If you are a business owner and you are considering purchasing new business equipment, now is the time to act! With the passing of the Economic Stimulus Act by Congress, business owners have been granted a tax break for purchasing new equipment in 2008.
Most of us have heard of the bonus tax refunds that have been approved through the passing of the Economic Stimulus Act. However, these are just a portion of the act. You may not know that there are components of the act that benefit business owners. One portion of this deals with the purchasing of new business equipment. Let's face it, as a business owner of any kind, there is almost a continual need for new or improved equipment to help our business perform better. Unfortunately, many times we put off these purchases for financial reasons. Now you can purchase the new equipment and receive a tax break for doing it. The Economic Stimulus Act states that any business owner who purchases and puts into use new equipment in 2008, will receive a bonus 50% depreciation on that equipment on their 2008 taxes! This could mean significant tax savings for your business! The government has implemented this program to try to entice business owners into making their equipment purchases now in order to help stimulate the economy. The tax savings are available for any business equipment purchase that will be depreciated on your 2008 taxes. It is applicable to any type of business as well.
What types of equipment qualify? Any type that is used directly for your business, to benefit your business, and that will be depreciable on your 2008 taxes. If you are unsure if certain equipment will qualify, consult your tax professional for advice. Let's look at a couple of examples of business types and the type of equipment that may apply. We'll start small, with a home daycare provider. Child care providers need equipment unique to their business, such as play equipment, appliances, and computer equipment. As a child care provider, if you purchase equipment that will be in use long term, then you will probably depreciate that equipment on your taxes. So, if you purchase a new swing set, a new refrigerator, or a new computer, you can collect the additional 50% tax savings when you depreciate these items. While these are a large outlay of cash now, it is worth it to make the purchase now to receive the tax benefits. Looking at a computer consulting company, they may need to purchase a new server, new office furniture, or new laptops for the consultants. Again, these purchases will be depreciated on the 2008 taxes, so they will qualify for the additional tax credit. Finally, let's look at a physician's office. Physicians often need to purchase the latest technology to offer their patients the best care possible. Many times this equipment is very expensive. By purchasing this equipment in 2008, at least they will qualify for the additional 50% depreciation on the equipment.
Since this tax benefit is only available for equipment purchases made and put into use in the year 2008, now is the time to buy. It may be hard to part with that money up front, but if you know you are going to need the equipment eventually anyway, it is worth it to make the purchase this year and benefit from the tax savings.
Saturday, May 3, 2008
Business For Your Son Or Daughter
First, how not to go about it:
A cash loan is not the way to go.
Neither is signing as surety for a bank loan
A gift of the amount required? Again, not the best approach
But these are the three most common but wrong ways by which parents try to help their children get started in business.
So what is the best way?
For US residents and citizens, Internal Revenue Code 1244 provides the answer.
If you give your daughter $50,000 say to start a new venture, and the business goes belly up with the loss of the $50,000, there is no way that the IRS will allow you to claim this loss as a deduction.
Or suppose you loan her business $50,000. Again, if things do not work out, the business will keep paying you the interest until it runs out of cash, leaving you with a worthless note.
Tax-wise, you have a capital loss, which is deductible at the pitiful rate of only $3,000 per year against your ordinary income. Or you can use the loss to offset capital gains.
The same sad tax fate, a capital loss, results if you sign as surety and must pay Sue's $50,000 loan from the bank.
Tax-wise, a gift to your daughter is even worse. The $50,000 is hers. As a result, the tax loss is hers, not yours. Under the circumstances, chances are that Sue has little or no income, and the loss is almost totally wasted.
Note too that a loan or a bank surety is often questioned by the IRS. Why? The IRS contends that the $50,000 was a gift because you never intended to try to collect in the first place. You had no reasonable expectation of being repaid is the way the IRS puts it.
But now let’s look at IRS Section 1244 – the right way.
Section 1244 allows you to claim an immediate deduction for a loss on stock in a small business corporation. Your loss is fully deductible against ordinary income, rather than a limited capital loss.
And you can claim a maximum Section 1244 loss of $100,000 (joint return) in a single year or $50,000 on a single return
The maximum amount you can claim as a Section 1244 loss in a single year is $100,000 on a joint return or $50,000 on a single return.
