Analyzing your expenses will be the tool you use to see where you're spending money. This is done through a review of the figures on the month-end income statement. As mentioned before, the income statement is the list of the revenues and expenses of your business. This is prepared monthly, often with a comparison to the budget figures you developed so far.
All of the income categories are totaled and represented as 100%. From here, expenses are calculated as a percentage of total income. Naturally, there will be certain expenses that are significantly large in comparison to other expenses. This will be identifiable in dollar figures and by percentage of total income. Watching the percentage will help you to see peaks and valleys if the item has regular fluctuations. An example would be labor. In construction, labor will be high during the summer, building up during the spring and then falling until winter. This would compare to high labor costs during the Christmas season and lower labor costs during the remainder of the winter for a retail store. If your labor is consistently steady, you will expect similar dollar amounts and percentages throughout the year. If this changes, you should catch it as a problem and identify what caused the change and then make any necessary corrections.
Over the course of time, you will prepare your budget according to expected highs and lows in all areas and be able to aim for specific income, expense and profit levels each month and as a cumulative figure at the end of the year. As years pass, you will see recurring percentages for expenses and be able to know if there is a problem or weakness in a particular. This will trigger corrective actions as variances arise.
In the end, you should have set up your budget to anticipate all the highs and lows you can and expect to have profits at a certain level. There should be a percentage target for your profit. As you control this, you will be continuously searching for ways to reduce total expenses and increase profit - the goal of any business.
Wednesday, August 27, 2008
Friday, August 22, 2008
The Chart of Accounts
Something not previously covered is the chart of accounts that make up your general ledger in your accounting software. The concept is plenty simple and has plenty of room for you to make it fit your way of thinking and working. The accounts will follow the accounting equation: Assets, Liabilities, Equity (or Capital), Income and Expenses. I prefer to set up my chart of accounts numerically but it isn't a requirement. Most accounting software will allow you to add accounts "on the fly", identifying them by category as you enter them. The thing that is a problem with this method is that it's easy to duplicate accounts and not know it. This can occur with a numerical system too.
In setting up the chart of accounts, it's typical to follow a common pattern. Here is a generalized sample. As your business develops, you will add accounts within these groups. I hope it's not too confusing.
ASSETS
***Current Assets
***Long term Assets
***Property (Land)
***Plant (the building(s))
***Inventory
LIABILITIES
***Current Liabilities
(ex.: payables, payroll, payroll taxes, current portion of long-term loans)
***Long term Liabilities
Portions of loans due more that one year out
EQUITIES
***Owner's Equity / Capital
***Less: Owner's drawing
***Net Equity or Retained Earnings.
REVENUE
***All sales accounts
EXPENSES
***Segregated by department
The software will put these accounts and any sub-accounts you create into the above categories as you set up the accounts. It will also do the math based on your financial setup.
That's all for tonight. Catch you next time.
In setting up the chart of accounts, it's typical to follow a common pattern. Here is a generalized sample. As your business develops, you will add accounts within these groups. I hope it's not too confusing.
ASSETS
***Current Assets
***Long term Assets
***Property (Land)
***Plant (the building(s))
***Inventory
LIABILITIES
***Current Liabilities
(ex.: payables, payroll, payroll taxes, current portion of long-term loans)
***Long term Liabilities
Portions of loans due more that one year out
EQUITIES
***Owner's Equity / Capital
***Less: Owner's drawing
***Net Equity or Retained Earnings.
REVENUE
***All sales accounts
EXPENSES
***Segregated by department
The software will put these accounts and any sub-accounts you create into the above categories as you set up the accounts. It will also do the math based on your financial setup.
That's all for tonight. Catch you next time.
Tuesday, August 19, 2008
Budgeting
Budgeting can be an involved process, especially the first time through. As you work through your numbers, you are sometimes shooting in the dark because you don't have enough historical information to work with. That's OK. With your first budget, you are building your foundation and each year you add another layer of brick and mortar and build your insight to how your business functions and where you can make adjustments to increase or decrease costs.
I think the best place to start is with your expenses, particularly if you are working on your first budget. If you already have some figures from previous months or the preceding year's activity, you are at a nice starting point. Look at these figures and study what is higher and lower than you expected. Then look at what percentage each expense is of the total of the expenses. From seeing this information, you can get a feel for where you need to plan your amounts for the next year. It will be good to look at the items that have caused a particular expense to be unusually high. It may turn out that something got put into account A instead of account B. Correcting these errors will give you a new picture and a better view of where your costs really are. In the future, you will be watching the performance of your actual expenses vs. your budgeted amounts and make the corrections throughout the year so you don't have a lot of fixing up to do at the last minute.
