Ways to Put a Value on Goodwill

When a company is acquired, the difference between the purchase price and its book value is considered goodwill. There are four recognized methods of accounting for goodwill.

Write-off – Goodwill can be written off immediately against retained earnings. Advocates of this method point out that goodwill is not measurable and has no definitive future value.

Capitalization – Proponents of this approach argue that goodwill is an important asset that belongs on the balance sheet. The main problem with capitalization of goodwill is determining the appropriate amount.

Non-amortization – Capitalization of goodwill without amortization produces the most advantageous financial reporting figures. The company records an asset instead of a decrease in retained earnings, and net income is not reduced thereafter.

Amortization – Amortization enables a company to write down the cost of intangible assets over a period of time following acquisition. If the life of the goodwill asset is indeterminate, it is amortized over a maximum of 40 years.

The Facts about Amortization and Depreciation

Amortization measures the consumption of the value of an intangible asset, such as a copyright, patent or trademark. In accounting parlance, amortization refers to the deduction of capital expenses over the life of an intangible asset.

Intangible assets are generally expensed according to their life expectancy, but nonphysical assets may have either an identifiable or indefinite useful life. Examples of intangible assets with identifiable useful lives include copyrights and patents, and these are amortized on a straight-line basis over their economic or legal life, whichever is shorter.

Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairment loss is determined by subtracting the asset’s fair value from its book value. This impairment loss may be reversed only under certain circumstances.  Trademarks and goodwill are examples of intangible assets with indefinite useful lives.
Goodwill must be tested for impairment rather than amortized. If impaired, goodwill is reduced and a loss must be recognized on the income statement.

Depreciation is an expense allocated to a tangible asset’s cost over its useful life. Think of depreciation as the reduction of an asset’s value due to use, passage of time, wear and tear, technological obsolescence, depletion, inadequacy, rot, rust, decay or other similar factors.

Depreciation is the allocation of the historical cost of an asset over the time when the asset is employed to generate revenues. This process of cost allocation has little or no relevance to the market value or current selling price of the asset. It is simply a recognition that a portion of the asset’s cost was used up in the generation of revenues during a given time period.

When used for accounting purposes, amortization and depreciation are noncash expenses that do not affect a company’s cash flow.

Depreciation recognized for tax purposes will, however, affect the cash flow of the company, as tax depreciation will reduce taxable profits. There is generally no requirement that depreciation for tax and accounting purposes be treated the same way. Where depreciation is shown on accounting statements, the figure usually does not match the depreciation for tax purposes.

Straight-line depreciation spreads the cost of depreciation evenly over the life of an asset. On the other hand, there are various methods of accelerated depreciation that allow you to deduct more in the first years after purchase. Bonus depreciation is an additional amount of deductible depreciation that is always taken in the first year of an asset’s service. Bonus depreciation may be offered as an incentive or as a measure of relief for small and medium-sized businesses to buy additional equipment.

The depreciation method used for an asset is fixed when the asset is first placed into service. Whatever rules or tables are in effect for that year must be followed as long as you own the asset.

Since depreciation rules have changed many times over the years, you may have to use a number of different depreciation methods if you’ve owned business assets for a long time.

Why Smart Inventory Management Keeps the Cash Flowing

Good inventory management is a key aspect of managing cash flow. Too much inventory depletes your business’s resources, tying up cash in the form of goods, as well as insurance, storage and interest charges on those goods. On the other hand, too little inventory can result in lost sales, delays and customer aggravation – free gifts to your competitors.

Inventory management is a juggling act. While you need to keep an adequate quantity and variety of goods on hand to meet customer demand in a timely manner, you don’t want to invest too much in goods that don’t sell well or may become obsolete, spoiled or irrelevant.

Many businesses strive to operate on a just-in-time (JIT) basis, holding stock for a minimal amount of time before moving it, selling it or using it. The keys to effective JIT inventory management are to pinpoint the rate at which each item in your shop moves and to maintain optimum stock levels for each item. To optimize stock levels, consider:

•    Anticipated stock turns for each item
•    Availability of raw materials and components to manufacture or assemble goods
•    Time necessary for delivery by suppliers
•    Shelf life for each item

To reduce excess inventory, you may need to sell off outdated or slow-moving merchandise. Remember that stock sitting on your shelves for long periods of time ties up money that  is not working for you.

Cut End-of-Year Stress with a Paper Trail That Starts Today

Keeping up-to-date and accurate records helps businesses succeed in many ways.  Records help track the progress of a business, help monitor expenses and deductions, assist in preparing financial statements, show all sources of receipts, and help prepare and support tax filings.

Basic record keeping is required to manage all day-to-day dealings. These include an overall summary of all business transactions; profit/loss statements that show gross receipts, returns, and credits; income statements showing all gross income; and a business checking ledger that lists all business-related expenses.

In addition to basic bookkeeping, there are several supporting documents each business should keep. These documents are necessary for tax and legal purposes, but also speed up the process of creating end-of-the month/year reports.

All money received from the sale of goods or services is considered gross receipts.  Documents that should be kept for proof of gross receipts include deposit tickets; cash register, credit card, or written receipts; invoices; and 1099-MISC statements.  Any purchases the business makes, whether for the business itself or for resale, should be recorded as well.  Such transactions include purchases of materials or inventory, office supplies, advertising expenses, insurance, and even trade dues.  Some of these items may also need to be recorded on asset or depreciation statements.  Back-up documentation for these entries includes invoices, cash receipts, cancelled checks, account statements, and credit card receipts.

Any expenses incurred from travel, entertainment, or transportation should also be documented and recorded for tax deduction purposes.

Sales tax paid to state and local governments, federal employer taxes, and employee taxes all need to be documented.

How to Add Capacity without Ruining Your Cash Flow

Think of something that could make money for your business: a truck to expand your fleet, a computer to make your staff more efficient, signage to draw more foot traffic, or perhaps a new machine to enhance your output capacity.

You could be more productive if you had that tool working for you. In fact, looking at it in another way, not having that piece of equipment is actually siphoning money away from your business.

Acquiring additional equipment or adding capacity can be a capital-intensive endeavor for SMEs, tying up funds that might otherwise be used for advertising, overhead, or reserves. Moreover, you will not begin to accrue a positive cash flow from the tools acquired until they are paid for – many months or even years down the road.

Often leasing is the right solution for SMEs. Leasing gives you the benefit of having the equipment work for you at a reasonable monthly fee and avoids a large initial capital outlay. Over and above that, the added capacity is contributing to your positive cash flow.

Leasing equipment enables you to start to appreciate the benefit of that equipment almost immediately. The equipment begins to pay for itself as soon as it earns a single dollar over and above the first month’s lease fee. You are essentially cash-flow positive from the very first month.

When you defer acquiring tools/upgrades/expansions, you are relinquishing the capital that they could be generating for your company.