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Controls and Customs for Petty Cash 0

Posted on April 02, 2015 by Tiffany C. Wright
Small U.S. bills

This is what petty cash looks like. Yours may include coinage.

In years past, the petty cash box or drawer was very important for businesses. Two decades ago, some companies would keep as much as $5,000 in their petty cash stashes to pay for small or immediate need-purchases. However, with the advent and subsequent increase in usage of business and vendor credit cards and charge cards, the need for petty cash accounts dropped significantly. In recent years the need has plummeted even more due to the rise in the use of online payment options such as Paypal. Despite this, some companies still maintain petty cash accounts for incidentals, including pizza for the staff or flowers for the receptionist.

Usage and Management

Companies often spend more time and effort on tracking their petty cash cachets than on tracking their company credit card transactions! Perhaps this has to do with having actual cash on the premises and the fact that you won’t receive a call from the bank regarding fraudulent activity in your petty cash account! Petty cash accounts lend themselves well to control and tracking mechanisms. Business must define and track the usage (drawing down) and replenishment of the petty cash account using customs/systems and procedures that work best for that firm.

cash

Most companies rarely keep this level of petty cash on hand.

What Is Petty Cash?

No, it’s not the cash that’s so minor, it’s not worth worrying about! Officially, petty cash is the cash that businesses keep on site to meet incidental and other small expenses or pay for very minor purchases. Most companies secure the funds in a locked drawer, such as a desk or file drawer, of keep it locked in a small safe or file cabinet. What if you receive a package C.O.D.? You would use petty cash to pay for it!

General Ledger Balance

One internal control feature that exists within petty cash is the recordation and maintenance of the general ledger balance. When a company creates a petty cash fund, it creates the fund and records the amount put into the fund in the general ledger. One company may use $50.00; another may create the fund with $250. The amount varies according to a company’s needs. Once established, companies rarely change their petty cash general ledger balance. Instead, businesses spend down the cash and replenish, over and over. To ensure that a company’s actual petty cash account equals its general ledger balance, the company must always maintain the petty cash amount in actual cash or the equivalent in receipts.

Restricted Access and Sign-outs

Companies restrict access to petty cash accounts to prevent theft. Therefore, they

Picture of a safe

If you need to put your company’s cash in a safe, it is no longer “petty cash”!

typically identify one or two people whom they make responsible for tracking and oversight of the petty cash fund. In addition, most firms keep a sign-out book with the cash for easy recordation. Each person who withdraws funds from the account must record the date, amount and her name. She must submit a receipt as soon as she obtains one. Typically, the responsible party will initial next to the fund withdrawal once she receives the receipt.

Checks

Another internal control feature of petty cash is the use of checks to replenish the fund amount. For example, a company has a $200 petty cash fund and spends down $150. The petty cash overseer must obtain a check for $150 to replenish the fund. Usually she must submit receipts equaling $150 to accounting to obtain a check for that amount made out to cash. Once she cashes the check, she deposits the cash back into the petty cash drawer. This system of replenishment acts as an excellent internal control.

Set Up

When companies set up a petty cash fund, they usually put the cash in a location that only a select few can access. For example, firms often place the cash in a large envelope or cash drawer then insert the container inside a locked file drawer or safe. The amount a company puts into its petty cash fund depends on the firm’s needs. Some may place $100 while others may place $300. As part of the set up, companies assign responsibility to one or two people and refer to this person as the cash custodian. Typically this person works in the finance or accounting department. Companies may also establish specific rules for the fund’s use and notify applicable employees.

Replenish

Companies regularly replenish the cash in the petty cash fund when the amount gets low or drops to or below a predetermined amount. Typically, at that time the cash custodian requests a check in the amount of the cash that has been expended. The custodian cashes the check and puts that cash back into the cash drawer. A company usually keeps the amount in the petty cash fund stable to avoid altering the dollar value reported in its general ledger account.

Picture of checkbook and calculator

You can use a regular checkbook to track your company’s petty cash or a sign in/sign out sheet.

Track

Companies must monitor the amount of cash that goes into and out of its petty cash fund to prevent theft and fraud. An easy way to do this is to require all employees withdrawing money to sign out funds and provide their name, date, and the funds’ purpose. Employees must then obtain and submit receipts as soon they can. Employees should return any unused cash to ensure that the cash taken exactly equals the amount shown on the receipt. Companies can then periodically audit these transactions by confirming that receipts exist for the cash removed.

