Managing Inventory Drives Cash into Your Business

The health of a business is dependent upon cash flow. So you need to be conscious of ways of using funds more efficiently.

Owning a business that carries inventory for resale presents special challenges. Inventory items drain your cash, but managing inventory for resale actually drives cash into your business.

Use financial information regularly to monitor your inventory levels. Your optimal amount of inventory is just enough on hand to meet customer demand. The secret to managing this successfully is by measuring inventory turnover. This is the ratio of your cost for items sold from inventory to the cost of inventory on hand. Put another way, divide cost of goods sold by current inventory: If you sold widgets last month that cost you $300 and you paid $100 for widgets on hand, your inventory turnover is three times per month.

This measure is only reliable if your accounting separates the cost for inventory items from any other category within cost of goods sold. Ideally, you want a breakdown of the cost of goods sold and the current inventory figures for each item your business sells. Downward-creeping inventory turnover is a signal you need fewer items on hand to meet demand.

Of course, occasional physical inspections are necessary to ensure that inventory figures are accurate. Count the number of units in an inventory item category and multiply by the cost per unit. This is tedious work, but you can always hire a service to do it.

A bookkeeping entry corrects your financial statements to match the inventory count.

DIY: Learn to Use Your Financial Statements

If you want to glean valuable information from your financial reports, you need to get your hands dirty. And that means compiling details yourself. By becoming involved in the data entry process, you can better see the inner workings of financial reports.

You don’t need to “do the books” manually or create full financial statements. But you should understand what those recorded transactions mean and how your financial statements work to provide you with information you need to make decisions. Here are the steps to follow:

Mental preparation

Your journey into the world of bookkeeping only transports you a short distance; your objective is more like understanding Dr. Seuss than conquering Shakespeare.

Rather than fearing the subject is too complicated, take an interest in learning basic bookkeeping rules.

It’s like studying up on a sport you want to appreciate as a spectator; you don’t want to play the game yourself. Focus on your goal of discovering how the figures deliver the true health and state of your business.

Tools

Find a helpful resource that explains the basics of bookkeeping in plain language. Many books tie together the essentials in a short format that’s easy to remember. Help is also available from friends or online articles, and of course your accountant is a valuable source of information.

After learning how a business transaction is recorded, you can begin to record one yourself, starting with a very low-tech system – the old-fashioned pencil and paper.

Once you fully comprehend the basics of the manual system, you can advance to computer programs. But note that accounting software does not do the work for you; these platforms only produce an output of reports based on your accurate input of transactions.

Following the procedure

Doing simple transactions is sufficient to teach you how they are summarized on financial statements. Make sure you know how to record a basic sale: Money comes in on one ledger and income is recorded on another ledger. Next, pay an expense: Cash goes out on one ledger and expenses go up on a different ledger.

Make things a little trickier by adding accrual accounting to the picture. Record a sale for which you invoice today and receive payment later. Try an expense in which you are billed now and pay two weeks later.

After each step, watch to see how your transaction shows up on the financial statements.

Summing up

By becoming involved in the data entry process, you can uncover errors. You also begin to see opportunities for analysis.

Accurate records that speak to you allow you to improve spending decisions, conduct better budgeting assessments, manage cash flow and monitor what’s owed to your vendors and due from your customers.

Providing a great product or service and winning customers is only part of a business owner’s mission. The difference between working hard and working efficiently is clearly revealed in your financial statements.

Grasping the steps that go into producing statements gives you the ability to extract from them useful and profitable information.

Managing Inventory Drives Cash into Your Business

 

The health of a business is dependent upon cash flow. So you need to be conscious of ways of using funds more efficiently.

Owning a business that carries inventory for resale presents special challenges. Inventory items drain your cash, but managing inventory for resale actually drives cash into your business.

Use financial information regularly to monitor your inventory levels. Your optimal amount of inventory is just enough on hand to meet customer demand. The secret to managing this successfully is by measuring inventory turnover. This is the ratio of your cost for items sold from inventory to the cost of inventory on hand. Put another way, divide cost of goods sold by current inventory: If you sold widgets last month that cost you $300 and you paid $100 for widgets on hand, your inventory turnover is three times per month.

