Tax Credits and Deductions Maximizing Opportunities for Savings
Tax credits differ from deductions because they reduce actual taxes owed dollar for dollar. These tax breaks are a great opportunity for small businesses and individuals to lower their income tax bills or increase their refunds.
Deductions are “above the line,” meaning they reduce your taxable income before your tax bill is calculated. However, tax credits are subtracted from your tax liability after the calculation.
1. Home Mortgage Interest Deduction
Home mortgage interest deduction reduces the amount of taxable income by deducting the homeowner’s interest payments from their federal tax bill. This benefit increases household wealth, and higher homeownership translates into greater consumer spending that boosts the economy.
But the mortgage interest deduction is largely used by higher-income households, and it encourages homeowners to take out larger loans and keep their home equity high. Larger mortgage balances and high home equity increases the risk that households could be stuck with mortgage debt they cannot pay if house prices decline.
Rather than scaling back or reforming the mortgage interest deduction, converting it to a credit would provide more help than today’s deduction for lower- and middle-income households while trimming subsidies for higher-income households. This approach would also reduce the deficit without jeopardizing economic growth or housing market recovery.
2. Child Tax Credit
Raising children is expensive, and even families with low incomes can have expenses like food, utility bills, clothing and education costs. Tax credits can help cover these expenses and encourage saving.
The Child Tax Credit, which is partially refundable, helps most families with children. Its benefits are correlated with health outcomes including lower food insecurity, reduced income volatility and better health.
Families can claim the CTC if their Modified Adjusted Gross Income (MAGI) is less than $200,000 for single filers and $400,000 for married filers. To qualify, children must meet age, relationship and support tests as well as citizenship and residency requirements. If you’re receiving the credit, consider stashing it in a no-fee savings account such as Marcus by Goldman Sachs High Yield Online Savings, Synchrony Bank High Yield Savings or Varo Savings.
3. Education Credits
For those who have a child in college, there are two tax credits that help offset tuition and fees. These are known as the American Opportunity Credit and the Lifetime Learning Credit.
The credit differs from deductions because it reduces taxes dollar-for-dollar, while deductions only reduce the amount of income that is subject to tax. The value of a tax credit can also increase or decrease with the taxpayer’s marginal tax rate, which rises as income increases.
The key to getting the maximum benefit from these credits is careful planning and record-keeping. A qualified tax professional can provide guidance on these and other credits. In addition, the accumulated earnings of a 529 plan may be tax-free when distributions are used to pay education expenses, boosting the benefits further.
4. Energy Credits
A tax credit reduces a filer’s tax liability dollar-for-dollar, while a deduction lowers taxable income by deducting an amount from the gross income. Tax credits are more valuable than deductions, particularly for low- and middle-income households, according to the Urban-Brookings Tax Policy Center.
For example, the bill extends and enhances the nonbusiness energy property credit for up to 30% of the cost to install efficient windows, doors, skylights, water heaters and furnaces in homes, as well as an electric vehicle charging station credit. It also adds battery storage as a new credit for renewable solar installations.
It also expands the renewable electricity production credit to pay 2.6 cents per kilowatt-hour for power generated by wind, solar, geothermal, small wind, biomass, microgrid controllers and combined heat and power properties.
5. Other Credits
There are several other tax deductions that can be useful, including contributions to traditional individual retirement accounts and above-the-line deductions like property taxes, says Josh. Eligible taxpayers can claim these deductions whether they itemize or take the standard deduction. The benefit of these above-the-line deductions is that they lower a filer’s adjusted gross income, which may help save money on Medicare Part B and Part D premiums, as well as other tax-deductible expenses.
In terms of saving money, a credit is more valuable than a deduction, according to financial experts. That’s because credits reduce a filer’s tax liability dollar for dollar, while deductions’ value depends on a person’s marginal tax rate, which rises as income increases. Keeping track of eligible expenses throughout the year and minimizing taxable income are key for maximizing tax benefits.
Read MoreUnderstanding Different Types of Taxes
Learn about taxes on what you earn, what you buy, and what you own. Some are paid directly to the government. Others are collected on your behalf by businesses.
Many states have consumer excise taxes in which sellers bear the legal burden for collecting and remitting sales tax. In contrast, property taxes are a major revenue source for local governments.
Income Tax
A tax is a fee that citizens or corporations pay to an authority. The purpose of taxes is to fund public services such as roads, national defense and education. Types of taxes include income, sales, capital gains, property, excise and inheritance.
