Cash Flow: The Life Blood of Business

Cash is essential to the success of any business. Cash is the "life blood" that keeps a business operating. If cash drys up, the business fails. Understanding your business' cash flow is a key managerial skill.

Failure to properly plan cash flow is one of the leading causes of small business failures. Understanding the basics will help you better manage your cash flow. Cash flow considerations become even more important as the economy struggles and businesses need to tighten all financial controls.

Your business' monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash.

For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable credit sales, usually paid 30 days after the original purchase date.

This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, increasing your cash. Now your cash has completed its flow through the operating cycle, and the process is ready to begin again.

Current Assets

Cash and other balance-sheet items that convert into cash within 12 months are referred to as current assets. Typical current assets include cash, marketable securities, receivables and prepaid expenses.

Cash-Flow Analysis

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flows and will allow adequate time to plan and prepare for the growth of your business.

It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

Planning a Positive Cash Flow

Your business can increase cash reserves in a number of ways.

• Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. You stand to lose revenues if your collection policies are not aggressive. The longer your customer's balance remains unpaid, the less likely it is that you will receive full payment.

• Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services. You should measure, however, any consequent increase in sales against a possible increase in bad-debt expenses.

• Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are types of credit used in this situation.

• Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.

How to Get Paid On Time

With the current struggling economic conditions, the collection of accounts receivable is becoming more and more of a challenge each day. Strengthening your collection procedures may allow you to shorten the aging days of your accounts receivable and improve collection rates.

The following suggestions can help your business tighten up its credit and collections policies and improve its cash flow. Although some of the tips discussed here may not be suitable for every business, they can serve as general guidelines to help improve cash flow.

Define Your Policy. It's important to have a clear credit policy. Your sales force should not be able to sell to customers who are not credit-worthy, or who have become delinquent. Define and stick to concrete credit guidelines. You should also clearly delineate what leeway sales people have to vary from these guidelines in attempting to attract customers.

Tip: A system of controls for checking out a potential customer's credit should be in place, and it should be used before an order is shipped. Further, there should be clear communication between the accounting department and the sales department as to current customers who become delinquent or otherwise contravene credit policy.

Tell Customers About Your Payment and Collection Policy. Communicate your policy to customers. Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.

Tip: Make sure invoices include a telephone number customers can call or website address customers can access with billing questions and a pre-addressed envelope.

Tip: The faster invoices are sent, the faster you will receive payment. For most businesses, it's best to send an invoice with a shipment, not afterwards in a separate mailing.

Follow Through On Your Payment and Collection Terms. If your policy is that late payers will go into collection after 60 days, then you must stick to that policy. Someone 'not a salesperson' should call all late payers and ask for payment. Accounts of those who exceed your payment deadlines should be penalized and/or sent into collection, if that is your stated policy.

Train Staff Appropriately. The person you designate to make calls to delinquent customers must be apprised of the seriousness and professionalism required for the task. Here is a suggested routine for calls to delinquent payers:

• Become familiar with the account's history and any past and present invoices.

• Call the customer and ask to speak with whoever has the authority to make the payment.

• Demand payment in plain, non-apologetic terms.

• If the customer offers payment, ask for specific dates and terms. If no payment is offered, tell the customer what the consequences will be to him.

• Take notes on the conversation.

• Make a follow-up call if no payment is received, and refer to the notes taken as to any promised payments.

Changes in Tax Brackets and Benefits for 2010

For 2010, personal exemptions and standard deductions will change only slightly to reflect inflation adjustments. Many levels will remain consistent with 2009.

By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result of little inflation, there will be no significant changes for 2010. The following is a brief review of some of the key levels effecting 2010 returns, filed by most taxpayers in early 2011, include the following:

• The value of each personal and dependency exemption, available to most taxpayers, will remain at the same level of $3,650, no change from 2009.

• The new standard deduction is $11,400 for married couples filing a joint return in 2010 (no change from 2009), and $5,700 for singles and married individuals filing separately (again, no change from 2009. The Head of Household standard deduction increased slightly to $8,400 for heads of household (up from $8,350 in 2009). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

• Tax-bracket thresholds increase slightly for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $68,000, up from $67,900 in 2009.

• The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.

• The annual gift exclusion will remain at $13,000, same as 2009.






IRS Announces 2010 Standard Mileage Rates

Beginning on January 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven

• 16.5 cents per mile driven for medical or moving purposes

• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year's. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

The business mileage rate was 55 cents in 2009. The medical and moving rate was 24 cents.