This measure is only reliable if your accounting separates the cost for inventory items from any other category within cost of goods sold. Ideally, you want a breakdown of the cost of goods sold and the current inventory figures for each item your business sells. Downward-creeping inventory turnover is a signal you need fewer items on hand to meet demand.

Of course, occasional physical inspections are necessary to ensure that inventory figures are accurate. Count the number of units in an inventory item category and multiply by the cost per unit. This is tedious work, but you can always hire a service to do it.

A bookkeeping entry corrects your financial statements to match the inventory count.

Understanding Travel Tax Deduction Rules

When the IRS develops special rules for a particular business expense category, you know it’s the their way of discouraging you from claiming deductions in this category.

Take travel expenditures. The rules around this expense category are complicated; however, every business owner should understand the deductibility restrictions.

First, you’re not allowed to deduct the cost of a trip unless its primary purpose is business. As long as the trip’s main objective is business, you can deduct all your transportation costs. There is no deduction permitted for family members unless they’re business employees needed on the trip.

Second, a business day is defined as one in which you conduct any business activity. So, if you spend the morning in a meeting and the afternoon sightseeing, it’s still considered a business day. But a day of sightseeing without a business element is not deductible.

You also can’t deduct the cost of lodging or meals on days that don’t include business. And remember, you can only deduct 50% of business meals, including meals on business travel days.

If the purpose of your trip is primarily nonbusiness, the only expenses you’re permitted to deduct are those directly related to business. For example, when you take a vacation but have one dinner with a client, that meal is tax deductible subject to the 50% limitation.

One leniency the IRS has allowed is that you don’t need receipts for travel expenses of $75 or less, unless the deduction covers lodging. So, don’t worry about receipts for short taxi rides.

Turn to Your Accountant for Business Advice

Overlooking a source of good advice is almost as detrimental to your business as not planning for the future. But you don’t have to look far for valuable resources: Why not turn to your trusted small-business accountant?

Accountants handle more than bookkeeping and tax return preparation. They’re trained to analyze and interpret data; render expert suggestions; and evaluate situations that confront you.

If you’re not meeting regularly with your accountant, now is the time to start. Most accountants are able to schedule appointments before the busy tax season starts; so tap into this resource soon.

Bookkeeping Advice

Before meeting with your accountant, talk with your bookkeeper to be sure that all transactions are correctly recorded, and identify any unresolved details that need accountant input.

For example, tax misclassification is an easy mistake for your bookkeeper to make, due to lack of communication. Many small-business owners pay nondeductible personal expenses from company funds but forget to inform their bookkeeper. As well, expenditures such as travel combine both personal and business elements and often are entered incorrectly.

Once you’ve talked to your bookkeeper, prepare a complete record of all your business transactions for your accountant, as he or she is a crucial resource for verifying the tax treatment of every entry.

Efficiency Advice

Come up with a list of nonbookkeeping topics to discuss with your accountant. Consider business planning and management issues. An accountant is trained to evaluate your inventory control system and the efficiency of your personnel based on the information in your financial statements.

The right advice can provide you with insights into your operations.  For example, your accountant may be able to explain how selling more of an item could reduce your profit margin. Or he or she may spot the fact that you have too many employees in one area and too few in another. Making suggested adjustments can boost your profits.

Growth Advice

If you’re thinking of expanding your business, your accountant’s advice is vital. Before purchasing new equipment or adding to staff, you need to know the impact on cash flow.

Your accountant can determine the break-even point for any growth initiative. In many cases, seizing new opportunities may cost you too much. An accountant recognizes when the risk for running out of cash is too great and recommends alternatives. If you decide to borrow for expansion, the cash flow projection prepared by your accountant will improve your ability to obtain financing.