The most familiar of these is the federal and many state income taxes that you see deducted from your paycheck. Those taxes help to fund public services such as Medicare and Social Security.
Individual income taxes are levied on wages, salaries, investments and other forms of personal income. In most states, the tax is progressive and rates increase as income rises.
A sales tax is a consumption tax that can be levied at the federal, state and local levels on goods and services. This can be in the form of a value-added tax (VAT), a goods and service tax, a state or municipal sales tax, or an excise tax. Sales taxes can be regressive, meaning that lower-income individuals and households pay a greater percentage of their income in taxes than higher-income residents.
Sales Tax
Sales taxes are a type of consumption tax that is levied by state and local governments on the retail sale of goods and services. They are a key source of revenue for many states, and can also be levied at the county and city level in some jurisdictions.
Most states operate under consumer excise or destination sales tax models, in which the primary responsibility for paying the tax rests with purchasers of taxable goods and services. Sellers serve primarily as collection agents, and don’t have the option of absorbing the tax.
The tax is often applied to items purchased from outside a state’s boundaries, in order to prevent shoppers from avoiding sales taxes through various shopping strategies. It is also a major contributor to the cost of shipping and handling charges. Keeping up with the rules and rates can be challenging, especially as a business grows. But it’s essential to understand these taxes in order to ensure compliance and visibility into a company’s costs.
Property Tax
The property tax is levied by your local government based on the value of your home or other real estate. You may pay this tax directly or it is often included in your mortgage payment. Property taxes also apply to other types of real estate and tangible personal property like tools and equipment.
Property taxes conform to the “benefit principle,” meaning that the taxes you pay should correlate to the benefits you receive from the services your tax dollars fund. These benefits can include public education, fire protection and police and other vital government services.
Your state or local governments set and administer property tax rates, policies and payment terms that can differ from one area to another. You can find more information about property tax rates and other laws at your local government website. You can also call your county or city tax assessor for more details about how property taxes are administered in your area.
Other Taxes
There are many different types of taxes imposed by federal, state, local and special-purpose government jurisdictions. In general, these taxes are based on the type of income you earn or the value of the property and land you own. Some are progressive, meaning that as your taxable income increases, so does the tax rate.
Another popular type of tax is the sales tax, a consumption tax based on the retail price of many goods and services. Some states also have a use tax, which is a similar tax on the storage, use or consumption of taxable items purchased outside the state without paying sales tax.
Local governments rely heavily on property taxes, which are levied on real estate and tangible personal property like machinery and equipment. This is often a classic ad valorem tax, where the property is assessed based on its “highest and best use.” Some jurisdictions tax business personal property as well. For example, many businesses have to pay a property tax on their office furniture and equipment.
Read MoreNavigating Tax Season – Essential Tips for Individuals and Businesses
During this tax season, the right tools can help make the process easier and less stressful. For example, keeping a detailed log of business expenses throughout the year allows individuals and businesses to maximize deductions while also providing a clear starting point for preparation.
In addition to establishing sound accounting practices, utilizing resources like Odoni Partners can support financial planning and compliance, ensuring a successful, seamless tax filing. Learn more about these and other essential tips for navigating tax season below.
1. Stay Organized
When it comes to tax season, the best way to avoid a stress-inducing boatload of documents is to stay organized. A key part of this is to create a file for any tax documents you receive throughout the year. This can be a physical document folder or a digital one like a spreadsheet or budgeting software program.
Then, whenever you get receipts or other tax-related documentation, place them into this file. You can make this a monthly task, and this will help you feel prepared for tax season rather than going on a wild goose chase for all of the crucial paperwork.
Another great tip is to keep a calendar of important tax dates. This will ensure you don’t forget any filing deadlines that can result in penalties.
2. Be Informed
When it comes to taxes, it pays to be informed. That means keeping up with your state-specific filing requirements, as well as tax credits and deductions you might be eligible for. You’ll also want to consider whether any major life changes have occurred over the past year — like a move, a divorce, or the birth of a child — which can alter your filing status.
If you’re running a business, keep track of your receipts and financial records to accurately determine which deductions are valid. This could be as simple as downloading your business credit card statements or creating a spreadsheet to track annual expenses. When you receive your refund (if applicable), make a plan to spend that money wisely, either by paying down debt, boosting your emergency savings fund, or saving toward a financial milestone, like buying a home.