So instead of a gift, a loan or a bank surety, you and your daughter set up a corporation for her new business. You get $50,000 of stock in the corporation that qualifies for Section 1244 treatment. Your daughter, who runs the business, draws a salary
If the business succeeds, your daughter can gradually buy back your stock (or, better yet, you can gift it to her) over time. Any profit you make on the buyback will be a low-taxed capital gain.
A cash loan is not the way to go.
Neither is signing as surety for a bank loan
A gift of the amount required? Again, not the best approach
But these are the three most common but wrong ways by which parents try to help their children get started in business.
So what is the best way?
For US residents and citizens, Internal Revenue Code 1244 provides the answer.
If you give your daughter $50,000 say to start a new venture, and the business goes belly up with the loss of the $50,000, there is no way that the IRS will allow you to claim this loss as a deduction.
Or suppose you loan her business $50,000. Again, if things do not work out, the business will keep paying you the interest until it runs out of cash, leaving you with a worthless note.
Tax-wise, you have a capital loss, which is deductible at the pitiful rate of only $3,000 per year against your ordinary income. Or you can use the loss to offset capital gains.
The same sad tax fate, a capital loss, results if you sign as surety and must pay Sue's $50,000 loan from the bank.
Tax-wise, a gift to your daughter is even worse. The $50,000 is hers. As a result, the tax loss is hers, not yours. Under the circumstances, chances are that Sue has little or no income, and the loss is almost totally wasted.
Note too that a loan or a bank surety is often questioned by the IRS. Why? The IRS contends that the $50,000 was a gift because you never intended to try to collect in the first place. You had no reasonable expectation of being repaid is the way the IRS puts it.
But now let’s look at IRS Section 1244 – the right way.
Section 1244 allows you to claim an immediate deduction for a loss on stock in a small business corporation. Your loss is fully deductible against ordinary income, rather than a limited capital loss.
And you can claim a maximum Section 1244 loss of $100,000 (joint return) in a single year or $50,000 on a single return
The maximum amount you can claim as a Section 1244 loss in a single year is $100,000 on a joint return or $50,000 on a single return.
So instead of a gift, a loan or a bank surety, you and your daughter set up a corporation for her new business. You get $50,000 of stock in the corporation that qualifies for Section 1244 treatment. Your daughter, who runs the business, draws a salary
If the business succeeds, your daughter can gradually buy back your stock (or, better yet, you can gift it to her) over time. Any profit you make on the buyback will be a low-taxed capital gain.
Friday, March 28, 2008
Overview of several business finance
This article provides an overview of several business finance factors that commercial borrowers should understand before attempting to obtain a Small Business Administration loan (SBA loan) to buy either commercial real estate or a business opportunity investment. There are many commercial mortgage and business loan misunderstandings involving the use of an SBA loan due to the complex nature of this approach to business financing.
Two of the most difficult business loan and commercial mortgage situations for a business owner involve obtaining a Small Business Administration loan and refinancing an SBA loan. There are practical business finance solutions for both of these common business investment problems.
Are SBA Loan and Business Finance Programs Difficult?
There are usually two schools of thought about getting a Small Business Administration loan to buy a business:
(1) Avoid this kind of commercial loan at all costs.
(2) Use such a business finance loan whenever possible.
These conflicting investment financing viewpoints are due to a commercial mortgage business loan process that is perceived as complex and difficult by many commercial borrowers.
In reality SBA loan programs are more practical than they often appear. It is critical to the success of a Small Business Administration loan program to be working with a business finance advisor and lender that is proficient at this difficult commercial mortgage and commercial loan process. There are many potential commercial financing problems to avoid when attempting to obtain a small business loans, and very few lenders are skilled in this business financing area.
Anticipating Business Investment Problems Before They Occur: Business Loan Refinancing
One of the major investment drawbacks of an SBA loan has historically been the difficulty of refinancing the Small Business Administration business financing later. Current options have revised the situation and it is more feasible to arrange refinancing. It is still accurate to say that refinancing is not routinely available, but more importantly it is much easier to obtain than it was in prior years.
