Starting a business venture is risky. You may make costly mistakes throughout your entrepreneurial journey. And, there are many things outside of your control that can affect your enterprise. Although you can’t always prevent threats, you can defend yourself through small business risk management. Small business risk management requires significant prep work. You can’t make educated guesses about potential risks and call it a day. Put in the legwork to prepare for business risks. Small business risk managementDo you claim that you own a no-risk business? If so, you may want to think again. Although some businesses may be less risky than others, business risk is widespread. Risk is an occupational hazard of launching a business. When it comes to business, you can’t escape threats. But, you can manage the consequences of risks. Get started with the four business risk management tips below. 1. Identify potential risksThe first step in small business risk management is knowing what kinds of things can affect your company. Although you can’t predict and defend your business against every threat in the book, you can identify common risks. Risks are divided into two main categories:
Learn about common types of internal and external business risks to help identify potential threats. Internal risksMany internal risks can plague your business. Some of them revolve around people and others around tangible assets. Common internal risks include:
Internal risks can lead to wasted time and a drop in your business bottom line. Keep an eye on the types of internal risks that impact your business. External risksSometimes, life happens. There are many factors outside of your business that you have no control over. But, you still need to identify external risks if you want to prepare your business. Here are some common external risks:
Dismissing external risks by saying That’ll never happen to me could end up costing you. Stay ahead of external threats by recognizing that even the unimaginable may happen. 2. Measure risksThe next step of company risk management is measuring risks. Some risks are more probable than others. You should determine the likelihood of each risk actually happening. When measuring risks, consider doing the following three things:
Probability scaleCreate a probability scale to determine which risks are the most likely to hit your business. You might use something like:
Financial damagesAssign an estimated value of how much the risk would cost you. If possible, use historical data. Let’s say you make the following estimates:
Risk rankingUsing the probability scale, rank risks in order from most likely to occur to least likely. Doing this helps you predict which risks you should plan the most for. But, you shouldn’t neglect planning for less-probable risks. For example, you might rank risks like:
3. Plan for risksWhen it comes to our personal lives, we map out potential risks and plan out strategies to safeguard ourselves all the time. For example, we:
Sure, we may never come face to face with potential threats. But isn’t it better to be safe than sorry? And if that is the case … … Shouldn’t your small business be prepared, too? After identifying and measuring risks, start planning your defense. Determine what you can do to prevent or handle identified small business risks. And, decide what you will do if the unexpected happens. Some things you can do to prevent or plan for risks include:
4. Revisit risksThe final step of small business risk management is ongoing. After identifying and planning for threats, revisit your business risk management plan. As your business grows, new risks might pop up. And, some of your older risks might fade away. Look over your risk management plan regularly and adapt it as needed. How to create your business risk management planA business risk management plan is separate from your small business plan. After collecting the above information, put pen to paper and create your small business risk management plan. List out:
Keep an eye on financial risks by tracking your incoming and outgoing money. Patriot’s online accounting software makes it easy to spot threats with features like bank reconciliation, invoice payment reminders, and more. Get your free trial today! This is not intended as legal advice; for more information, please click here. The post Small Business Risk Management appeared first on Accounting Tips, Training, and News. from https://www.patriotsoftware.com/accounting/training/blog/small-business-risk-management/
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Outsourcing is a wonderful way to minimize your firm’s operational cost, maximize your time, and give your clients the attention that they deserve. Outsourced accounting firms are here to help you get all these benefits and more. But which of your services should you delegate first? Here are a few suggestions to make the most out of your outsourced accounting services: from https://www.dvphilippines.com/blog/which-accounting-services-should-you-outsource-first As a small business owner, you need to conduct regular audits to ensure your records are accurate. Although many business owners dislike the idea of auditing, audits can be beneficial to your company. Learn more about the different types of audit below.