3. Be Prepared
If you’re a business owner, keep detailed records of your business expenses. Whether it’s from receipts, business credit card statements or bookkeeping software, having all the information at your fingertips will save time at tax filing time and prevent errors that could delay your refund.
If you’re a single taxpayer, be sure you have all the documentation you need before your filing deadline, which is April 15 (unless it falls on a weekend or holiday). Make a list of all your paperwork and if you can, file early and e-file to reduce processing delays. And if you’re expecting to owe money, learn more about tax payment options and filing for an extension. This will prevent late filing penalties and interest charges.
4. Be Flexible
Tax season can be grueling for business owners, especially those who work with clients. Clients often wait until the last minute, there is never enough staff and it feels like you’re working 24/7. This is when burnout looms and it’s essential to take steps to avoid it this year.
The key to minimizing your tax burden is planning ahead. Make sure you’re getting the most out of your deductions by ensuring that all expenses are being properly documented throughout the year. Also, if you’re on the itemize-or-not borderline, consider bunching deductible expenses in one year and deferring income in another.
Finally, it’s important for business owners to remember that tax season is a great opportunity to promote services like financial guidance and investment strategies. This can help you build trust and loyalty with your clients and establish a long-lasting relationship.
5. Take Advantage of Extensions
If you’re unsure that you’ll be able to file your federal tax return by this year’s deadline, it’s worth filing for an extension. Depending on the type of extension you choose, you may not have to pay your tax liability until later.
Keep in mind, however, that a filing extension only gives you more time to file, not more time to pay, so it’s best to estimate the amount you will owe and submit an estimated payment as soon as possible to avoid late-payment penalties.
If you’re self-employed, getting a filing extension also allows more time to contribute to a solo 401(k) or Simplified Employee Pension (SEP) account. However, contributions to these accounts must be made by the original filing deadline, which is this year April 18. Organizing these records now can make it easier and less stressful to do your taxes later.
Read MoreFinancial Planning for Entrepreneurs Mapping Out Your Business Future
Entrepreneurs are always working to ensure that business aspects like cash flow and budgeting are in order. However, personal financial planning often takes a backseat, and this can have negative implications down the road.
A well-developed financial plan should include strategies for tracking expenses, establishing clear company goals, and investing wisely. In addition, entrepreneurs should work with a financial advisor and keep up to date on tax regulations.
1. Cash Reserve
As your business grows, it’s important to have some cash reserve available to pay for unexpected expenses. Having this cushion can help you avoid having to interfere with other savings accounts or take on debt, which can delay your growth goals.
It’s recommended that businesses keep three to six months worth of expenses saved in a cash reserve. To determine the right amount for your company, analyze past earnings and expenses using a full-year cash flow statement. You may also want to consider establishing a line of credit in addition to your cash reserves, since this could allow you to maintain a smaller reserve balance while still providing emergency access to funds.
2. Financial Goals
Setting financial goals is a great way to ensure that your business is on the right track. It also encourages accountability and discipline.
One of the first financial goals that entrepreneurs should try to achieve is getting their business to cash flow positive. This is important because it means that they are generating more revenue than they are spending.
Another financial goal that entrepreneurs should set is to forecast their cash flow on a regular basis. This will help them get a better understanding of their company’s finances and how much money they have available to invest. They should also make sure that they are staying compliant with all of the applicable regulations and laws.
3. Budgeting
Entrepreneurs need to have a financial plan for their businesses as well as their personal finances. By creating a budget and tracking their financial goals, they can improve their original standing and increase their growth prospects.
Using a budgeting system can help entrepreneurs get a clear picture of their cash flow, and identify areas where they could save money or direct more towards savings and debt reduction. Adding up all of their sources of income and subtracting automatic deductions for things like 401(k), savings, insurance and more can reveal an accurate picture.
Having an understanding of their finances can help them make better business decisions, and maintain stability during challenging times.
4. Investing
Entrepreneurs can use financial planning to make well-informed choices on finance, investments, and resource allocation. This can lead to improved business performance and long-term success.
Investors can also invest in their own financial knowledge by enroling in courses or workshops, reading books and blogs, or even seeking out advice from a financial adviser (there may be a fee for this service). Expanding your knowledge will help you manage your finances better.
Another important aspect of financial planning is investing for retirement. Unlike employees, entrepreneurs do not have access to employer-sponsored retirement accounts or benefits. Hence, it is imperative that they start saving and investing at an early stage.