Advance commercial real estate loan and commercial loan planning can avoid some of the SBA loan refinancing problems. First and foremost, if the original business financing is arranged without a small business loan, this will make later business refinancing easier than if a Small Business Administration loan is involved. This means that commercial borrowers should at least consider if the initial business loan requires this form of commercial financing before proceeding.
Finalizing Small Business Financing: Two Common Commercial Loan Misunderstandings
One of the most frequent criticisms of an SBA loan program is the amount of paperwork required to complete the business loan and commercial mortgage process. What many commercial borrowers fail to understand is that any business financing process is likely to involve substantial paperwork and formal documentation requirements. In the end the key is working with a business finance advisor that understands what is required and can facilitate the submission procedures.
Beyond the paperwork concerns, a more critical and real problem is working with an SBA lender that is not very good at successfully completing Small Business Administration loan requirements. Even though there are many commercial lenders that publicize their ability to process these complicated and specialized commercial loans, in reality there are very few lenders nationwide who are consistently successful at completing the complex loan process in a timely manner.
Alternatives to SBA Loan Financing - Conventional Real Estate Investment and Business Opportunity Loan Options
Conventional business finance options should always be considered simultaneously with the possibility of obtaining an SBA loan. As noted above, the feasibility of refinancing a business loan or commercial real estate loan in the future will depend heavily on the choices made by a commercial borrower when obtaining the initial commercial mortgage.
A conventional business loan or commercial mortgage might be more feasible than many borrowers realize. Refinancing is likely to be more successful if an experienced business finance lender and advisor are involved.
Two of the most difficult business loan and commercial mortgage situations for a business owner involve obtaining a Small Business Administration loan and refinancing an SBA loan. There are practical business finance solutions for both of these common business investment problems.
Are SBA Loan and Business Finance Programs Difficult?
There are usually two schools of thought about getting a Small Business Administration loan to buy a business:
(1) Avoid this kind of commercial loan at all costs.
(2) Use such a business finance loan whenever possible.
These conflicting investment financing viewpoints are due to a commercial mortgage business loan process that is perceived as complex and difficult by many commercial borrowers.
In reality SBA loan programs are more practical than they often appear. It is critical to the success of a Small Business Administration loan program to be working with a business finance advisor and lender that is proficient at this difficult commercial mortgage and commercial loan process. There are many potential commercial financing problems to avoid when attempting to obtain a small business loans, and very few lenders are skilled in this business financing area.
Anticipating Business Investment Problems Before They Occur: Business Loan Refinancing
One of the major investment drawbacks of an SBA loan has historically been the difficulty of refinancing the Small Business Administration business financing later. Current options have revised the situation and it is more feasible to arrange refinancing. It is still accurate to say that refinancing is not routinely available, but more importantly it is much easier to obtain than it was in prior years.
Advance commercial real estate loan and commercial loan planning can avoid some of the SBA loan refinancing problems. First and foremost, if the original business financing is arranged without a small business loan, this will make later business refinancing easier than if a Small Business Administration loan is involved. This means that commercial borrowers should at least consider if the initial business loan requires this form of commercial financing before proceeding.
Finalizing Small Business Financing: Two Common Commercial Loan Misunderstandings
One of the most frequent criticisms of an SBA loan program is the amount of paperwork required to complete the business loan and commercial mortgage process. What many commercial borrowers fail to understand is that any business financing process is likely to involve substantial paperwork and formal documentation requirements. In the end the key is working with a business finance advisor that understands what is required and can facilitate the submission procedures.
Beyond the paperwork concerns, a more critical and real problem is working with an SBA lender that is not very good at successfully completing Small Business Administration loan requirements. Even though there are many commercial lenders that publicize their ability to process these complicated and specialized commercial loans, in reality there are very few lenders nationwide who are consistently successful at completing the complex loan process in a timely manner.
Alternatives to SBA Loan Financing - Conventional Real Estate Investment and Business Opportunity Loan Options
Conventional business finance options should always be considered simultaneously with the possibility of obtaining an SBA loan. As noted above, the feasibility of refinancing a business loan or commercial real estate loan in the future will depend heavily on the choices made by a commercial borrower when obtaining the initial commercial mortgage.