Now that you have your corrected figures, you can look again at where your highs and lows are. Decide from this information if you spent too much in a particular area. You may have been too frivolous or you may have room to negotiate lower prices. You can also decide to actually spend more in one area or another. Remember that this is alright. In spending more, you are putting emphasis on items that may help you generate more income. The key to this is to still get the best prices so you get as much out of your dollar as you can, spending the savings on something else that you may need as well....even if it's money in your pocket (profit) to help you pay your bills at home more easily.
Before I go too far with the expense side of the picture, we have to remember to plan expenses so they remain within the income you will earn. If you plan your expenses well enough, it will be easier for you to set sales targets AND profit targets. If you budget your expenses to increase by 50% but you will only be able to plan on an increase of 30% in sales, you will have a problem. This will be the trigger to get you to re-evaluate your expense budget for realistic figures. Having a budget will eventually allow you to set aggressive sales goals and plan for expenses and profit that will match.
More on this to come. Let me know if you have any questions or comments.
I think the best place to start is with your expenses, particularly if you are working on your first budget. If you already have some figures from previous months or the preceding year's activity, you are at a nice starting point. Look at these figures and study what is higher and lower than you expected. Then look at what percentage each expense is of the total of the expenses. From seeing this information, you can get a feel for where you need to plan your amounts for the next year. It will be good to look at the items that have caused a particular expense to be unusually high. It may turn out that something got put into account A instead of account B. Correcting these errors will give you a new picture and a better view of where your costs really are. In the future, you will be watching the performance of your actual expenses vs. your budgeted amounts and make the corrections throughout the year so you don't have a lot of fixing up to do at the last minute.
Now that you have your corrected figures, you can look again at where your highs and lows are. Decide from this information if you spent too much in a particular area. You may have been too frivolous or you may have room to negotiate lower prices. You can also decide to actually spend more in one area or another. Remember that this is alright. In spending more, you are putting emphasis on items that may help you generate more income. The key to this is to still get the best prices so you get as much out of your dollar as you can, spending the savings on something else that you may need as well....even if it's money in your pocket (profit) to help you pay your bills at home more easily.
Before I go too far with the expense side of the picture, we have to remember to plan expenses so they remain within the income you will earn. If you plan your expenses well enough, it will be easier for you to set sales targets AND profit targets. If you budget your expenses to increase by 50% but you will only be able to plan on an increase of 30% in sales, you will have a problem. This will be the trigger to get you to re-evaluate your expense budget for realistic figures. Having a budget will eventually allow you to set aggressive sales goals and plan for expenses and profit that will match.
More on this to come. Let me know if you have any questions or comments.
Saturday, August 16, 2008
Sales Tax and Use Tax and exemptions
The Pennsylvania Sales Tax has intricacies that require a lot of study to be sure of adhering to the laws while still avoiding paying unnecessary taxes. Let's start with Sales Tax....
To begin with, a lot of customers hold a Sales Tax license and believe that gives them exemption from any sales tax liability on their purchases. If they run a gym and a window breaks, the glass used to replace the broken pane is not exempt. It is part of an expense to maintain their facility, not something for resale. Other businesses do similar things. From a financial standpoint, the business is saving money. If a PA Sales Tax auditor catches this a couple of years later, the tax will be due, along with interest and penalty. Naturally, one purchase isn't a big deal. If this is a habitual practice, the results of an audit can add up quickly.
When a customer claims exemption from Sales Tax on a specific purchase, you as the collector are required to have an executed exemption form for that purchase. If the customer is a regular customer, particularly purchasing items from you for resale, having a single form in the customer's file will, from my experiences, satisfy an auditor.
As a business collecting Sales Tax, there are rules within PA of what is and what is not taxable. You need to know what items you are selling that are taxable and what are not. An orange or grapefruit isn't taxable. It's food. But...the meal you get at a restaurant is taxable. It's a prepared meal. A shirt is exempt from sales tax. An accessory, possibly a purse or bracelet, would be taxable.
A quick bit on Use Tax. Use Tax is due on anything taxable purchased without tax charged. This often occurs in construction and with interstate or international purchases. I've been told that if you order something from another state and no tax is charged, you don't owe the tax. This is flat out FALSE! If the item purchased from another state and will be used by your business, not for resale, The PA Sales Tax is due.
That's all for now. See you next time.