5. Insurance
Entrepreneurs often pump their personal savings and assets into the business to help it grow. It’s essential that they engage in financial planning to save for retirement and protect their personal wealth.
A crucial part of financial planning is insurance. Since emergencies and health problems often occur without warning, it’s better to be prepared in advance.
Financial planning also involves budgeting and forecasting. By creating a budget, entrepreneurs can manage expenses and allocate resources effectively. Moreover, by tracking their spending habits, they can identify areas where they can save money. In addition, working with a fee-only CFP® professional can help them navigate complex tax issues and wealth management considerations.
6. Working with a Financial Advisor
Many entrepreneurs pump their personal savings and assets into their business to fuel growth, but they also need to engage in financial planning on a personal level to save for retirement, cover health-care expenses and more. Working with a financial advisor can help with both.
Financial advisors can recommend a variety of investment strategies, insurance solutions and other products that may be beneficial to your situation, including annuities and life-insurance policies. They can also provide guidance on tax strategies and rebalancing your portfolio.
Evaluate your financial plan regularly to make sure you are on track to achieve your goals. Ready to start a conversation with a financial advisor? Compare vetted advisors matched to your needs.
Read MoreThe Importance of Budgeting in Business
Effective budgeting is a crucial step in maintaining financial control for a business. It can help businesses estimate revenue, expenditure and expected profits.
Monitoring the variance between actual and budgeted data helps a business understand where changes can be made to improve the company’s bottom line. This can help businesses secure loans from banks and investors.
Identifying Problem Areas
While it is essential to prevent budget creep and uncontrolled overage, it can also be helpful to recognize the times when a strategic splurge may be warranted. Having a clear understanding of actual expenses, ROI and customer information can help you decide whether an expense that is off-budget should be avoided or is the beginning of something better.
A business budget is a financial document that estimates income and expenditures for a specified period. It is an important tool for businesses as it provides a roadmap for accomplishing business goals and objectives. A good budget is accurate, realistic and clearly identifies the specific revenue targets and expense limitations for each functional area and manager in the organization on a monthly basis.
Some strategies for sticking to a business budget include prioritizing spending needs, involving employees in the process, and using technological tools for efficiency. It is also helpful to compare actual income and spending with the budget on a regular basis. This can help you spot trends and potential problems.
Identifying Potential Issues
A well-formed budget is a roadmap to help you achieve your business goals. It also enables you to monitor the financial health of your business, including cash flow and profits.
A budget allows you to compare actual results with expected results and identify areas where adjustments are necessary. For example, if your sales or customer acquisition costs (CAC) are higher than planned, it may be time to invest in marketing programs and other efforts to increase your ROI.
By regularly reviewing and adjusting your budget, you can prevent unnecessary expenditures and ensure that you have enough money to cover operating expenses. In addition, you can identify potential issues like declining sales or a cash flow shortage and take corrective action before they become critical. By comparing budgets from previous periods, you can see whether you are meeting your business objectives. You can also compare your budget to that of your competitors. This gives you a competitive advantage as you make strategic decisions.
Identifying Potential Solutions
Creating an effective budget requires number-crunching and attention to detail, but it is well worth the effort. It can help you identify potential solutions that can mitigate risks, such as cash flow shortages or declining sales, and keep you on track to meet business goals.
For example, if your budget shows that revenue will decline significantly in the month of August versus what you expected, this gives you an opportunity to prepare by building up reserves. Similarly, if your income increases significantly in the run up to Christmas but you were not expecting it to, then this provides an opportunity to revise budgets for future periods to better plan for the increase in sales and expenditure.
Using historical information and your business plan, you can create a budget that can provide you with the right level of accuracy. This allows you to track actual expenses and sales against your budget, which can help to detect any problems early on.
Identifying Potential Opportunities
Lenders or investors may be more likely to consider lending your business money or investing in it if it has a history of producing well-documented and detailed budgets. In addition, a well-prepared budget gives you the data to back up any financial decisions that you make.
The information that a budget provides also allows you to identify potential problems such as declining sales or cash flow shortages in advance and take proactive measures such as cutting unnecessary costs or reallocating resources to correct the problem before it gets worse.
A business that doesn’t develop and follow a budget is effectively flying blind and will have a much harder time meeting its financial goals. A budget identifies current available capital, estimates expenditure and anticipates incoming revenue, giving businesses the necessary information for making sound financial decisions. Participative budgeting, a method that allows the input of multiple people in the company, can facilitate more informed and accurate decision-making.