 

References

 

 

Small Business Retirement Plans – Get One 0

Posted on July 26, 2013 by Tiffany C. Wright

Many small business owners consider retirement plans essential to maintaining the wealth and disposable income of retirees, however many owners stop short of providing retirement plans to their employees. A bit of a quandary there, eh? Perhaps the viewpoint is, pensions are important but let someone else handle them. Or is the thought, “We are not sure we’ll be in business long enough to have retirees?”

Small businesses have several inexpensive retirement plan options.

Small businesses have several inexpensive retirement plan options.

In addition to your employees’ retirement, whose funding yours? You may think that you’ll fund your retirement through the sale of your business. However, if like most small business owners you maximize your tax deductions and minimize your taxes and/or if you are the primary or sole manager in the business, then the likelihood of selling your business anywhere what you think it’s worth is very low. You’d be selling a job with nice benefits. That just doesn’t attract the amount of money you want for your business.

If you want to minimize your taxes and still fund your retirement, set up a retirement plan. There are a number of relatively inexpensive options including a SEP-IRA or Simplified IRA.

Check out this great article on American Express’ Open Forum that discusses this subject. It provides some valuable insights you may want to consider as a small business owner. Article: The Crucial Mistake You May Be Making With Your Retirement Plan .

Depreciation and Capital Gains 0

Posted on July 12, 2013 by Tiffany C. Wright
You recapture depreciation when you sell a rental property.

You recapture depreciation when you sell a rental property.

 

The Internal Revenue Service encourages individuals to invest by offering generally lower capital gains tax rates on investments than for ordinary income. Capital gains tax rates vary due to regular changes in tax law. When you sell an investment property, the depreciation on that property may not offset its capital gains due to depreciation recapture. However, you can use depreciation on one property to offset capital gains on another asset during the property’s holding period.

Capital Gains Tax

Capital assets include certain assets or investments you purchase and hold for a length of time. Capital gains occur whenever you sell such assets for more than you paid for them. You calculate the actual capital gain by deducting your cost, including any transaction costs or improvement costs, from the amount you sell such an asset for. You claim capital gains on Schedule D, Capital Gains and Losses, of your personal income tax return.

Depreciation

Depreciation is the reduction in a property’s value, not including land, to account for the effect of wear and tear and obsolescence. For example, when you purchase a rental house, the property’s facade will fade and the interior will run down unless you regularly maintain the property and make periodic improvements. Depreciation accounts for this.

Capital Gains Tax

The capital gains tax rate is lowest for those assets held for 12 months or more. From 2208 – 2012 the capital gains tax rate varied from zero percent to 35 percent. In 2013 the rate changed and currently varies from zero percent to 43.4 percent. For example, you own two rental properties that generate $15,000 in annual depreciation. Last year you had $18,000 in capital gains on stock sales. You can deduct the depreciation from the capital gains resulting in net capital gains of $3,000.

Depreciation Recapture

Depreciation recapture means that you fold the amounts that you deducted as depreciation back into income. Depreciation recapture is generally taxed at a lower rate than ordinary income but at a higher rate than capital gains. You only include depreciation recapture when you sell a property. Therefore, depreciation recapture will only factor into your capital gains calculation if you are taking capital gains on a physical property you are selling that you previously held for investment and depreciated, for example, a rental home or vacation home. The tax on depreciation recapture ranges from zero percent to a maximum of 25 percent.

Example – Depreciation Recapture

Now let’s say you sold a rental property last year on December 31 for $30,000 more than you paid for it. You owned it for three years and had depreciated $20,000 in the first two years. You depreciated another $10,000 last year. If the $30,000 on your property sale is your only capital gains, then you can use the $10,000 to offset the $30,000 capital gains. However, the IRS requires you to recapture the $30,000 in total depreciation you took and pay tax on that recaptured amount.

 

References

Resources (Further Reading)

Industry Background and Margins for Bakeries 0

Posted on April 17, 2013 by Tiffany C. Wright
Retail bakeries increase margins by serving customer needs and delivering exceptional service.

Retail bakeries increase margins by serving customer needs and delivering exceptional service.