To begin with, a lot of customers hold a Sales Tax license and believe that gives them exemption from any sales tax liability on their purchases. If they run a gym and a window breaks, the glass used to replace the broken pane is not exempt. It is part of an expense to maintain their facility, not something for resale. Other businesses do similar things. From a financial standpoint, the business is saving money. If a PA Sales Tax auditor catches this a couple of years later, the tax will be due, along with interest and penalty. Naturally, one purchase isn't a big deal. If this is a habitual practice, the results of an audit can add up quickly.
When a customer claims exemption from Sales Tax on a specific purchase, you as the collector are required to have an executed exemption form for that purchase. If the customer is a regular customer, particularly purchasing items from you for resale, having a single form in the customer's file will, from my experiences, satisfy an auditor.
As a business collecting Sales Tax, there are rules within PA of what is and what is not taxable. You need to know what items you are selling that are taxable and what are not. An orange or grapefruit isn't taxable. It's food. But...the meal you get at a restaurant is taxable. It's a prepared meal. A shirt is exempt from sales tax. An accessory, possibly a purse or bracelet, would be taxable.
A quick bit on Use Tax. Use Tax is due on anything taxable purchased without tax charged. This often occurs in construction and with interstate or international purchases. I've been told that if you order something from another state and no tax is charged, you don't owe the tax. This is flat out FALSE! If the item purchased from another state and will be used by your business, not for resale, The PA Sales Tax is due.
That's all for now. See you next time.
Thursday, August 14, 2008
Unemployment taxes
Part of the fun of payroll is having to pay taxes in case you have to lay someone off from their position. That way they can still be paid even though they aren't working. These taxes are called, believe it or not, unemployment taxes. The federal and PA governments assess these taxes based on the beginning earnings each year. The federal portion is calculated and on the first $7,000 of earnings. The base rate is 6% but credit is allowed at 5.2% for a net payment of .8%. So, for each employee, you pay .8% on the first $7,000 they earn each year. Obviously, this will take several pays before they reach the $7K limit.
PA Unemployment is similar but it is calculated at a rate assessed or adjusted each year, before the 31st of March, based on previous years' records. If you have a lot of turnover or a lot of layoffs, you will have a higher rate or multiplier to calculate the tax. The PA figure is based on the first $8,000 for each employee.
Be sure to allow for these payments after the close of each quarter to make sure you avoid penalties and to keep your cash flow smooth. The nice thing about these taxes is that although they are significant the first quarter or two each year, they drop off significantly for the remainder of the year. One other point to make about these is that as you acquire new employees throughout the year, the tax starts all over again for them. Even if they earned the base of $7k or $8k working for a previous employer, you still pay the tax on their first $7 or $8k as your employee. If they happen to have two jobs at the same time, the tax is paid by each employer. The IRS and your state revenue department make some serious tax money from people changing jobs during the year or picking up a second job.
Have a good weekend!
PA Unemployment is similar but it is calculated at a rate assessed or adjusted each year, before the 31st of March, based on previous years' records. If you have a lot of turnover or a lot of layoffs, you will have a higher rate or multiplier to calculate the tax. The PA figure is based on the first $8,000 for each employee.
Be sure to allow for these payments after the close of each quarter to make sure you avoid penalties and to keep your cash flow smooth. The nice thing about these taxes is that although they are significant the first quarter or two each year, they drop off significantly for the remainder of the year. One other point to make about these is that as you acquire new employees throughout the year, the tax starts all over again for them. Even if they earned the base of $7k or $8k working for a previous employer, you still pay the tax on their first $7 or $8k as your employee. If they happen to have two jobs at the same time, the tax is paid by each employer. The IRS and your state revenue department make some serious tax money from people changing jobs during the year or picking up a second job.
Have a good weekend!
Saturday, August 2, 2008
The Federal form 941
The Federal form 941 is the most intricate payroll tax form I've completed. You can see a sample of it at: http://www.irs.gov/pub/irs-pdf/f941.pdf?portlet=3
This form is used to reconcile payment of income and FICA taxes withheld from employees each quarter. Once you have been issued your FID #, you will start receiving a number of things from the IRS to help you make your tax payments. Often, when your tax liability is low at the end of the quarter, you can complete the 941 and remit payment at that time. More than likely, you will have to make payments every other week (bi-weekly) via the coupon booklet you receive from the IRS. This coupon booklet is nothing more than a packet of forms #8109-B which you complete and take to the bank with your payment. The bank receives your payment and coupon and deposits it into the Federal Reserve Account for you, using the information off the coupon. An example of the coupon can be found at http://www.irs.gov/pub/irs-pdf/f8109b.pdf. It should be pretty self-explanatory.