Read MoreUnderstanding Financial Ratios Key Metrics for Evaluating Business Performance
Financial ratios use numerical values derived from financial statements (balance sheet, income statement and cash flow statement) to analyze business performance. They are an essential tool for quantifying business performance.
The quick ratio, also known as the acid test ratio, sums a company’s current assets (cash, marketable securities and accounts receivable) and divides it by its current liabilities. Inventory is excluded from the calculation.
Profitability Ratio
Profitability ratios provide insight into a company’s current state and the future potential for growth. They can help entrepreneurs formulate concrete ways to improve profits and attract investors.
For example, net profit margin reveals how much after-tax profit is made for every dollar of assets owned by a business. Companies with higher margins than their competitors are considered more efficient, flexible and able to take advantage of opportunities as they arise.
Ratios can also be used to compare performance over time or against industry benchmarks. It’s important to run them on a regular basis, taking into account seasonality and other temporary fluctuations.
Cash Flow Ratio
A company with enough cash or cash equivalents to cover its short-term debt and liabilities is considered financially strong. It’s a more conservative measure than other liquidity ratios, as it only considers cash and cash-equivalent holdings (excluding accounts receivable).
Lenders often use this ratio as part of their lending criteria and should be evaluated on a monthly basis. It’s also useful to compare the ratio against industry and competitor averages. This is especially helpful for identifying industry seasonality. The cash ratio can be improved by turning over inventory more quickly, reducing working capital and lowering payment terms with customers.
Working Capital Ratio
The working capital ratio illustrates a company’s ability to convert its current assets into cash. A higher ratio indicates more cash-on-hand, but it can also mean that the company is hoarding money rather than reinvesting it in its business. A comparatively low ratio can indicate that the company could have trouble paying its bills or taking advantage of new business opportunities that require quick cash.
To gain perspective on your company’s current liquidity, compare your ratios against those of similar companies in your industry. Use these comparisons to identify trends and improve your business’s efficiency and flexibility.
Days Payables Outstanding
The Days Payable Outstanding metric measures the average time it takes for your business to settle its payables with suppliers. Ideally, your business should be able to use its current assets and cash equivalents to cover all of its short-term debts.
Depending on the nature of your business, you may have different payment terms with your suppliers. For example, a clothing store might need to keep inventory short and have fast turnover, while airplane manufacturers have high-value inventory that requires long periods of time for production.
Using industry benchmarks and calculating your own ratios over time helps you gauge whether your business is on track for success. You can also compare your company to its peers in the same industry and identify areas for improvement.
Accounts Receivables Ratio
The accounts receivable turnover ratio is a measure of how quickly a company turns its invoices into cash. It can be a good indicator of efficient collections practices and quality customers who pay their debts promptly.
This ratio is not without its limitations, however. It’s important to clarify how the ratio is calculated because some companies use total credit sales instead of net credit sales, which inflates results.
Additionally, the turnover ratio can vary greatly throughout the year due to seasonality and other factors. This makes it important to look at the ratio over a long period of time.
Quick Ratio
This financial ratio divides a company’s quick assets — cash and liquid investments such as marketable securities and accounts receivable — by its current liabilities, which are any immediate debts that the business must pay. The calculation excludes prepaid expenses and inventory, which can take a significant amount of time to convert into cash. The quick ratio is used by investors, suppliers and lenders to assess a company’s ability to pay its debts on time.
However, this metric is not without limitations and requires context and qualitative factors when making comparisons between companies in different industries.
Days Working Capital
The Days Working Capital (DWC) ratio is a measure of how long it takes for the company to turn its initial investments in working capital into revenue. It indicates if the company is efficient in managing its inventories, collecting its receivables and paying its payables.
This financial metric differs from the current ratio because it only considers assets that can quickly be converted into cash, including cash and cash equivalents, marketable securities and accounts receivable. The quick ratio excludes inventory and prepaid expenses, which might not be easily converted into cash.
Read MoreEssential Tools and Software For Financial Success
Keeping up with the financial side of running a business can feel like a never-ending task. Fortunately, affordable tech tools can save you time and headaches by automating some of the most tedious accounting tasks.
From bank statement converters to tailored business finance management software solutions, these tools empower businesses to streamline their data processing and make data-driven decisions.
Budgeting Tool
Managing business finances involves a lot of different tasks that involve forecasting, accounting, and budgeting. Using the right tools to help manage these financial processes helps you create and track budgets effectively and make decisions based on accurate data.