According to a study done by First Research, the bakery industry generated $33 billion in revenue in the United States in 2010. Commercial bakeries were responsible for the bulk of these revenues with $30 billion in sales. Retail bakeries comprised the remainder. Profit margins differ between commercial and retail outfits, as does the level of competition. For both segments, profitability is tied to operational efficiency.

Bakery Industry

The commercial bakery industry segment is highly concentrated but the retail segment is highly fragmented. According to First Research, 2,800 commercial bakeries exist in the US, with the top 50 companies responsible for 75 percent of the sales. Contrast that with the 6,000 retail bakeries, of which the 50 largest companies receive approximately 15% of the revenue. In terms of product, according to IBIS World, breads and rolls accounted for the largest industry product segment with 51 percent of industry sales.

Bakery Industry

Large commercial bakeries leverage size advantages to reap higher margins. Commercial enterprises typically bake large amounts at a centralized location and distribute to tens or hundreds of sites. Small retail facilities achieve higher margins by providing excellent customer service and sought-after specialty goods. The profit margin shows how much profit is earned on each sales dollar. The average profit margin for cake decoration entities was 6.3 percent in 2006, expected to drop to 5.5 percent for 2011. As the price of inputs — including flour, butter and milk — has increased over the past few years, profit margins at some bakeries have shrunk.

Profit Margin

Profit margin is calculated by dividing profit by gross revenue, numbers found on a baker’s profit and loss statement. Profit includes the costs of all the expenses incurred in operating a bakery including ingredients, personnel, machinery and baking ware. Profit margin analysis across an industry shows which segments or specialties are most profitable. An owner can use this information to make changes to her product offerings, expand the number of locations, or switch to a different segment.

Opportunities for Higher Profit

The bakery industry in the U.S. is a mature industry, so overall industry growth is low. However, new developments in the industry, driven by changing consumer tastes, has led to higher margins in certain categories. Artisan, or hand-crafted gourmet, breads is one development. The increasing demand for natural and organic foods and the rise in appeal of “gluten-free” are another. Bakeries that cater to these consumer tastes can charge higher prices and reap higher profits.

References

What Is an Adjusted Net Profit Margin? 0

Posted on April 09, 2013 by Tiffany C. Wright
Businessman Holding Graph

Adjusted net profit margin is given as a percentage of sales.

 

When selling a business, business owners must think from the buyer’s perspective in order to anticipate questions and identify any potential issues or concern area. A major consideration for a buyer is the value of the business. Often the information that would be clearly shown in audited financial statements are missing from a small business’ tax returns. Therefore, buyers typically ask for the adjusted net income and its counterpart, the adjusted net profit margin.

Small Business Valuation

An owner selling a company must provide his financial statements to the prospective buyer. However, most small companies focus on minimizing taxes and not on maximizing profit. In addition, most small businesses do not have CPA reviewed or compiled financial statements which can cause some buyers to question the authenticity of the accounting numbers. Therefore, sellers typically provide tax returns in addition to a Quickbooks or other software-generated financial statement. However, sole use of the tax returns may provide a valuation far below what the seller believes his business is worth.

Net Profit Additions

Adjusting the net profit number shown on the return is one way of factoring back in the deducted items that the seller believes contributes to his company’s value. Typically, the numbers added to the net profit number include the owner’s salary, company-paid life or health insurance premiums, company vehicle, depreciation and the company’s contribution to his pension. In addition, owners like to add in the personal expenses they ran through the company under meals and entertainment, auto expenses and travel.

Adjusted net profit margin

Adjusted net profit, also referred to as adjusted net income, typically refers to the amount of money the buyer can expect to withdraw from the business as the owner. It is the “all-in” number that many small business owners and aspiring owners like to know. The adjusted net profit margin is calculated by dividing the adjusted net income by the company’s total revenue. This number indicates the percentage of profits from every sales dollar that the owner can withdraw from the business. It is both a profitability and cash flow indicator.

Example

A company shows $500,000 in revenues but only $25,000 in net profit. The owner drew $60,000 in salary. The company contributed $40,000 to a SEP-IRA on his behalf plus paid out $15,000 in car loan payments, insurance and upkeep. The owner also adds another $12,000 in travel and meals. The adjusted net income is the sum of these amounts, or a total of $152,000. The net profit margin is five percent; the adjusted net profit margin is 30.4 percent.

