DETERMINING THE RIGHT CASH BALANCE

Today I continue sharing my toughts about business cash flow management. As I mentioned on my previous posting, the information being shared here can also be applied to your family cash management.

One of my main complaints with bookkeepers, accountants and other professionals in the accounting and financial profession is their obsession with net income when advising their small business clients, instead of focusing on cash flow.  As I mentioned on my previous posting, cash flow is the life blood of any business. However, for a small business it is even more critical to have a tight grip on cash flow management. Small business owners must insist their accountants, CFOs, bookkeepers, CPAs to help them with the cash management instead of worrying so much about the net income.

Why is cash flow management so important for a business? 

The main reason, your business could go bankrupt while you continue showing profitable financial statements. Many of you may be thinking; What? When you have been in this industry for over 20 years you have seen your fair share of things that will make you go hmmm. This is one area that baffles many small business owners; "But my CPA showed my financial statements last six months showing me a profit...." when they get hit by a Mac truck in the middle of the highway when the news hit them that they are bankrupt or in a serious cash flow deficiency.

When looking at cash flow management you must look at both extremes, another mistake that many financial professionals make is to only focus on the cash flow deficiency side only. If your business has been blessed with excess cash, the excess cash should never be idle (i.e. invested in marketable securities, buying productive assets (such as computers or machinery and equipment), reducing debt, etc).


How much cash balance should I hold?

This is an awesome question and the answer is depends. The answer to this important question is not so simple since it is affected by many external factors:

1. State of the economy - If economic uncertainty exists, the conservative
strategy is to retain higher cash balances.
2. Rate of return from marketable securities you can earn
3. Uncertainty about future cash flows
4. Ability to borrow on short term notice
5. How long funds are needed?




To name a few.

If there is an inadequate cash balance, you face the following adverse effects:



1. The negative impact on your credit rating of not paying a creditor on time.
2. The possibility of losing a cash discount and incurring late fees.
3. The inability to make a bargain purchase because of lack of funds.
4. The payment of brokerage and administrative fees when marketable securities are sold or a bank line of credit is used to obtain funds.
5. The possibility of having to borrow at high interest rates.
6. The need to sell assets to derive cash, such as selling accounts receivable to a
third party.

The goal of cash management is to have sufficient cash balances for transactions while avoiding excessive balances. It is a delicate balance that must be watched on a regular basis, which baffles me how can business owners (or their respective person in charge of their financials) operate without looking at their financial statements for several months. Once again, cash flow is the life blood of your business. More time is spent on the type and quality of their stationaries (not to say that it is not important) than in the most important aspect of business which will determine if the business will be around to see the use of the stationaries.

How To Handle Habitual Socializers

Yesterday during a conversation with a friend, one of the topics that came up is the amount of jobs the United States has lost to off-shoring. Which brought up the obvious question, why? and what can we do differently.? My friend being in the corporate sales training arena, highlighted that the main reason is the lack of productivity.

So this conversation has made me think, what are the major causes of inefficiency in the United States and what can we do differently? One that comes quickly to mind is those poorly planned meetings. Worldwide respondents to a recent Microsoft Office survey say they feel unproductive for as much as a third of their workweek. Wow! unproductive for as much as 33% of their work week. The top three time wasters, according to survey participants, were ineffective meetings, unclear objectives and lack of team communication. 

In the United States, 42% cited procrastination, 39% picked lack of team communication and 35% chose ineffective meetings among the top time wasters, according to the same survey. However, one that was not mentioned and I think that we overlook is the excessive socializing in the office during work hours.

There are two main forms of time wasters in our offices; Interruptions and distractions. Eventhough some of the interruptions cannot be prevented, there is one that is easy to avoid and the focus of this article. I am talking about the visits from the infamous "habitual socializers". Even though socializing is  important for the work environment, team and career, it's better to set aside some specific time for socializing with your colleagues in a way that represents a win-win for everyone.

Interruptions are inevitable in the corporate world, specially if you are the "go to person" in your office. Whether you answer difficult questions, provide
guidance, or point people in the right direction, helping others can be a valuable service to your team and your company. However, unplanned interruptions can become a time waster and lower your productivity. Therefore, to be able to increase your productivity you must take action to reduce the number and frequency of unexpected interruptions, particularly the ones that end up wasting your time, without sacrificing your team's productivity in the process.

If you are facing this problem at work right now, you should consider implementing a unique strategy to handle these interruptions. The key is to avoid inviting them in with friendly question,s instead you may need to use a less inviting statement to discourage the interruption unless it is truly important.

For example:

Visitor: "Got a minute?"

You: "Actually, I'm in the middle of something right now. Can this wait?"

or

You: "I'm really busy right now, is it something urgent?"

The majority of habitual socializers will realize you don't have any interest in socializing at that moment and try to find someone else to talk to. If they do have something legitimate to discuss they will say so and you can then decide how to proceed. You should reserve this tactic only for people that you've identified as habitual socializers through repeated patterns of abuse. The rest of your colleagues and staff deserve the benefit of the doubt.