Using a budgeting tool can save you time, reduce expenses, and increase revenue. It also allows you to monitor cash flow and other financial indicators that are essential for your business’s success.
Having the best tools at your disposal is critical for ensuring that your company’s financial health is in good shape. Inefficient finance processes can hamper employee productivity and result in costly mistakes. Moreover, manual finance procedures are not scalable and cannot keep up with the growth of a business. Choosing the right budgeting tool for your business requires careful research and consideration. Look for solutions that allow you to import existing spreadsheets, automate expense reporting, and enable collaboration between teams. The software should be easy to use, affordable, and able to adapt to your needs as you grow.
Accounting Tool
Managing the basic financial processes of your business is important to keep up with. This includes tracking expenses, processing payroll, and preparing financial reports. There are a few tools that can help you save time and effort by automating these processes.
A cloud accounting tool can help you manage and track your budget, invoices, expenses, payments, and profit and loss statements. It also provides you with a clear picture of your company’s financial health and helps you make informed decisions to grow your business.
There are several online accounting apps that offer different features and pricing plans. Some of them are free and others require a monthly or yearly subscription. Some of the top-rated platforms include DocuPhase, PayEm, and Sage 300. These tools can streamline non-payroll financial processes, from request to reconciliation. They can also reduce manual errors and ensure compliance with policies and regulations. They also enable users to integrate their AP processes with their general accounting operations.
Expense Tracking Tool
Managing business finances can feel like an overwhelming task, and it’s no wonder that so many entrepreneurs struggle to keep up. The good news is that there are tools and resources available to help save startup owners time and money. From budgeting tools to accounting and bookkeeping software, there are a variety of tools that can help a startup succeed.
Another important tool is a business expense tracking system. Small expenses like gas, meals, and cab rides add up quickly and are difficult to track manually. An expense tracking solution can automatically categorize receipts and cash expenses and upload them for rebilling, expense accounting, and reimbursement.
Finally, a robust inventory tracking system is essential to manage and optimize business sales. Cloud-based solutions such as SOS Inventory or Scout’s topShelf can track inventory from purchase orders to customer fulfillment and provide real-time inventory visibility. They can also automate low inventory alerts and sales reports, and integrate with existing accounting software.
Payroll Tool
Financial management tools for business should be scalable, easy to use and integrate with other finance tools. Manually completing various finance-related procedures can be time-consuming and may result in costly errors. Adding automation via finance tools increases efficiency, accuracy, and precision.
For example, UKG Pro provides cloud-based accounting, payroll, sales and inventory management software that can handle complex payrolls with ease. It allows employees to view their pay stubs online and on mobile devices. UKG Pro also helps them anticipate their take-home pay after tax deductions and other expenses.
Using an online payment processing solution like Square allows businesses to accept credit cards. It has a free trial and is simple to set up. Then there is Gusto, which makes payroll a breeze with automated paycheck options. It has a variety of plan tiers and offers HR add-ons such as health insurance administration, self-onboarding and state new hire reporting. It also has an in-house time tracking tool that’s included in all plan tiers.
Read MoreEffective Cost Management Strategies for Controlling Expenses and Boosting Profitability
Effective cost management techniques can improve your business’s profits and increase the visibility of costs. This includes establishing budgets that limit unnecessary spending.
It is also important to separate your expenses into fixed and variable costs. This can help you monitor your costs and proactively address any variances that may arise.
1. Review Your Budget Regularly
Using real figures and data rather than rough estimates when setting budgets is essential for controlling expenses. This means reviewing and revising the budget regularly. This can be done by comparing actual income with the sales budget, and by reviewing and analysing each expense to identify areas where costs are increasing.
This involves going beyond a simple analysis of your current costs, and looking for ways to cut them. It also requires a willingness to change the company’s structure so that it only incurs costs that generate revenue.
This can include renegotiating contracts with suppliers, streamlining processes to eliminate waste and inefficiencies, or implementing technology solutions for greater visibility of spending. These are all long-term projects, but the benefits of implementing effective cost control strategies are significant, with Aberdeen Group research showing that companies that do so see a 10% increase in profit margins.
2. Review Your Expenses
An effective expense review process can be a great way to save money. Smart leaders call everything into question, asking if the activity adds value and whether it is essential for the business to do what it does.
The review can be a time-consuming and labour-intensive task that requires careful analysis. It’s important to include business advisers like your NAB Small Business Banker and your accountant in the process so they can help you identify ‘cost culprits’.