Technology Advice

Accounting data is so essential to ongoing business operations that business owners require assistance protecting it. Cloud storage technology provides security and remote access to accounting records. This inexpensive technology enables you to outsource bookkeeping tasks, instead of hiring an in-house employee. Plus, you can give your accountant year-round access to your company’s financial records while you retain control over the data.

Your accountant is the proper choice for advice on a multitude of issues. Rely on these advisory services; you won’t find a better consultant.

Stop Fearing the Cash Flow Roller Coaster

As you know, starting your own business isn’t for the faint of heart, and you didn’t take the plunge because you enjoy leisurely amusement park rides. So stop fearing the roller coaster ups and downs of cash flow management. Taking charge of your cash flow isn’t as complicated as you might expect.

Understanding your business cash flow allows you to plan ahead and gives you a high comfort level that you will be able to meet your goals.

To achieve business success you must capture new opportunities, whatever the risks. This is evident when using cash for expansion or upgrades. Having cash on hand gives you a feeling of security, but your business will stagnate if you fail to deploy cash to grow. The only obstacle is making sure you have sufficient funds.

Determining Cash Flow

Start by assessing your company’s cash flow. Many enterprises have “cash basis” bookkeeping – income is recorded only when collected. Counting income when you send an invoice is “accrual basis.” When using cash basis, expenses are those already paid; accrual basis records expenses when you’re billed.

Your cash basis profit and loss statement (P&L) mainly reflects actual cash flow for both income and expenses. Some adjustment is required for cash outlays not on the P&L, such as principal paid on loans or purchases of furniture and equipment. Also, noncash accounting expenses such as depreciation are added to profit when determining cash flow.

Your accountant can create a cash flow statement as part of your monthly financial reports. This is particularly important if you have an accrual basis P&L. Accounting software such as QuickBooks allows printing of cash flow statements.

Evaluating Cash Flow

Improve cash flow by finding ways of reducing expenses without draining productivity. Sometimes cutting your own salary is the best option; a wise entrepreneur is willing to reduce his pay in the short term for a long-term gain.

A reasonable calculation of monthly cash flow is the average over several months. This is the amount of money your business generates to solve special problems such as equipment breakdowns as well as to tackle unforeseen events such as shipping problems or a late-paying customer. Calculate the cash you’ll need each month for these contingencies.

Cash flow is also required to reduce debt. You must keep your borrowing power intact for those times when you need an immediate loan.

After accounting for emergencies and loan repayments, the remaining cash flow is available for new goals.

Funding Goals

Next, prioritize objectives for improving or expanding your business. Outline costs and benefits for each goal and identify best choices. Armed with the cash flow figures, you now can determine how many months of operation are required to safely build the funds needed for a particular task.

Goals such as upgrading equipment or adding an employee are easy to implement if you plan using cash flow management. Or you can use the excess cash flow to service additional debt. That analytical approach is what bankers need in order to loan you money to modernize and grow.

Education Can Be Tax Deductible – But Ensure It’s Legit

As a business owner, you probably are barraged by invitations to educational events – free courses and those that cost.

Fortunately, you don’t have to worry about paying for courses; you’re usually allowed a tax deduction for the cost of business education. You just have to be sure the subject is relevant to your existing business.

Education expenses are tax deductions only when the education improves the skills you require for your current job. Business owners and their staff can deduct costs for seminars, conference, and symposiums related to their employment but not, however, for any new business ventures.

If, for example, you’re in the business of selling shoes and decide you want to breed thoroughbred horses, you can’t deduct the cost of a course on racehorses. It would be disallowed even if you actually did become a horse breeder down the road. Your intent for an educational undertaking is irrelevant. All that matters is whether the education improves your existing work.

Also, while your philosophy is to pay for all types of education, you can prevent future problems by alerting your bookkeeper and accountant whenever your business pays for nondeductible personal education.

Meanwhile, enjoy the tax-deductible seminars and conferences that relate to your current business. Even general business education courses count, so why not take an introductory accounting class? You’ll develop familiarity with bean-counter terminology and better appreciate the role of high-level accounting in your business.