2010 Rules for Roth IRAs

Beginning January 1, 2010, the income and filing status requirements for rollovers (including conversions) to a Roth IRA was eliminated. Additionally, for rollovers to a Roth IRA in 2010 only, a special 2-year option for reporting taxable portions of your rollover apply.

Under the new rules, regardless of your income or filing status, you can roll over (convert) the following to a Roth IRA:

• Your traditional individual retirement arrangement (IRA), SEP IRA or SIMPLE IRA;
• an Eligible rollover distribution (ERD)- For example, a 401(k) or a 403(b) plan; or
• an ER from a retirement plan for which you are a beneficiary.

For rollovers and conversions to a Roth IRA in 2010 only, you have the option of reporting the taxable portion of your rollover in your gross income for 2010, or reporting half in 2010 and half in 2011.

Previously, to roll over to a Roth IRA, both of these requirements needed to be met; your modified AGI was less than $100,000 and your filing status was not married filing separate.

For additional information on the effect of the 2010 changes on your retirement accounts, please contact us.






Filing Requirements for Dependents

Whether a dependent had to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind.

Note: A dependent may have to file a return even if his or her income is less than the amount that would normally require a return.

Even if you do not have to file, you should file a federal income tax return to get money back if any of the following apply:

• You had income tax withheld from your pay.
• You qualify for the earned income credit.
• You qualify for the additional child tax credit.

IRS Publication 929 provides worksheets to help you determine the need to file for dependents. Contact us for further information.






Receive Your Refund Faster with Direct Deposit

It is tax time! Want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 61 million people had their tax refunds deposited directly into their bank accounts last year. It's a secure and convenient way to get your money in your pocket faster.

• Security. The payment is secure - there is no check to get lost. Each year thousands of refund checks are returned by the US Post Office to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund stolen.

• Convenience. There's no special trip to the bank to deposit a check!

To request direct deposit, follow the instructions for 'Refund' on your tax return.

Want an even faster refund? Try e-file! Taxpayers who file electronically get their refunds in about half the time as those who file paper returns.

You can also electronically direct your refund to multiple accounts. With the new "split refund" option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions. The split refund option, using Form 8888, is also available for paper returns.

Caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Also, make sure you have the correct nine-digit routing number and your account number when selecting direct deposit.






Financial Tips for January 2010

Create a Financial Plan and Monitoring System


If you haven't already done so, prepare a financial plan and a budgeting system for monitoring your income, expenses, assets and liabilities. The information you collect will enable you to start planning for retirement or other major life events. Use last year's information to establish a budget for the coming year.

Setup an Effective Filing System


If you haven't already done so, set up a filing system for storing your important documents and records.

Prepare for Taxes


Start getting ready for preparing your tax return for the preceding year. As you receive Forms W-2, 1099 and other tax documents, file them immediately. This will reduce time looking for them later.

Request a social security number for any child regardless of age who does not already have one.





Tax Due Dates for January 2010

	Employers - Give your employees their copies of Form W-2 for 2009 by February 1, 2010. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by February 1st.
January 1	Employers - Stop advance payments of the earned income credit for any employee who did not give you a new Form W-5 for 2010.
January 11	Employees - who work for tips. If you received $20 or more in tips during December, report them to your employer. You can use Form 4070 Employee's Report of Tips to Employer.
January 15	Employers - Social Security, Medicare and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2009. Individuals - Make a payment of your estimated tax for 2008 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2009 estimated tax. However, you do not have to make this payment if you file your 2009 return (Form 1040) and pay any tax due by February 1, 2010. Employers - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in December 2009. Farmers and Fishermen - Pay your estimated tax for 2009 using Form 1040-ES. You have until April 15 to file your 2009 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2009 return and pay any tax due by March 1, 2010, to avoid an estimated tax penalty.
February 1	Employers - Federal unemployment tax. File Form 940 for 2009. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 10 to file the return. Employers - Social security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2009. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2009 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return. Employers - Give your employees their copies of Form W-2 for 2009. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by February 1. Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040) for 2009. Filing your return and paying any tax due by February 1 prevents any penalty for late payment of last installment. Businesses - Give annual information statements to recipients of 1099 payments made during 2009. Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of From W-2G. Certain Small Employers - File Form 944 to report social security and Medicare taxes and withheld income tax for 2009. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2008 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.






Copyright © 2010  All materials contained in this document are protected by U.S. and international copyright laws. All other trade names, trademarks, registered trademarks and service marks are the property of their respective owners.