A conventional business loan or commercial mortgage might be more feasible than many borrowers realize. Refinancing is likely to be more successful if an experienced business finance lender and advisor are involved.
Finance a Business for your Future
First, how not to go about it:
A cash loan is not the way to go.
Neither is signing as surety for a bank loan
A gift of the amount required? Again, not the best approach
But these are the three most common but wrong ways by which parents try to help their children get started in business.
So what is the best way?
For US residents and citizens, Internal Revenue Code 1244 provides the answer.
If you give your daughter $50,000 say to start a new venture, and the business goes belly up with the loss of the $50,000, there is no way that the IRS will allow you to claim this loss as a deduction.
Or suppose you loan her business $50,000. Again, if things do not work out, the business will keep paying you the interest until it runs out of cash, leaving you with a worthless note.
Tax-wise, you have a capital loss, which is deductible at the pitiful rate of only $3,000 per year against your ordinary income. Or you can use the loss to offset capital gains.
The same sad tax fate, a capital loss, results if you sign as surety and must pay Sue's $50,000 loan from the bank.
Tax-wise, a gift to your daughter is even worse. The $50,000 is hers. As a result, the tax loss is hers, not yours. Under the circumstances, chances are that Sue has little or no income, and the loss is almost totally wasted.
Note too that a loan or a bank surety is often questioned by the IRS. Why? The IRS contends that the $50,000 was a gift because you never intended to try to collect in the first place. You had no reasonable expectation of being repaid is the way the IRS puts it.
But now let’s look at IRS Section 1244 – the right way.
Section 1244 allows you to claim an immediate deduction for a loss on stock in a small business corporation. Your loss is fully deductible against ordinary income, rather than a limited capital loss.
And you can claim a maximum Section 1244 loss of $100,000 (joint return) in a single year or $50,000 on a single return
The maximum amount you can claim as a Section 1244 loss in a single year is $100,000 on a joint return or $50,000 on a single return.
So instead of a gift, a loan or a bank surety, you and your daughter set up a corporation for her new business. You get $50,000 of stock in the corporation that qualifies for Section 1244 treatment. Your daughter, who runs the business, draws a salary
If the business succeeds, your daughter can gradually buy back your stock (or, better yet, you can gift it to her) over time. Any profit you make on the buyback will be a low-taxed capital gain.
If the business fails, your loss will be fully deductible under Section 1244 (up to the $100,000/$50,000 limits).
Here's another nice thing about Section 1244: The tax benefits are easy to get. The beneficial tax treatment is automatic and no written plan is necessary.
A final point: Section 1244 is the way to go not only for your kids, but also for your spouse who might want to start a new business. And the same strategy applies if you want to venture into something new while keeping your present business.
A cash loan is not the way to go.
Neither is signing as surety for a bank loan
A gift of the amount required? Again, not the best approach
But these are the three most common but wrong ways by which parents try to help their children get started in business.
So what is the best way?
For US residents and citizens, Internal Revenue Code 1244 provides the answer.
If you give your daughter $50,000 say to start a new venture, and the business goes belly up with the loss of the $50,000, there is no way that the IRS will allow you to claim this loss as a deduction.
Or suppose you loan her business $50,000. Again, if things do not work out, the business will keep paying you the interest until it runs out of cash, leaving you with a worthless note.
Tax-wise, you have a capital loss, which is deductible at the pitiful rate of only $3,000 per year against your ordinary income. Or you can use the loss to offset capital gains.
The same sad tax fate, a capital loss, results if you sign as surety and must pay Sue's $50,000 loan from the bank.
Tax-wise, a gift to your daughter is even worse. The $50,000 is hers. As a result, the tax loss is hers, not yours. Under the circumstances, chances are that Sue has little or no income, and the loss is almost totally wasted.
Note too that a loan or a bank surety is often questioned by the IRS. Why? The IRS contends that the $50,000 was a gift because you never intended to try to collect in the first place. You had no reasonable expectation of being repaid is the way the IRS puts it.
But now let’s look at IRS Section 1244 – the right way.
Section 1244 allows you to claim an immediate deduction for a loss on stock in a small business corporation. Your loss is fully deductible against ordinary income, rather than a limited capital loss.