Also, do not overlook for the interruptions in the form of text, chats, emails, facebook, tweeting, social/personal phone calls that eat up into your productivity.  Here are three simple steps to address habitual socializers:

1. Make your office a work place. When habitual socializer drop-in, go and meet them at the door, a clear message that right now the communication needs to be kept short and sweet.

2. While client droping-in your office is important make sure it is productive. If the request will only take a minute or two of your time, complying will bolster your relationship with the client. However, if what the client wants is going to take up more time than you can afford to lose, or they start abusing your time, politely ask him or her to come back later or make an appointment. Most people won't mind doing so.

3. Be firm and clear with the abusive habitual socializer. Some people are more
persistent than others and just "don't get it". You may have to just talk to them, set some boundaries, and ask them to respect them. Make it clear that while you value your relationship with them, you'd rather socialize at a different time. Offer to have a chat with them during lunch, or during a pre-arranged coffee break.

Socializing should not be eliminated all together, it is an important part of effective team building. However, you do have the right to decide when you want to socialize and when you want to work. Like everything else, having a balance is the key. I have written an ebook that you will find very useful if you are interested in improving your efficiency - Making Time Work For You.

Cash Flow The Lifeblood of Any Business

Today I will address a subject geared to the survival of every business. One of the areas that every business must constantly maintain a tight grip on, after income taxes, is cash flow. Even though the article was written with business owners in mind, many of the tips and warnings here apply to the business of running a family.

Cash flow is the lifeblood of any business; If you don’t have it, your business won’t grow. However, many business owners struggle with the management of cash flow. When the cash that’s coming in and the cash that’s going out don’t balance you find yourself in a cash flow gap which in many cases can be hard to climb out of.

Cash flow should not be confused with financial profit or bottom-line (shown on the profit and loss statement). Cash is liquidity, most of us understand it; it is the inflow of cash that is available for the acquisition of assets, pay debt down/off, invest, etc. Profit is recorded in the financial statements when they are earned (accrued) rather than when the money is actually in hand. A business' cash flows and accounting profits must of the times does not occur at the same time. Due to this difference, it is important the your business generate reports that track the cash position and cash flow at a given time. This difference is such that many companies go broke eventhough their financial statements are showing a profit, which I know it baffles many business owners. Sound cash management is the instrumental to the survival of any business. Successful business owners put their money to work for them productively.

My advice to the business owners is to go beyond the traditional profit & loss statements and analyze cash flows. If you have an accountant, bookkeeper, or CPA helping you with your business financial activities, ask them to help you understand the cash flow of your business. Without monitoring your cash—measuring it, investing it, borrowing it, and collecting it—you will must likely end up in trouble with creditors and in bankruptcy.

Having "enough" cash means having enough cash available at the right time. Poor cash flow can mean the loss of attractive opportunities such as the chance to buy inventory at bargain prices or to pay vendors early in exchange for discounts. This applies to all type of businesses and families, regardless if you are organized as a nonprofit organization. A nonprofit organization that poorly manages it cash flow will have a limited reach and will lose grants as a consequence of this.

What are signs of cash flow trouble?

• Cash on hand has been declining for several months
• Receivables are taking longer to collect
• Payables are increasing
• You’re putting aside bills that you typically pay on time
• You’re unable to pay yourself a regular salary
• You’re getting calls from vendors asking about invoice payments
• Your inventory levels are increasing
• You overdraw your checking account expecting new sales to cover it
• You loan the business personal funds to meet routine expenses

What can I do if I have Cash Flow Problems?
Before you borrow more, consider the following:

1. Accounts receivable - many times you have the cash in your balance sheet. Review your receivables turn over ratio and your collection policies. You may want to consider the factoring of receivables if possible.
2. Equipment - if you have excess equipment, consider the sale of the excess equipment to improve your current cash flow situation.
3. Inventory Management - Money tied up in inventory can dramatically impact cash flow. Retailers should regularly gauge their inventory turnover ratio (cost of goods sold divided by the average value of inventory) to make sure it is within industry norms. Old or outdated stock should be cleared out through end-of-season sales to turn stale assets into liquid ones. Manufacturers can use supply-chain management tactics to have just enough inventory on hand to keep product lines running and meet customer commitments without tying up critical cash.
4. Debt restructuring - negotiation of the term of your existing debt, for example lowering your interest rate on your loan or even establishing new payment terms that can provide the necessary cash flow needed today.

Tips to Prevent Cash Flow Difficulties
• Keep a tight grip on bookkeeping and your cash flow. A great way to keep an eye on your business’ cash flow is to balance your business’ books at the end of each month.
• If your business allows customers to be billed for your services or products, then make sure that you have an invoice ready when their items are delivered. This way, you don’t add to the time that they have to pay the invoice if they are on a net-30, 60, or 90.
• Have clear customer credit policies. Keep an eye on customer’s credit lines with your business and when you start to see problems with an account, cut their credit line back to help prevent a large loss. This is a great way to see which customers are paying on time, and which you need to work on.
• Provide an incentive for customers who pay their invoices on time, such as a 2-5% discount off their entire order if they pay before the 30 day mark. This will help your invoices get paid faster, since most customers will want to get that discount, no matter how small it is.
• If you provide services, develop a deposit policy to help cut down on up-front expenses. By placing a deposit on your services, you already recoup some of your costs, and your customers aren’t as likely to not pay the invoice since they have already put out part of the total up front.
• Hire a good credit and collections person(s). Having someone who knows how to handle credits and collection issues will also help to cut down on overdue invoices and missed payments.
• Hire a good bookkeeper, not necessarily the cheapest one. To be successful you need to surround yourself with qualified professionals. Work closely with that person and empower that person so he/she can help you manage your cash flow. Depending on the size of your business, you may need a professional that acts as a CFO for your enterprise. If you cannot afford a full-time CFO, hire one on a part time basis.