The coupon book should have your business information already printed on each form. You have to complete the information the IRS won't automatically have and take the completed coupon to the bank as a mentioned above. I have been away from this task for a while, so this can probably all be done by a draft by the bank from your account, online, without having to make the extra trip to the bank. The payment you are making with this coupon is calculated on gross wages your employees have earned and Federal income tax withheld. When you hire employees, they must fill out a form W-4 which specifies how much Federal income tax you are to withhold from their earnings. Once you have this completed form, the amount to be withheld can be found in a booklet you should receive from the IRS called the Circular E. There is a table in this booklet that you can use to find out how much to withhold for each employee's gross earnings. The FICA taxes withheld are two separate figures. One is for Social Security, calculated at 6.2% of gross wages. The other is for Medicare, calculated at 1.45% of gross wages. The total you pay with the coupon is a combination of all income tax withheld, FICA tax withheld AND a matching amount of FICA taxes. If $100.00 is withheld for FICA from employees, the employer also pays $100.00 as an expense. This should be included in how much will be needed for payroll taxes each week or pay period.
At the end of the quarter, you have a month to complete the 941 and submit it to the IRS by mail. The form summarizes the wages your employees RECEIVED (by check, cash or direct deposit) within the quarter. The total wages for all employees and the Federal income taxes withheld are shown and the gross wages are multiplied by the FICA percentages and listed also. There is a separate section for the monthly totals of the payments you have taken to the bank. If there is a difference, this must be paid, refunded or applied to future quarters. If there is a balance you have to pay, you must submit it with the form 941-V - payment voucher. There are additional items included on this form, such as EIC (Earned Income Credit) and similar items. Your accountant can give you more information about these. Once all of this is reconciled and the form is completed, it gets signed, dated and mailed to the IRS at an address specific for your state.
This got pretty lengthy. Write back and I'll reply to your questions.
Have a great weekend.
This form is used to reconcile payment of income and FICA taxes withheld from employees each quarter. Once you have been issued your FID #, you will start receiving a number of things from the IRS to help you make your tax payments. Often, when your tax liability is low at the end of the quarter, you can complete the 941 and remit payment at that time. More than likely, you will have to make payments every other week (bi-weekly) via the coupon booklet you receive from the IRS. This coupon booklet is nothing more than a packet of forms #8109-B which you complete and take to the bank with your payment. The bank receives your payment and coupon and deposits it into the Federal Reserve Account for you, using the information off the coupon. An example of the coupon can be found at http://www.irs.gov/pub/irs-pdf/f8109b.pdf. It should be pretty self-explanatory.
The coupon book should have your business information already printed on each form. You have to complete the information the IRS won't automatically have and take the completed coupon to the bank as a mentioned above. I have been away from this task for a while, so this can probably all be done by a draft by the bank from your account, online, without having to make the extra trip to the bank. The payment you are making with this coupon is calculated on gross wages your employees have earned and Federal income tax withheld. When you hire employees, they must fill out a form W-4 which specifies how much Federal income tax you are to withhold from their earnings. Once you have this completed form, the amount to be withheld can be found in a booklet you should receive from the IRS called the Circular E. There is a table in this booklet that you can use to find out how much to withhold for each employee's gross earnings. The FICA taxes withheld are two separate figures. One is for Social Security, calculated at 6.2% of gross wages. The other is for Medicare, calculated at 1.45% of gross wages. The total you pay with the coupon is a combination of all income tax withheld, FICA tax withheld AND a matching amount of FICA taxes. If $100.00 is withheld for FICA from employees, the employer also pays $100.00 as an expense. This should be included in how much will be needed for payroll taxes each week or pay period.
At the end of the quarter, you have a month to complete the 941 and submit it to the IRS by mail. The form summarizes the wages your employees RECEIVED (by check, cash or direct deposit) within the quarter. The total wages for all employees and the Federal income taxes withheld are shown and the gross wages are multiplied by the FICA percentages and listed also. There is a separate section for the monthly totals of the payments you have taken to the bank. If there is a difference, this must be paid, refunded or applied to future quarters. If there is a balance you have to pay, you must submit it with the form 941-V - payment voucher. There are additional items included on this form, such as EIC (Earned Income Credit) and similar items. Your accountant can give you more information about these. Once all of this is reconciled and the form is completed, it gets signed, dated and mailed to the IRS at an address specific for your state.
This got pretty lengthy. Write back and I'll reply to your questions.
Have a great weekend.
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