Caution

Unless the seller keeps accurate records of the expenses he is running through the company, there is no way to substantiate the additions. Seller additions can amount to many times the actual net income, substantially more for companies operating at break even or at a loss. Failure to obtain supporting documentation for any add-back claims could result in significantly overpaying for a company.

 

References

LLC Protection for Construction Subcontractors 0

Posted on March 27, 2013 by Tiffany C. Wright

A framing subcontractor can protect his assets by organizing as an LLC.

Construction can be a risky business. Some general contractors push as much of their risks onto subcontractors as they can. There is the risk of employee accidents, the risk of not fulfilling a contract or job and the risk of site visitors getting hurt. Organizing as an LLC provides a way for a subcontractor to mitigate the personal liability tied to these risks.

Limited Liability Companies

Limited liability companies are separate legal structures created by filing articles of organization with the secretary of state. LLCs offer many of the benefits of a corporation but with the flexibility and low administrative requirements of a partnership which makes LLCs attractive to subcontractors. Subcontractors may also find LLCs desirable because of two significant corporate-like benefits they offer: personal liability protection and the majority of business expenses as tax deductions.

Personal Liability Shield

Due to the nature of their jobs, construction subcontractors encounter more risks than many other business service providers. Sole proprietors and general partners can be held fully liable for any lawsuits, adverse judgments rendered, bad debts or medical bills of employees or independent contractors. However, LLCs shield the construction firm’s owner’s assets from personal liability by structurally limiting his liability to the loss of his investment in the LLC.

Subcontractor DBAs

Construction company LLCs that began life as sole proprietorships or general partnerships sometimes use DBAs, or doing business as, to maintain connection with the business name they had operated under. If so, the company must change the registration to the LLC’s name in all applicable local jurisdictions or at the state level, depending on your state’s registration requirements. Thereafter, periodically update any DBA registrations the company has. Failure to keep DBAs current could cause confusion about the company and result in the loss of the liability shield.

Licensing as an LLC

Obtain and maintain any requisite contractor licensing in your LLC’s name. All states that require contractor firm licensing provide licenses to corporations. Most states now do the same for LLCs. For example, effective 2011 California allowed the issuance of contractor licenses to LLCs.

Signatures

Any owner or employee authorized to sign contracts or proposals must include the LLC’s legal name and the signer’s title with the company. For example, ABC Plumbing, LLC authorized the vice president of sales to sign and John Adams currently fills that position. John would sign all documents as John Adams, Vice President, ABC Plumbing, LLC or ABC Plumbing, LLC d/b/a Dripstoppers. Signing in this manner guarantees all parties know John is acting on the company’s behalf and that the company operates under two different names and ensures the risks remain at the LLC level.

References

 

Stuck in a Creative Rut? Try Innovation Consulting 0

Posted on April 19, 2012 by Tiffany C. Wright

Are you stuck in a creative rut? Do you spend all your time working in the business and little to no time working on your business? Has this made you so focused on generating current sales, managing employees, and running operations that you have no time to think about anything else? Do you try to think about great ways to grow your business but start to feel tired and worn out when you do?

As small business owners, you’ve weathered the startup roller coaster ride and now have (hopefully) a business that generates good net income and cash flow. What constitutes “good” depends on the individual. For one person “good” is sufficient funds to fund your lifestyle and support your family while, for another person, “good” is sufficient monies to fund significant growth and expansion. Whatever is “good” for you and your business, harnessing your creativity can help you get there.

Sometimes business owners sell themselves short when it comes to creativity. Creativity is not just producing wonderful graphics or great marketing campaigns or inventing new products. It’s looking at old things from a new angle, applying ideas from one industry to another, and pursuing business from a different perspective. When you seek out and find programs that pay for interns when your hiring budget is tight, that’s using creativity. When you pursue partnerships with other entities in complementary fields to provide a full service suite of offerings to existing and potential clients, that’s creativity in action.