And you can claim a maximum Section 1244 loss of $100,000 (joint return) in a single year or $50,000 on a single return
The maximum amount you can claim as a Section 1244 loss in a single year is $100,000 on a joint return or $50,000 on a single return.
So instead of a gift, a loan or a bank surety, you and your daughter set up a corporation for her new business. You get $50,000 of stock in the corporation that qualifies for Section 1244 treatment. Your daughter, who runs the business, draws a salary
If the business succeeds, your daughter can gradually buy back your stock (or, better yet, you can gift it to her) over time. Any profit you make on the buyback will be a low-taxed capital gain.
If the business fails, your loss will be fully deductible under Section 1244 (up to the $100,000/$50,000 limits).
Here's another nice thing about Section 1244: The tax benefits are easy to get. The beneficial tax treatment is automatic and no written plan is necessary.
A final point: Section 1244 is the way to go not only for your kids, but also for your spouse who might want to start a new business. And the same strategy applies if you want to venture into something new while keeping your present business.
Thursday, March 13, 2008
Small Business With Healthy Cash Flows
The important part of a small business is its healthy cash flow, which can be maintained by small business loans and finance. Healthy cash flow is the keystone to the success of any small business stability and ultimately growth.
Most finance companies focus on the start-ups and provide them with the required finance to get their business up and running, however, once you are in a finance crunch or are struggling for some immediate cash flow its difficult to convince any of those financers to offer a loan. A few of them who care to offer loans under such situation would also ask for a collateral. This is again a big problem for small business entrepreneurs. They often do not have the suitable collateral to get the loans. Under such conditions, “unsecured cash advance” are the smart solution for them to meet their finance needs.
“Unsecured Cash Advance” as the name suggests, is secured on nothing at all. The collateral required for any secured loan is absent in unsecured cash advance. Question arises, then on what basis are this cash advances given? Cash advances are mainly given based on your existing business volume and also other factors like Credit history and repayment potential of the entrepreneur are taken into consideration.
Alternatively, unsecured business loans also provides for easy availability of money, as the process of approval does not involve any verification of collateral. Each borrower has to pay interest against the amount borrowed. Unsecured business loans are usually provided at higher rate of interest as no collateral is put against the money. You can either choose to pay a fixed interest rate or variable interest rate on the amount borrowed.
Credit score is the most important factor considered by lenders while lending unsecured business loans. Higher the credit score, higher is the possibility of getting a large amount of loan quickly and that too at comparative low interest rate. A borrower can get his credit score evaluated from any of the credit rating agencies.
Unsecured loans can be borrowed from any financial institutions or banks, also there are companies online that provide easy to get unsecured cash advance.With Internet access its just few clicks away from your required loan.
Profit maximization is the sole desire for any business. Accomplishment of this desire requires a lot of hard work and commitment along with adequate supply of capital. Unsecured cash can provide you with this.
Follow your dreams, be committed and dedicated, you never know, you might be the next Bill Gates in the making..
Most finance companies focus on the start-ups and provide them with the required finance to get their business up and running, however, once you are in a finance crunch or are struggling for some immediate cash flow its difficult to convince any of those financers to offer a loan. A few of them who care to offer loans under such situation would also ask for a collateral. This is again a big problem for small business entrepreneurs. They often do not have the suitable collateral to get the loans. Under such conditions, “unsecured cash advance” are the smart solution for them to meet their finance needs.
“Unsecured Cash Advance” as the name suggests, is secured on nothing at all. The collateral required for any secured loan is absent in unsecured cash advance. Question arises, then on what basis are this cash advances given? Cash advances are mainly given based on your existing business volume and also other factors like Credit history and repayment potential of the entrepreneur are taken into consideration.
Alternatively, unsecured business loans also provides for easy availability of money, as the process of approval does not involve any verification of collateral. Each borrower has to pay interest against the amount borrowed. Unsecured business loans are usually provided at higher rate of interest as no collateral is put against the money. You can either choose to pay a fixed interest rate or variable interest rate on the amount borrowed.