Successfully managing the cash flow of the company requires an active participation from the owner or an assigned office manager and a clear understanding of the costs of operations and the efficiencies of accounts receivable and inventory. Also, successful cash flow management requires consistent measurement and input from your several advisors; banker, accountant/CPA.

Using Tax Credits To Lower Your Tax Bill

We are now in the last quarter of 2011. Now is the time to make all of the necessary adjustments to achieve your tax and financial results. One of the areas that should be considered in your tax plan is the use of tax credits to lower your tax bill.

What are tax credits?
Tax credits are not deductible from income; they directly reduce tax. As a result,
they are a great way to reduce taxes on a dollar for dollar basis.

Earned Income Tax Credit - IRC§32
This is a refundable credit for low-income working individuals and families.

Child Tax Credit - IRC§24
This credit is for people who have a qualifying child. The maximum amount of
the credit is $1,000 for each qualifying child. This credit can be claimed in addi-
tion to the credit for child and dependent care expenses.

Child and Dependent Care Credit - IRC§21
This is for expenses paid for the care of children under age 13, or for a disabled
spouse or dependent, to enable the taxpayer to work.

Adoption Credit - IRC§23
Adoptive parents can take a tax credit of up to $10,000 (adjusted for inflation)
for qualifying expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if taxpayer does not have any qualifying expenses.

Credit for the Elderly and Disabled - IRC§22
This credit is available to individuals who are either age 65 or older or are under age 65 and retired on permanent and total disability, and who are citizens or residents.

Education (American Opportunity) Credits - IRC§25A
There are two credits available:
1. Hope Credit - for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. and
2. Lifetime Learning Credit - available for all post-secondary education for an unlimited number of years.  
A taxpayer cannot claim both credits for the same student in one year. In 2009, the Hope Credit was modified and renamed the “American Opportunity Tax” credit.

Retirement Savings Contribution Credit – IRC§25B
Eligible individuals may be able to claim a credit for a percentage of their quali-
fied retirement savings contributions, such as contributions to a traditional or
Roth IRA or salary reduction contributions to a SEP or SIMPLE plan. To be el-
igible, you must be at least age 18 at the end of the year and not a student or an
individual for whom someone else claims a personal exemption. Also, your ad-
justed gross income (AGI) must be below a certain amount.

Work Opportunity Credit - §51
The work opportunity (formerly the targeted jobs) credit (§51) was created to
encourage employers to hire persons from the following groups:
(1) A vocational rehabilitation referral,
(2) A high-risk youth,
(3) A qualified veteran,
(4) An economically disadvantaged ex-felon,
(5) A qualified summer youth employee,
(6) Members of families receiving cash welfare benefits, and
(7) Individuals 18 to 24 who are in families that have been receiving food
stamps for at least a six-month period ending on the date of hire.

Welfare-to-Work Tax Credit – Formerly IRC§51A
The TRA ‘97 provided to employers a tax credit on the first $20,000 of eligible
wages paid to qualified long-term family assistance (AFDC or its successor pro-
gram) recipients during the first two years of employment. The credit is 35% of
the first $10,000 of eligible wages in the first year of employment and 50% of the
first $10,000 of eligible wages in the second year of employment.

This credit expired in 2005; but was recently expanded and reinstated through 2011.

Combo Credit - IRC§51
In 2007, the Work Opportunity and Welfare to Work tax credits were
combined under §51. The total amount of the credit is not changed but
the computation is made easier by coordinating the definition of “qualify-
ing worker.” However, separate computations apply for recipients of
long-term family assistance and summer youth employees.

Research & Development Credit - IRC§41
Increasing the amount spent on research and development provides a credit of
20% on qualifying expenditures exceeding average expenses in a base period. It has been extended through December 31, 2011.

Rehabilitation Tax Credit - IRC§47
The credit is 20% for rehabilitation of certified historical structures and 10% for
other qualified building originally placed in service before 1936 (§47(a)).

To qualify for the credit, the law requires the retention of at least 75% of the ex-
isting external walls, including at least 50% as external walls as well as, at least
75% of the building’s internal structural framework.

Low Income Housing Credit - IRC§42
Section 42 creates three separate credits that may be claimed by owners of resi-
dential rental projects providing low-income housing. The credit rate is set up so
the annualized credit amounts have a present value of 80% or 30% of the basis
attributable to qualifying low-income units, depending on the income of the ten-
ant qualifying for the credit.

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. Now is the time to review your tax situation to determine what are the last minute tweaking needed to achieve the desired goals.