In addition to looking at individual expenses, the review should look at costs for an entire project. This is known as cost profile analysis and can be a useful tool when evaluating a new project budget. By doing this, you can ensure that the project will be profitable and ensure that all necessary expenses are in place. It also enables you to see which projects are running over budget. This information can then be used to inform future budgets.
3. Negotiate with Suppliers
If you’re looking to save money on materials and other products, it’s worth negotiating with your suppliers. Ask the supplier for a list of existing clients and reach out to them to find out how much they pay for the same items you’re interested in purchasing. This information will give you an anchor point to begin price negotiations.
During the negotiation process, make sure that you’re willing to compromise on key aspects of the deal. You may need to accept a lower quality or a longer lead time in exchange for low prices. However, you should also draw the line on a few items that are non-negotiable.
Try to treat your negotiations as a partnership rather than a haggle where both sides are seeking the upper hand. Developing good relationships with your suppliers can help you negotiate better prices in the future, as they will be more likely to do business with you again. This will ultimately help you save money on costs and boost your profitability.
4. Manage Your Inventory
Identify the costs that generate profit and stick to those, ignoring expenses that don’t. In this way, effective expense management allows businesses to use the money they save in one area to advance initiatives in other areas of their business and drive overall profitability.
Using a first-in, first-out (FIFO) method for your inventory will reduce waste by ensuring that your oldest stock gets sold before your newer stock. This is particularly useful for perishable products.
In addition, it’s important to review your inventory regularly. For example, some companies do an annual full inventory count, while others conduct weekly, monthly or even daily spot checks of their most popular items.
This will prevent you from having dead stock wasting space in your warehouse and tying up capital unnecessarily. This includes stock that has lost customer interest or is simply obsolete. You may be able to move these products on for a profit by offering discounts or coupons.
Read MoreDemystifying Bookkeeping A Beginners Guide to Accounting Basics
Accounting can be overwhelming, especially to small business owners. This guide demystifies bookkeeping and other accounting concepts without the use of confusing jargon.
From analyzing expenses to understanding earnings statements and cash flow, this guide covers all the essentials of interpreting financial data. Mike Piper simplifies complicated topics such as Generally Accepted Accounting Principles and the accounting equation in an easy-to-read format.
Basics
Bookkeeping is the process of recording financial transactions and storing them in an accounting system. It is a crucial step in the accounting cycle and provides an accurate view of your company’s financial standing. It is essential to know how to correctly record your financial information in order to produce an accurate net income statement, cash flow statement and balance sheet.
Learn the basics of accounting, and start managing your business finances confidently. With this streamlined guide, author Wayne Label introduces core accounting principles in simple terms—from the intricacies of debits and credits to creating and interpreting financial statements. This easy-to-understand primer will enable you to make informed financial decisions and steer your company towards profitability. Designed with small business owners in mind, this QuickStart guide will improve your holistic financial literacy.
Chart of Accounts
A chart of accounts is an accounting framework that organizes financial transactions into basic categories like assets, liabilities, equity, revenue and expenses. Each account is assigned a number for easy identification and used in conjunction with the general ledger to produce financial statements like the balance sheet and income statement.
A good best practice is to keep the numbering consistent from one account to the next, making it easier for stakeholders to compare results over a period of time. It’s also common to list the accounts in the order they appear on a company’s financial statements, with balance sheet items like assets and liabilities listed first and income statement items like revenue and expenses listed next.
A well-organized and accurate chart of accounts allows businesses to get a bird’s eye view of their financial health, attract investors, stay profitable as they scale, and adhere to reporting standards.
Debits and Credits
Whether you are an aspiring bookkeeper or business owner, it is essential to understand debits and credits. Every accounting transaction has both a debit and credit side, and the total of all debits must equal the total of all credits. This principle is called the double entry accounting system and results in each account having a balance.
Debits are recorded on the left side of an account and represent increases in assets or expenses. For example, when your business purchases office supplies, you would debit the expense account for office supplies and credit the accounts payable account (assuming you are paying on credit).
Understanding debits and credits can be intimidating at first glance, but with a little practice, they become second nature. Having a grasp of this foundational concept can help you to make informed financial decisions and steer your business towards profitability.
Income Statement
Often called the profit and loss statement, this important accounting fundamental is a snapshot of business revenue minus business expenses. It goes hand in hand with the balance sheet and cash flow statement to create a complete picture of your business’s financial health.