Different types of auditAs a brief recap, an audit examines your financial records and transactions to verify they are accurate. Typically, audits look at your financial statements and accounting books to compare information. You or your employees may conduct audits. Or, you might have a third party audit your information (e.g., IRS audits). Many business owners have routine audits, such as once per year. If you are not organized or don’t keep thorough records, your audits might take more time to complete. Types of audits can vary from business to business. For example, a construction business might conduct an audit to analyze how much they spent on a specific project (e.g., costs for contractors or supplies). Overall, audits help ensure your business is operating smoothly. So, what are the various types of audit? Internal auditInternal audits take place within your business. As the business owner, you initiate the audit while someone else in your business conducts it. Businesses that have shareholders or board members may use internal audits as a way to update them on their business’s finances. And, internal audits are a good way to check in on financial goals. Although there are many reasons you may conduct an internal audit, some common reasons include to:
External auditAn external audit is conducted by a third party, such as an accountant, the IRS, or a tax agency. The external auditor has no connection to your business (e.g., not an employee). And, external auditors must follow generally accepted auditing standards (GAAS). Like internal audits, the main objective of an external audit is to determine the accuracy of accounting records. Investors and lenders typically require external audits to ensure the business’s financial information and data is accurate and fair. Audit reportsWhen your business is audited, external auditors usually give you an audit report. Audit reports include details of the audit process and what was found. And, the report includes whether your financial records are accurate, missing information, or inaccurate. IRS tax auditIRS tax audits are used to assess the accuracy of your company’s filed tax returns. Auditors look for discrepancies in your business’s tax liabilities to make sure your company did not overpay or underpay taxes. And, tax auditors review possible errors on your small business tax return. Auditors usually conduct IRS audits randomly. IRS audits can be conducted via mail or through in-person interviews. Financial auditA financial audit is one of the most common types of audit. Most types of financial audits are external. During a financial audit, the auditor analyzes the fairness and accuracy of a business’s financial statements. Auditors review transactions, procedures, and balances to conduct a financial audit. Operational auditOperational audits are similar to internal audits. An operational audit analyzes your company’s goals, planning processes, procedures, and operation results. Generally, operational audits are conducted internally. However, an operational audit can be external. The goal of an operational audit is to fully evaluate your business’s operations and determine ways to improve them. Compliance auditA compliance audit examines your business’s policies and procedures to see if they comply with internal or external standards. Compliance audits can help determine whether or not your business is compliant with paying workers’ compensation or shareholder distributions. And, they can help determine if your business is compliant with IRS regulations. Information system auditInformation systems audits mostly impact software and IT companies. Business owners use information system audits to detect issues relating to software development, data processing, and computer systems. This type of audit ensures the system provides accurate information to users and makes sure unauthorized parties do not have access to private data. Also, IT and non-software businesses should regularly conduct mini cybersecurity audits to ensure their systems are secure from fraud and hackers. Payroll auditA payroll audit examines your business’s payroll processes to ensure they are accurate. When conducting payroll audits, look at different payroll factors, such as pay rates, wages, tax withholdings, and employee information. Payroll audits are typically internal. Conducting internal payroll audits helps prevent possible external audits in the future. Businesses should conduct internal payroll audits annually to check for errors in their payroll processes and remain compliant. Pay auditPay audits allow you to identify pay discrepancies among your employees. A pay audit can help you spot unequal pay at your company. During a pay audit, analyze things like disparities due to race, religion, age, and gender. Pay audits can also help you ensure workers are paid fairly based on your business’s industry and location. Importance of auditsYou must conduct audits regularly to understand different aspects of your business. And, audits can help catch issues early on before they snowball into big mistakes. If you don’t conduct audits, you may find yourself reviewing inaccurate information, which can impact your business later. Before you kick the idea of audits to the curb, think about how they can benefit your small business. Audits can help you:
Need a way to simplify your audit processes? Patriot’s online accounting software makes it easy to track your income and expenses to help you organize records. What are you waiting for? Try it for free today! This is not intended as legal advice; for more information, please click here. The post Breaking Down 9 Different Types of Audit appeared first on Accounting Tips, Training, and News. from https://www.patriotsoftware.com/accounting/training/blog/different-types-of-audit/ Miles spent driving to meet clients, going to an office supply store, and depositing a customer’s check at the bank can add up. If you use a vehicle for small business purposes, you might qualify for a business mileage deduction from the IRS. You might be thinking that a business mileage deduction is only going to save you loose change. But, you could end up with a substantial tax break. In this article, you’ll learn what is a business mileage deduction, how to calculate mileage deduction, and how to report mileage on taxes. What is a business mileage deduction?The business mileage deduction is a tax break small business owners can claim for business miles driven. Mileage deduction rates apply to those who are self-employed. Due to the Tax Cuts and Jobs Act of 2017, your employees cannot claim the deduction. However, you can continue or start providing mileage reimbursement to your employees. You can claim a business mileage deduction when you use any four-wheeled vehicle for business purposes. However, your business cannot revolve around using cars, such as a taxi service. Mileage deduction for business purposesBefore learning how to calculate mileage for taxes, make sure you know what you can claim. So, what types of trips are considered business miles? Here are some common business purposes for vehicles:
You should not claim:
How to calculate business mileageWhen it comes to calculating mileage for taxes, you have two options. You can either use the standard mileage rate or the actual expense method. Before choosing a business mileage deduction calculation method, consider calculating your deduction with both. That way, you can determine which method gets you the larger tax deduction. Both methods let you deduct parking fees and tolls for qualifying business purposes. But, you must calculate those costs separately. Regardless of which method you choose, keep accurate records that back up your business mileage deduction claim. Consider keeping a log in your car to help you organize your records. The more supporting documents you have, the better. 1. How to calculate standard mileage rateThe standard mileage rate is one tax deduction method you can use. If you use this method, you can claim a standard amount per mile driven. The standard mileage rate is easier to use than the actual expense method. Rather than determining each of your actual costs, you use the IRS standard mileage deduction rate. Calculating mileage for taxes using the standard method is a three-step process:
Determine if you can use the standard mileage rateNot all business owners can use the standard mileage method. First, you must own or lease the car you put business miles on. If you own the car and want to use the standard mileage rate, you must choose this method during the first year you put business miles on it. You can opt for the actual expense method later. If you lease the car and select the standard mileage rate, you must use this method during the entire lease period. According to the IRS, you cannot use the standard mileage rate if you do any of the following:
Know the 2019 mileage deduction rateEach year, the IRS sets a standard mileage deduction rate. The 2019 standard mileage rate is 58 cents per business mile driven. Multiply business miles driven by the IRS rateTo find out your business tax deduction amount, multiply your business miles driven by the IRS mileage deduction rate. Let’s say you drove 15,000 miles for business in 2019. Multiply 15,000 by the mileage deduction rate of 58 cents (15,000 X $0.58). You could claim $8,700 for the year using the standard mileage rate method. 2. Actual expense method for mileage tax deductionIf you use the actual expense method, keep track of what it costs to operate your car. From there, you can record what portion of the overall expenses applies to business use. Again, you cannot use the actual expense method if you previously used the standard mileage rate on a leased vehicle. For the actual expense method, include the following expenses:
When you record what you spend on the above expenses, also include the date and a description of the costs. How to calculate your actual expenses for businessTo calculate actual expenses, figure out what percentage of your car you used for business purposes. You can do this by dividing your business miles driven by your total annual miles. Next, multiply your business use percentage by your total car expenses. Let’s say your total car expenses for the year were $6,850:
You drove a total of 60,000 miles during the year. Of those 60,000 miles, 20,000 were for business purposes. First, divide your business miles by your total miles: 20,000 business miles / 60,000 total miles = 33% Now, multiply your business mileage percentage by your total car expenses: 33% X $6,850 = $2,260.50 You can claim approximately $2,260.50 for the business mileage deduction using the actual expense method. How to report mileage on taxesSo, how do you claim mileage on your taxes? When you file your taxes, you use Form 1040. Form 1040 is your U.S. Individual Income Tax Return, which lets the IRS know whether you owe more taxes or should be reimbursed. Use Schedule C to claim business mileage expenses as a sole proprietor. Complete Part II, Line 9 on Schedule C. Enter either the actual expenses or the standard mileage for your car’s business purposes. You will also add parking fees and tolls to the number. Part IV, Information on Your Vehicle, asks you further questions about the business use of your car. Fill out Part IV if you use the standard mileage rate. You can also fill Part IV out for the actual expense method if you do not claim depreciation. If you include depreciation for the actual expense method, enter the depreciation in Part II, Line 13. Form 4562If you use the actual expense method and claim depreciation, you need to complete Part V of Form 4562, Depreciation and Amortization. Part V asks you information about your vehicle. AdvisoryWhen filing taxes for your small business, only deduct a car’s business use. Do not claim 100% business deduction on a vehicle unless you use all 100% for business purposes, or you could end up with an IRS audit. Keep careful records of your vehicle expenses to claim the business mileage deduction. Patriot’s online accounting software lets you easily track expenses and income. And, we offer free support. Get your free trial today! This article has been updated from its original publication date of 12/20/2016. This is not intended as legal advice; for more information, please click here. The post Business Mileage Deduction 101 appeared first on Accounting Tips, Training, and News. from https://www.patriotsoftware.com/accounting/training/blog/calculate-business-mileage-deduction/ Most accountants dream of starting their own firm. They work hard to move up on their firm’s ladder until they have gained the resources and the experience needed to start their own path. If you’re now at on this stage of your career, congratulations, you’ve made it! The next challenge is actually turning your plans to reality. Starting an accounting firm has its own share of risks. You'll be putting your job security, savings, time, and other resources on the line as you start your journey. To help you minimize these risks, here are a few tips on how to start an accounting firm: from https://www.dvphilippines.com/blog/getting-started-on-your-own-accounting-firm As a small business owner, you must know which forms to file. And if you’re a sole proprietor or sole owner, you need to understand the ins and outs of Schedule C. So, what is a Schedule C?
What is a Schedule C form?Schedule C, Profit or Loss from Business, shows a business’s income and deductible expenses for the tax year. Attach Schedule C to Form 1040, U.S. Individual Income Tax Return. The purpose of Schedule C is to report how much money you made or lost in your business during the tax year. A sole proprietor must file IRS Schedule C. Sole proprietors are individuals who own and operate their own business. If you are the sole owner of a limited liability company (LLC), you must also file a Schedule C tax form. In most cases, sole proprietors and single-member LLCs must also fill out Schedule SE, Self-Employment Tax. Complete Schedule SE if your sole proprietorship or single-member LLC earns $400 or more in net profits during the tax year. Schedule C-EZ formSchedule C-EZ is a simpler version of Schedule C that allows business owners to cut down time on tax preparation. If your business has less than $5,000 in business expenses, you may be able to use Schedule C-EZ. To file Schedule C-EZ, you must also meet all of the following criteria:
If you are considered a statutory employee, you may be able to file Schedule C-EZ. Review all Schedule C-EZ requirements on Part I of the form. Information needed for Schedule CBefore you can fill out and file Schedule C, you must gather some information. To complete your Schedule C, you need the following:
Also, provide your business name, type of business, address, employer identification number (or Social Security number), and which accounting method you use. How to fill out Schedule CFilling out Schedule C requires a few calculations and additional information about your business expenses. Use the following steps to help fill out Schedule C. 1. Calculate cost of goods soldFirst, you must calculate your business’s cost of goods sold (COGS). To calculate COGS, you need your beginning inventory, purchases during the period, and ending inventory. Calculate your COGS using the following formula: COGS = Beginning Inventory + Purchases During the Period – Ending Inventory 2. Compute gross incomeAlong with calculating COGS, you must also calculate your gross income. To calculate gross income, use the following formula: Gross Income= Revenue – COGS 3. List business expensesSchedule C lists which business expenses you can deduct. Review which business expenses you had during the tax year. Some expenses you can list include:
4. Calculate net incomeYour final calculation for Schedule C is net income. To calculate your business’s net income, subtract total business expenses from gross income. Then, report net income on Schedule C. Net Income= Gross Income – Total Business Expenses How to file a Schedule C tax formFile Schedule C along with your individual tax return, Form 1040. And, don’t forget to calculate your self-employment tax based off your net income on Schedule C (if applicable). You can mail Schedule C to the IRS. Or, you can e-File your Schedule C form. If you make an error on Schedule C, you must correct it. Use Form 1040X to file an amended personal tax return after correcting your Schedule C form. When to file Schedule CThe business tax return due date depends on your type of business structure. Sole proprietors and single-member LLCs must file Schedule C by April 15 each year. Attach Schedule C to your individual tax return. Check with the IRS for more questions regarding rules to follow while filing your Schedule C form. Reduce the stress of filing Schedule C with updated and accurate books. Patriot’s accounting software makes it easy to record transactions, track expenses, and more. Start a free trial today! This is not intended as legal advice; for more information, please click here. The post What Is a Schedule C? appeared first on Accounting Tips, Training, and News. from https://www.patriotsoftware.com/accounting/training/blog/schedule-c/ Companies and firms today have many reasons for finance and accounting outsourcing. Gone are the days when outsourcing was frowned upon as a business strategy due to the apparent risks involved. According to the Finance and Accounting Outsourcing Annual Report – 2018 prepared by the research firm Everest Group, the global finance and accounting outsourcing market has experienced a strong growth of 8% to 10% in 2016, reaching an annual size of USD 6.4 billion. This goes to show how confident businesses and firms are in the robustness of this industry. from https://www.dvphilippines.com/blog/4-reasons-for-finance-and-accounting-outsourcing-in-2019 Not being able to pay your debts can be scary. And when your creditor is the IRS, you might be especially nervous about making ends meet. To alleviate some of your tax debt burden, consider applying for an offer in compromise. You must apply for an offer in compromise through the IRS. But before applying, weigh your options—the IRS does not accept all applications. In fact, the IRS rejects approximately 60% of offers in compromise applicants. Familiarize yourself with the IRS offer in compromise process and qualifications to improve your chances of acceptance. What is an offer in compromise?Offers in compromise (OIC) allow taxpayers to settle their tax debt with the IRS at a lower price than what they owe. An offer in compromise is typically a last-ditch effort for taxpayers who have already explored other payment options, like an installment agreement. Installment agreements let you make monthly tax payments, but you are still liable for your full tax debt. To settle with the IRS, you need to submit an official application. In your application, provide personal and financial information and make an offer amount. Businesses and individuals who want to apply for an offer in compromise must meet IRS eligibility requirements. Do you meet the IRS eligibility requirements?Before applying, verify that you are eligible. The IRS requires that you:
You might be able to use the IRS offer in compromise pre-qualifier tool to determine eligibility and calculate your preliminary offer. The pre-qualifier tool is a guide, not an offer in compromise application. To get started, you must answer some questions and input personal and financial information. You cannot use the IRS offer in compromise pre-qualifier tool if your business is structured as a partnership or corporation. When does the IRS accept a business offer in compromise?Even if you meet the eligibility requirements, the IRS can decline your offer in compromise. When reviewing an offer in compromise, the IRS looks at your ability to pay, income, expenses, and asset equity. The IRS typically declines offers if the taxpayer can afford to pay what they owe. Here are some reasons that the IRS may accept your offer in compromise:
Offer in compromise guidelinesReady to learn about the OIC tax settlement program? After verifying that you are eligible, you can begin the application process. Keep in mind that after submitting your offer, the IRS can take up to two years to make a determination. While you wait for a determination, the IRS suspends collection activities. And, you do not need to make payments on an existing installment agreement. If the IRS accepts your OIC, they will keep tax refunds for tax periods that extend through the calendar year. For example, if the IRS accepts your OIC in 2019, you cannot receive a refund on your 2019 tax return. The refund does not go toward your tax debt. To submit your offer in compromise, you must file the appropriate forms and choose a payment option. After filing, you will receive your IRS determination. Filing the offer in compromise formThe forms you must file depend on two things:
If you are submitting an OIC based on doubt as to collectibility or effective tax administration, you must file Form 656, Offer in Compromise. You must also file Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, Form 433-B (OIC), Collection Information Statement for Business, or both. File Form 433-A (OIC) if you are:
File Form 433-B (OIC) if you are a:
The IRS’s Form 656 Booklet contains Forms 656, 433-A (OIC), and 433-B (OIC). If you are submitting an OIC based on doubt as to liability, only file Form 656-L, Offer in Compromise (Doubt as to Liability). All taxpayers submitting an OIC should also include copies of supporting documents to back up their claims. Application feeMost taxpayers must include an application fee of $186. However, you do not need to pay the application fee if you’re submitting your OIC because you doubt your liability. Also, if you’re an individual (e.g., sole proprietor) who qualifies for the low-income exception, you do not need to submit the application fee. Choosing a payment optionTaxpayers with an accepted offer in compromise generally make installment payments to pay down their reduced tax debt. You must choose your payment plan when you apply. The IRS offers two payment options: lump sum cash and periodic payment plans. Both payment options require an initial payment when you apply, in addition to your application fee. Separate your application fee from your initial payment. Although the payment is nonrefundable, the IRS applies the amount to your total tax bill if they reject or return your OIC. Lump sum cashIf you pursue the lump sum cash payment option, you can either pay your offer amount in one large sum or in installment payments. Under the lump sum cash option, you must make five or fewer installments within five or fewer months after the IRS accepts your offer. Your initial payment is 20% of your total offer amount. So if your offer is $40,000, you would include an initial payment of $8,000. Periodic paymentTaxpayers who pursue the periodic payment option make six or more monthly installments within 24 months after the IRS accepts your offer. When applying, your initial payment is your first proposed installment payment.
Receiving your IRS determinationThe IRS can accept, return, or reject your offer in compromise. Accepted OICIf the IRS accepts your OIC, you must abide by the terms and conditions. Failing to comply with tax laws and make timely payments for your new tax debt could end up costing you more than your original liability. The IRS can cancel your OIC and charge you for your original debt, plus interest and penalties. What if you don’t hear from the IRS within two years of submitting your OIC? If the IRS does not make a determination within two years, your OIC is automatically accepted. Returned OICThe IRS might return your offer in compromise if you are ineligible or made a mistake when applying. A return is not a rejection. The IRS might return your offer in compromise if you:
If the IRS returns your OIC, you cannot appeal the decision. However, you can resubmit your OIC once you are eligible and/or correct your application. Rejected OICThe IRS notifies you by mail if they reject your offer in compromise. Notifications explain why offers are rejected and provide instructions for appealing the decision. If you decide to appeal a rejection, you must do so within 30 days. File Form 13711, Request for Appeal of Offer in Compromise, to appeal. Are you unsure whether you should appeal or not? The IRS provides an online self-help tool to help you decide. Offers in compromise require significant financial information. Avoid scrambling at the last minute by keeping updated books. Use Patriot’s online accounting software to track income, expenses, and receivables. Ready for your free trial? This is not intended as legal advice; for more information, please click here. The post Offer in Compromise: Possible Solution for Business Owners Drowning in Tax Debt appeared first on Accounting Tips, Training, and News. from https://www.patriotsoftware.com/accounting/training/blog/offer-in-compromise-tax-debt/ As a small business owner, you need to track your income and expenses. And to organize your business finances, you must select an accounting method. One method you can choose is modified cash-basis accounting. Learn the ins and outs of the modified method, how it differs from other accounting methods, and its advantages.
