tax review session without needing to change anything. Even so, it is a reminder that your accountant is another valuable resource in planning for your future.
By: Diane Cook, Accountant
Categories: Other Resources