Using a simple approach, this book introduces readers to the core accounting principles of preparing and reading an income statement. Whether they are new entrepreneurs, stock-market investors or undergraduate or MBA students, readers will gain the knowledge needed to understand these three core financial statements.
Understanding these essential concepts can empower small business owners and others who feel intimidated by the complexities of accounting. From interpreting earnings per share to recognizing and calculating revenue, this book helps readers conquer the fear of finances and make informed decisions.
Balance Sheet
The balance sheet, also known as a statement of financial position, displays a company’s assets, liabilities and owners’ equity at a point in time. Assets are items that provide economic value to the company, such as cash and cash equivalents (checking and savings accounts), marketable securities, prepaid expenses and inventory. Liabilities include short-term debts and long-term loans, such as bank lines of credit and bonds. Owners’ equity includes the owner’s contribution to the business, net of losses and dividend payments.
Accounting can seem daunting for small business owners, but this comprehensive guide demystifies the world of debits and credits in an easy-to-understand format. Discover the tools necessary to master budgeting techniques, financial report analysis and strategies for maximizing small business profitability. The only book you will ever need on the subject of accounting.
Read MoreFinancial Management Tips For Small Businesses
A lack of financial management is one of the leading reasons for small business failure. Without a good system, expenses can overtake revenue and bank accounts can run dry.
Sound money management practices include thorough bookkeeping, accurate projections and reliable sales reporting. It also includes keeping a separate chequing account, reconciling accounts monthly and utilizing an invoicing system such as register tape or invoices.
Set a Budget
Creating and following a budget is one of the best things you can do for your business. A budget gives you a clear picture of your profitability for the month by estimating both income and expenses. This includes calculating your “day one” costs (which are the costs necessary to open your doors) as well as recurring monthly expenses like rent, insurance, internet and accounting services. It also includes one-time purchases and costs that vary in amount from month to month, such as raw materials or marketing.
You can create a budget for the entire year or reassess your finances quarterly. Either way, you should compare your estimated budget with your actual spending at least monthly and quarterly to stay on track with your financial goals. This will also help you proactively manage costs and avoid surprises. Without a budget, you run the risk of spending more than your company brings in or failing to invest enough in the business to compete.
Track Your Expenses
Keeping track of expenses is essential for small businesses. This includes a wide range of costs, from the obvious like rent and utilities to employee salaries (if you have employees) and inventory purchases. Tracking expenses properly is the first step to creating a budget.
It’s also important to save receipts, both for tax purposes and so you have a record of what actually went out each month. It’s a good idea to break down the expense categories on a spreadsheet and then roll them up into a summary worksheet that looks similar to your Profit & Loss Statement so you can compare apples-to-apples.
Another way to track your expenses is by using accounting software, which can help you keep a record of everything in one place and automate some tasks. This can help you save money and time while improving your accuracy. It’s also a good idea to review your expenses regularly and look for ways to cut out any unnecessary spending.
Pay Your Bills on Time
Whether you use an automated payment service or write checks yourself, it’s essential to pay bills on time. If you don’t, you risk damaging relationships with suppliers and losing access to future financing.
To avoid missed payments, set aside a specific day of the week or month to do your business finances. This can include adding data to your financial software, filing receipts, or invoicing customers. You may also want to set up reminders on your phone, calendar or online to help you stay on top of due dates. It’s also a good idea to separate personal and business accounts so it’s easier to keep track of expenses and taxes. TD offers small business checking and savings accounts with features like next day access to funds1 and TD point of sale credit card reader integration. These tools can make it easier to manage cash flow and prepare financial statements. Keeping a cash reserve is another great way to protect your business from unexpected costs or disruptions.
Make a Profit
When a small business makes a profit, it’s one of the most rewarding aspects of owning your own company. That’s why it’s so important to keep close tabs on expenses and make smart decisions that will contribute to profitability.
One way to do this is through cash flow budgeting. This style of budget focuses on the timing of expected cash inflows and outflows, such as debt payments or inventory purchases. This will give you a sense of when your business might face cash shortfalls so that you can start lining up funds to cover them, such as with a line of credit or personal savings.
Another thing to do is separate your personal and business accounts. This will help you oversee your funds and keep track of taxes more easily. TD offers business checking and savings accounts that can work for you, including a small business checking account that helps you manage expenses and gets you paid faster with next day access to your money1. Learn more here.
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