Ideas to Improve Profit

Consider the following ideas for saving time and money and making your business more profitable.

1. Develop tight controls over billing and collections. To speed up cash flow, reduce the time between shipping your product and sending an invoice. Consider semimonthly instead of monthly billing, and send second notices more quickly.

2. Collect past-due receivables. Almost every business has past-due receivables. Phone the people who owe you the most money, and try to resolve the problem on the spot. If you can’t collect the total immediately, try to negotiate a payment schedule, or schedule a follow-up call.

3. Watch your payables. Don’t be one of the many businesses that overpay vendors due to sloppy accounts payable procedures. Go over these rules with your accounts payable clerk:

• Don’t pay vendors twice (or more) for the same invoice.

• Don’t pay for goods that you return to the vendor; check the invoice to be sure an adjustment has been made.

• Keep track of credit memo allowances you receive and subtract them from the next invoice.

• Be sure to take discounts for early payments when they apply.

• Don’t pay for charges that are incorrectly included on the invoice, such as shipping charges the vendor agreed to pay.

4. Keep payroll costs under control. Payroll costs are a major item in most businesses. Perhaps a more efficient plant layout or work schedule would result in reduced labor needs. Consider the use of temporary employees and subcontractors if your business is subject to seasonal variations. Review employee classifications for workers’ compensation insurance. Improperly classified workers can be costing you significant premiums. Review group insurance programs. Solicit bids for the programs every three years. Consider higher deductibles as a means to lower premiums.

5. Watch those numbers. Use your financial statements to give you important management information. Compare inventory turnover (cost of sales divided by average inventory) year by year. If turnover drops, consider it a warning sign and investigate further read more...

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Recordkeeping Requirements for Business

What records should your business keep, and how long should you keep them? There are several categories of records that are important to a business, some for internal purposes and some for tax returns and other government requirements. Let’s take a look at these by category.

• Tax records. First, consider the records you need to substantiate your annual income tax return. The IRS says that you must maintain adequate records, so support the items of income and expense that you claim. That means you must be able to produce receipts, invoices, cancelled checks, or banking records supporting expense items. Similarly, you should keep sales slips, invoices,or bank records to support income items.
• Accounting records. Most businesses have adequate accounting systems to capture routine transactions, but not for non-routine transactions such as the purchase of depreciable assets. When you buy a car, computer, or piece of office equipment, be sure to file all purchase documents, assign an inventory number, and immediately set up a depreciation schedule.
• Travel and entertainment expenses. Good record keeping for travel and entertainment expenses is essential. Although the rules can be complex, in general you should capture where, when, who, how much, and the business purpose for each expense. A well-designed standard expense report form can help insure that your records contain all the required information. Also, if you have employees who drive on company business, make sure they keep an auto log showing the miles driven for each trip.
• IRS audits. Generally, the IRS can audit a tax return for three years after the date it was due or the date the tax was paid, whichever is later. However, if there is a major understatement of income, they can audit for six years after the due date (or seven years after the tax year). For that reason, you should keep most income tax records for seven years. The IRS requires records relating to employment taxes to be kept for at least four years after the date of the return or the date the tax was paid, although here again a seven-year rule is safer read more...

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Most Common Areas for Tax Beaks

Tax law changes so frequently that you must be concerned with tax planning year-round, or you’ll miss opportunities to lower your tax bill. Here are some common areas that can mean big money savings with proper planning.

1. Familiarize yourself with the income levels at which various tax breaks phase out. While it doesn’t make sense to make less income just to qualify for a tax break, shifting income from one year to another may sometimes be a smart thing to do.

Learn about the tax credits and deductions for which you might qualify. Then estimate your income, and if it will be just beyond qualification range, lookfor opportunities to defer income until a later year. Investment income can often be shifted, or you might delay the exercise of stock options or the receipt of a bonus.

2. Don’t pay tax on a home sale. The law lets you sell your home tax-free if you meet certain requirements.

The home must have been owned and used as your principal residence for at least two of the five years prior to the sale. Couples can enjoy $500,000 of tax-free profits in a home sale, while singles qualify for up to $250,000 of tax-free gain.

To the extent possible, time home sales to meet the requirements in order to enjoy tax-free profits.

3. Factor education tax breaks into your college planning.

First, there’s the American Opportunity credit for a percentage of qualified higher education expenses.

Second, the Lifetime Learning credit allows a deduction for a percentage of qualified expenses paid for any year the American Opportunity credit isn’t claimed, and it even appliesto job-related classes.
Third, you may qualify for a deduction for interest paid on student loans.

Fourth, education savings accounts allow annual nondeductible contributions for every child under 18, with tax-free withdrawals for qualifying education expenses. These section 529 plans are great tools to save for college expenses.

Check the income phase-out levels for these breaks. Careful planning is required to find what’s best in your particular circumstances read more...

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