Solomon & Hoover CPAs, PLLC Blog - Financial Guidance to Help Your Business Succeed

Solomon & Hoover CPAs, PLLC Blog

Financial Guidance to Help Your Business Succeed

Archive for November, 2012

While growth and profitability are good measures of your business’s success, cash flow may better reflect its overall health. Cash flow is what allows you to meet current financial obligations — to employees, vendors and other creditors — and without it your company’s future is uncertain.

In fact, many of the businesses that failed during the recent economic downturn can blame cash-flow problems such as low collection rates or the inability to secure lines of credit. You can keep this from happening to your business if you understand how your decisions affect the availability of funds.

2 Analytical Tools

Two tools enable you to analyze your business’s cash flow:

1. Detailed budget. Maintaining a detailed budget for all expenditures can be tedious, but it’s essential to good cash flow management. Budget items should tie into and support overall business objectives. If you can’t demonstrate how an item supports a specific goal, question its inclusion. Such scrutiny helps you avoid unnecessary spending and makes more cash available for higher priorities.

Keep in mind that your budget is useful as an analytical tool only if it accurately reflects current spending. So update it regularly.

2. Cash flow statement. This statement is designed to report your business’s net increase or decrease in cash. It factors in the cash inflows and outflows of daily business operations, asset purchases and sale proceeds, and financing activities. Because it excludes noncash accounting items, it can help you pinpoint cash flow problems.

Cash flow statements are particularly useful when prepared monthly. This won’t be difficult if you have accounting software and use your budget as an initial input.

Cash opportunities

Once you know how your cash flows, look for opportunities to improve that flow. For many businesses, such opportunities lie in their accounts receivable department.

To minimize the risk of slow collections, conduct credit and reference checks on new customers and require them to provide deposits on orders or services to be rendered. Promptly send invoices to customers — by e-mail for faster delivery — and offer discounts for early payments. Also, don’t wait until accounts are 60 to 90 days late before contacting customers.

For more tips on improving cash flow, see the sidebar “Shortening the cash operating cycle.”

Balancing act

Cash-flow management can be a high-wire act. You can’t forgo growth. But as you grow your business, you’ll naturally have more operational costs, which will hamper cash flow. For help in striking the right balance, talk to your financial advisor.

Sidebar:  Shortening the cash operating cycle

For many businesses, the key to managing cash flow is to shorten the cash operating cycle. Consider doing the following:

  • Increase prices.
  • Lower inventory by writing off obsolete items.
  • Stretch payments on accounts payable.
  • Cut operating expenses.
  • Minimize taxes through effective tax planning

© 2012 Michele M. Hoover, CPA. Alexander & Hoover, P.A., Certified Public Accountants, specializes in providing a wide range of diversified accounting, tax, finance, and consulting services to individuals and businesses. 

To learn more, contact Michele M. Hoover, CPA at 239.481.4114 or visit http://www.alexanderhoover.com

Tax Planning: Recognize Capital Gains This Year

Posted by admin On November 13th

Right now the maximum federal tax rate on LT Capital gains is 15%.  Absent Congressional action, starting next year, the maximum rate on LT capital gains will increase to 20%.  Also starting next year, there will be a new 3.8% Medicare contribution tax that will apply to the lesser of:

  • Net investment income (including capital gains)
  • Modified Adjusted Gross Income (AGI) in excess of $200,000 ($250,000 for MFJ and $125,000 for MFS)

This means that wealthy taxpayers may end up paying 23.8% tax on their garden-variety LT capital gains starting in 2013.

Investment moves should not be made solely to capitalize on the current low capital gains rates. However, if you think that the LT capital gains rates will increase next year and you are planning to sell sometime in the near future anyway, here are some tax planning strategies to consider:

If you own appreciated LT capital gains securities (that you have held for more than a year) that you intend to sell within the next few years, you might consider selling them during the remaining months of 2012 to recognize those gains at a 15% tax rate.  If you think a security will continue to appreciate, you can immediately buy it back.  This will step up your tax basis to the current value at a low 15% tax rate.  Only gains beyond this value will be taxed at the anticipated higher rate.

If the rate increases as scheduled next year, installment sales of certain LT capital gain property (such as a piece of raw land you have held for over a year) provide a number of opportunities to capitalize on the 15% LT capital gain rate for 2012.  In fact, installment sales that originate in 2012 offer a rare chance to use 20/20 hindsight in that you have until the extended due date of the 2012 Form 1040 to decide if you want to report the full gain in 2012 and pay taxes at the current 15% rate or instead report the gain when you receive payments on the installment note and pay taxes at whatever rate applies during that year.

The current low tax rates combined with the current low applicable federal interest rates makes 2012 an especially good year to consider making installment sales of capital assets to family members.

In the case of a pre-2012 installment sale (for which it is too late to elect out of installment treatment) it is still possible to accelerate the remaining gain into 2012 if you take certain actions before the end of the year.

With careful planning, we can help you determine whether you would benefit from putting LT capital gain planning strategies in play this year.  Please give us a call if you have questions or want more information.

© 2012 Thomson Reuters/Practitioners Publishing Company.  All Rights Reserved.

© 2012 Michele M. Hoover, CPA. Alexander & Hoover, P.A., Certified Public Accountants, specializes in providing a wide range of diversified accounting, tax, finance, and consulting services to individuals and businesses.
 
To learn more, contact Michele M. Hoover, CPA at 239.481.4114 or visit http://www.alexanderhoover.com