What is modified cash-basis accounting?Modified cash-basis accounting, otherwise known as hybrid accounting, uses aspects of both cash-basis and accrual basis accounting. Typically, cash-basis is considered the simplest method, while accrual is the most complex. The modified method is a happy medium for business owners who need aspects from both cash and accrual accounting. Modified cash-basis uses the same types of accounts as accrual basis. However, with the accrual method, you must record income when transactions take place—with or without the transfer of money—and record expenses when you are billed. Because other methods can have certain limitations, a business may opt to use modified cash-basis to develop a more accurate financial snapshot. Common industries that use modified cash-basis include:
By using aspects from cash-basis and accrual, the modified cash-basis method can better balance short and long-term accounting details. You can record both short-term items like utility bills and long-term items like property using modified cash-basis accounting. A modified cash-basis system also uses double-entry bookkeeping. In double-entry accounting, every entry to an account requires you to create a corresponding and opposite entry to a different account. Modified cash-basis accounting can be used for internal purposes. However, it does not comply with the Generally Accepted Accounting Principles (GAAP). Because of GAAP’s standards, you might need to adjust some transactions to remain compliant (e.g., convert cash-basis transactions to accrual). Keep in mind that not all businesses need to follow GAAP’s standards. Check the Financial Accounting Standards Board’s website for more information regarding which GAAP principles your business must follow. Cash-basis vs. modified cash-basis accountingAlthough their names may sound similar, cash-basis and modified cash-basis accounting have differences. With cash-basis accounting, only cash accounts are available. You record income when you receive it and report expenses when you pay them. You can record things like cash, equity, income, cost of goods sold, and expenses. Typically, you can’t use cash-basis accounting if you need to track inventory, fixed assets, or loans. Modified cash-basis is a little more time-consuming than cash-basis accounting. Because there are more accounts, you may spend more time recording transactions. And rather than only handling cash accounts, modified cash-basis includes both cash and accrual accounts. As mentioned, modified cash-basis allows you to include short-term items like cash-basis accounting. But, you can also include long-term items like you can with the accrual method. Unlike with cash-basis, you can record accounts receivable, current and fixed assets, and accounts payable with modified cash accounting. Comparing accounting methodsNow that you know more about the different accounting methods, let’s compare how the methods vary. Here is a breakdown of some of the types of accounts you can use with each accounting method:
When do you use modified cash-basis?You might decide to use modified cash-basis accounting to take advantage of both its cash-basis and accrual method features. Using modified cash-basis gives businesses a clear financial picture of their business. And, business owners don’t have to worry about converting from cash to accrual basis accounting. When you first start your business, you may choose to stick with cash-basis accounting since it is easy to understand. And when your business grows, you might decide to change your accounting method. If you are starting out, consider using basic accounting software. As you grow, you can upgrade to a more advanced system for your small business books. If you are not sure if the modified cash method is best for your small business, consider reaching out to an accountant to discuss your options. Reasons to use modified cash accountingIf you’re unsure about which type of accounting method to choose, consider looking at some advantages of modified cash-basis accounting. For many small business owners, accrual basis accounting might be too complex and difficult to understand. Using modified cash-basis is easier to comprehend than the accrual method, but also gives you access to more accounts than cash-basis. If you are ready to take a step forward from cash-basis, modified cash-basis is a good start. Modified cash-basis allows for flexibility. And, it is not as much of a commitment as accrual basis accounting. Need an easy way to track your business’s transactions? With Patriot’s online accounting software, you can choose cash-basis, modified cash-basis, or accrual accounting. And, we offer free, U.S.-based support. Try it for free today! This is not intended as legal advice; for more information, please click here. The post Modified Cash-basis Accounting: How Does it Differ From Other Accounting Methods? appeared first on Accounting Tips, Training, and News. from https://www.patriotsoftware.com/accounting/training/blog/modified-cash-basis-accounting/ If you want someone to invest in your company, you need to be able to tell them why it’s worth the investment. And, you must be able to back up your claims with strong financial data. To show investors why your business is a good investment, develop a financial analysis report.