After reading all of this, if you still think, “I don’t do any of that” then you may need an innovation/creativity boost. Participating in small business groups or CEO roundtables may help you. Or consider hiring a business coach or innovation consultant. Although small business owners can sometimes be loathe to hire consultants, the reasons so many corporations do is because consultants produce results. When you have an issue that requires a solution, reach out to someone who excels in the area of expertise in which you’re having trouble. Even though that person or company may seem expensive, when you do a cost/benefit analysis, they are generally very cheap. If you are stuck in a creative rut, an innovation consultant may be just what you need to get out.

January – 2012 Economic Crystal Ball – Team Ivy Breakfast 0

Posted on January 15, 2012 by Tiffany C. Wright

Team Ivy Breakfast Networking, Inc.
Connecting & educating Ivy League alumni in the greater Atlanta metro area

January 2012 Meeting
2012: What’s the Economic Outlook in Atlanta? Georgia? The Southeast?

 

“What will I do about my business in today’s environment?”

Are you worried or stressed out about what the future holds in 2012?  Are you wondering what the new year’s economic environment portends for your business?  Worse than 2011? Double dip recession?
Or is the outlook more positive? Will 2012 be better than 2011? Will there be a continuing recovery? Well, perhaps we could look into our crystal ball and tell you…
Sorry! We don’t have a crystal ball…but we have the next best thing. We have a speaker well-versed on the subject that’s engaging and entertaining. No matter what the “prediction” is, you’ll leave feeling good about what you heard, even if it’s only because the delivery was so great!
What will 2012 hold for our local and national economy? Come to our breakfast this month to find out.

Click here to register

Event details:
When: January 18, 7:30am – 9:00 am.
Where:  City Club of Atlanta (Buckhead)

3343 Peachtree Road
Suite 1850
Atlanta, GA 30326
(404) 442-2600
COST: $20 pre-registration, $25 after January 15th
(Parking is included).

Click here to register

January Event:
2012 State of the Local and Regional Economy

This is our first breakfast event for 2012.  You don’t want to miss it!

Click here to register

Another Term Sheet Liquidity Event – in Boston 0

Posted on January 09, 2012 by Tiffany C. Wright


Term Sheet  (Fortune’s Dan Primack writes this) will be hosting another Liquidity Event in Boston, on Tuesday, January 31, 2012. The first one in New York City in November was a raging success and sold out early. These events are “cocktails and conversation with the area’s top deal-makers, deal-breakers, entrepreneurs and assorted hangers-on”.  The “liquidity” comes from the open bar as well as the attendees who could potentially help fund your enterprise… or connect you to those who can.

Here’s the information:

Where: Ned Devine’s, inside Quincy Market at Faneuil Hall Marketplace

When: Tuesday, 01/31/2012 evening

Cost: Tickets are only $10.00.>

Link: http://getliquid.eventbrite.com

Note: The ticket proceeds will go to a local charity chosen by event attendees. Therefore, make sure you nominate your favorite charity when you buy your ticket.

Liquidity Event sponsors: Edwards Wildman and Atlas Venture.

Felix Dennis’ Eight Secrets to Getting Rich 0

Posted on November 08, 2011 by Tiffany C. Wright

How to Get Rich by Felix Dennis is an excellent, excellent book in my humble estimation. I highly recommend it to any current or aspiring entrepreneur who aspires to be rich. Mr. Dennis’ net worth is somewhere between $500 – $900 million, depending on the markets and the underlying valuation of his various businesses, holdings and other assets. You’ll see a number of references in my blog to his book over the next  few months. Different people are inspired by different things and his words inspired and enlightened me.

Loosely quoting from his book, here are his Eight Secrets to Getting Rich:

  1. Analyze your desire and need for riches. The need must be compulsive.
  2. Eliminate negative influences. This includes friends and family. You must distance yourself from naysayers in order to stay motivated and inspired.
  3. It’s not the great idea that matters. It’s the execution of the ideas. Focus on execution.
  4. Maintain laserlike focus. Keep your eye on the end goals.
  5. Delegate. Like Henry Ford said, hire really smart people.
  6. Ownership. Ownership. Ownership is key. Keep as much ownership as you possibly can.
  7. Sell before necessary or when the business has lost its interest and appeal for you.
  8. Banish fear. Self-confidence is a must. Without it you are doomed.

Loosely excerpted from pp. 284-285 of “How to Get Rich: One of the World’s Greatest Entrepreneurs Shares His Secrets

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