Credit score is the most important factor considered by lenders while lending unsecured business loans. Higher the credit score, higher is the possibility of getting a large amount of loan quickly and that too at comparative low interest rate. A borrower can get his credit score evaluated from any of the credit rating agencies.
Unsecured loans can be borrowed from any financial institutions or banks, also there are companies online that provide easy to get unsecured cash advance.With Internet access its just few clicks away from your required loan.
Profit maximization is the sole desire for any business. Accomplishment of this desire requires a lot of hard work and commitment along with adequate supply of capital. Unsecured cash can provide you with this.
Follow your dreams, be committed and dedicated, you never know, you might be the next Bill Gates in the making..
Finance Accounting Solutions For Business Outsourcing
At present, most of the business organization are outsourcing their finance and accounting tasks to offshore destinations. Basically, these businesses hire outsourcing firms, so that their financial and accounting tasks may be organized in a proper manner. In fact, outsourcing combines various supreme benefits and provides the client with an expert and cost effective way to manage financial and accounting tasks. With the help of such business accounting outsourcing services, the client business can better focus on its core business competencies. Since accounting and financial tasks cannot be taken lightly, it is always a sensible decision to manage it through any outsider firm.
Any flaw or ignorance of accounting task can affect the reputation of a business very badly. Moreover, these mistakes or flaws can affect corporate relationships, crucial financial decisions and final statement of the concerned business. Be it any sapling business organization or a well established enterprise, accounting task is important for the appropriate growth and extension for every business. Since managing a proper accounting management system requires extra financial and human resources, getting this task done through an outsider firm can reduce the financial burden of the business owner.
With the help of finance accounting outsourcing the client business can reduce its operational cost, as it provides the client with cost effective accounting services. It is quite true that hiring accounting professionals for accomplishing accounting and financial jobs is an expensive deal for a business owner, as it puts extra financial burden on him or her. However, outsourcing these tasks to offshore destinations can save a lot of money of that business owner because with it there is no need of establishing a separate accounting department. As far as cost effectiveness of financial accounting outsourcing is concerned, a business owner can get a well maintained accounting system just by spending a small amount of money every month.
Since all business organizations are including various HR policies, monitory benefits of all employees have become just double. Involvement of these strategies is beneficial for employees but on the other hand, the employer is finding it very difficult to meet this ever-increasing financial burden. In such situation, hiring new accounting professionals can cause mismanagement in available financial resources. However, accounting is one of those pillars of a business that decides its future and success therefore, entrusting accounting task to financial accounting outsourcing firm is the most suitable option.
Basically, development of a proper accounting management system involves high-tech procedures and up-to-date technology. These technologies and procedures demand firm financial baking, as that system needs to get updated as per the changing business requirement. However, with financial accounting outsourcing, the business owner will never have to worry about these updates, as outsourcing firms take care of these updates and technologies. Therefore, now it is not that much surprising that most of business are outsourcing their accounting operations to offshore destinations, as with them they are getting everything as per their expectations
Any flaw or ignorance of accounting task can affect the reputation of a business very badly. Moreover, these mistakes or flaws can affect corporate relationships, crucial financial decisions and final statement of the concerned business. Be it any sapling business organization or a well established enterprise, accounting task is important for the appropriate growth and extension for every business. Since managing a proper accounting management system requires extra financial and human resources, getting this task done through an outsider firm can reduce the financial burden of the business owner.
With the help of finance accounting outsourcing the client business can reduce its operational cost, as it provides the client with cost effective accounting services. It is quite true that hiring accounting professionals for accomplishing accounting and financial jobs is an expensive deal for a business owner, as it puts extra financial burden on him or her. However, outsourcing these tasks to offshore destinations can save a lot of money of that business owner because with it there is no need of establishing a separate accounting department. As far as cost effectiveness of financial accounting outsourcing is concerned, a business owner can get a well maintained accounting system just by spending a small amount of money every month.
Since all business organizations are including various HR policies, monitory benefits of all employees have become just double. Involvement of these strategies is beneficial for employees but on the other hand, the employer is finding it very difficult to meet this ever-increasing financial burden. In such situation, hiring new accounting professionals can cause mismanagement in available financial resources. However, accounting is one of those pillars of a business that decides its future and success therefore, entrusting accounting task to financial accounting outsourcing firm is the most suitable option.