Financial analysis reportYour financial analysis report highlights the financial strengths and weaknesses of your business. Essentially, the report communicates the financial health of your company to investors. You can use a financial analysis report to attract the interest of investors and help grow your business further. Even though business owners can build their own financial analysis report, sometimes other individuals may create reports about companies. Then, the individuals creating the reports can use the research to recommend the business’s stock to investors. How to conduct a financial analysis reportFollow these four steps to conduct a financial analysis report for your small business. 1. Gather financial statement informationTo begin conducting your financial analysis report, you must collect data. Gather financial statements and other documentation. Examples of financial reports include your income statement, cash flow statements, and balance sheets. Consider also gathering any financial notes, quarterly or annual records, and government reports (if applicable). 2. Calculate ratiosCalculate ratios that give a snapshot of your business’s financial health. For example, you might calculate and include your business’s return on investment ratio. That way, you can show investors the profitability of your investments. Find what ratios matter most to your business. Add your ratios and calculations to your financial analysis report. 3. Conduct a risk assessmentHow risky is your business? Investors want to see if your business is worth the risk. To show investors your business is worth investing in, conduct a risk assessment. You can analyze your business’s risk by doing the following:
4. Determine the value of your businessLastly, estimate how much your business is worth. Determine the price of your business’s stock and the value it can bring to investors. Financial analysis report sectionsTo begin attracting investors, you must learn how to make a financial analysis report. Review the common sections of a financial analysis report below. Company overviewTo start a financial analysis report, start with a description of your business. The company overview helps investors understand the business, industry, and the company’s competitive advantage. These factors help investors determine if your business is a good investment or not. Gather this information from your company’s quarterly or annual financial statements. InvestmentThe investment section addresses the pros and cons of investing in the company. Investment analysis includes reviewing your business’s cash flow, liquidity, and levels of business debt. And, this section should give projections for how the information might change in the future. Go into detail about your company’s growth trends, financial statement analysis, and how it compares to the competition. Consider also including details like turnover ratios, return on investment (ROI), and other financial components. The more information you have, the better. Using past financial trends in your analysis can help define the likelihood of future financial success. ValuationOne of the most important parts of a financial analysis report is the valuation section. In this section, you must include how much your business’s stock is worth. There are three methods for stock valuation, including discounted cash flow analysis, relative value, and book value. Discounted cash flowUsing the discounted cash flow method, estimate the value of stocks and investments based on the business’s future cash flows. When using this method, find the present value of expected future cash flow using a discount rate. Relative valueTo use the relative value method, compare your business’s fundamental metrics and key financial ratios to your competitors. Typically, the price-to-earnings ratio is included in the financial analysis report. This ratio compares the market price of a business’s stock to its earnings per share. Book valueTo find book value, compare the business’s book value to the current price of the stock. Book value allows you to see if the stock is overvalued or undervalued. Risk analysisYour risk analysis section includes risks that may prevent your company from achieving its valuation. Detail all key factors that may derail your business. Remember that factors can vary from business to business. And, they can range anywhere from lack of supplies to the loss of patent protection on a product. Analyze the main risks and summarize them in your report. Consider also looking at the type of industry to determine other potential risks (e.g., technology industry). DetailsIn the details section, include summaries of your financial statements and documents. And, incorporate interpretations of the statements using ratios, pie charts, and other graphs. Consider including a summary or shortened versions of the following financial statements:
The information you include in the details section should support other information presented in your report. SummaryAt the end of the report, give a brief recap of the sections you discussed. Summarize the key points made in the analysis. Do you need an easy way to keep track of your business’s finances? Patriot’s online accounting software lets you keep track of your income and expenses. And, we offer free, U.S.-based support. Try it for free today! This is not intended as legal advice; for more information, please click here. The post Breaking Down the Basics of a Financial Analysis Report appeared first on Accounting Tips, Training, and News. from https://www.patriotsoftware.com/accounting/training/blog/financial-analysis-report/ |