Basically, development of a proper accounting management system involves high-tech procedures and up-to-date technology. These technologies and procedures demand firm financial baking, as that system needs to get updated as per the changing business requirement. However, with financial accounting outsourcing, the business owner will never have to worry about these updates, as outsourcing firms take care of these updates and technologies. Therefore, now it is not that much surprising that most of business are outsourcing their accounting operations to offshore destinations, as with them they are getting everything as per their expectations
Friday, February 22, 2008
Managing Direct And Indirect Costs
There are two types of costs "direct" and "indirect." Direct costs are also called "variable costs" and refer to costs that are a direct result of producing, delivering, or returning your product/service. Examples of these are materials and labor needed to produce/deliver the product that only occur once you sell the product, transactions costs like visa commissions, sometimes shipping charges, etc.
Indirect costs are also called "fixed costs" and refer to expenses that your business will have regardless of sales volume. Examples of ithese are rent, utilities, wages that are not based upon commission, interest expense, advertising, automobile, etc. The tricky aspect of these are that a cost may increase with increased sales, e.g. an increase in sales may require overtime or the addition of staff but the relationship is not direct.
A good tool for managing direct and indirect costs is to monitor the costs on your monthly income statement using percent of sales. Divide the cost by total sales.
Direct costs as a percent of sales will remain within a narrow margin, e.g. materials costs if 30% of sales at $1,000 sales then materials should be right around 30% at the $5,000 sales level. The actual dollar amount of materials used to produce more products will go up but as a percent of sales, it will remain close to 30%. What would lower the percent is if you got a better deal from your supplier.
Your indirect costs when monitored as a percent of sales will respond differently. For example, rent equaling $500 per month remains $500 per month even if your sales increase to $5,000. $500 divided by $1,000 in sales equals 50%. $500 divided by $5,000 in sales equals 10%. (It is that old math axiom in action here: A numerator divided into a larger denominator produces a smaller fraction.)
So why is this important? Knowing the difference between direct and indirect costs provides you with a couple of valuable management tools, break-even analysis, and your contribution margin. Break-even analysis is a handy management tool for quickly determining if a solution is feasible. Contribution margin is the remaining profit after direct costs are taken out of a sale. For example, if you sell a bookcase for $250 and it cost you $75 to make your contribution margin is $175 or 70%. The contribution pays for all the Fixed expenses/overhead.
A good way of organizing these costs is to put all the direct costs in the "Cost of Goods" section and the indirect costs in the expense area of your income statement. By doing this Gross Profit equals Contribution Margin and is automatically calculated for you.
Another reason to identify your direct costs is when bidding in a competitive environment. Ever wonder how your competitor beat you on a bid??
Imagine a situation where you know you have covered your overhead expenses for the month with normally bid projects. A quick project comes up for bid around the 15th of the month and you have a crew available to work on it. You figure it will be very competitive and if you use your usual estimating process on it you will not get the project. Since you have already covered all your expenses for the month and any margin above your direct costs is profit. Plus you have a crew that it would be better to have working on a project and being paid by a client versus cleaning the shop being paid by your profits. You decide to aggressively go after the project with a bid slightly above your direct costs.
Indirect costs are also called "fixed costs" and refer to expenses that your business will have regardless of sales volume. Examples of ithese are rent, utilities, wages that are not based upon commission, interest expense, advertising, automobile, etc. The tricky aspect of these are that a cost may increase with increased sales, e.g. an increase in sales may require overtime or the addition of staff but the relationship is not direct.
A good tool for managing direct and indirect costs is to monitor the costs on your monthly income statement using percent of sales. Divide the cost by total sales.
Direct costs as a percent of sales will remain within a narrow margin, e.g. materials costs if 30% of sales at $1,000 sales then materials should be right around 30% at the $5,000 sales level. The actual dollar amount of materials used to produce more products will go up but as a percent of sales, it will remain close to 30%. What would lower the percent is if you got a better deal from your supplier.
Your indirect costs when monitored as a percent of sales will respond differently. For example, rent equaling $500 per month remains $500 per month even if your sales increase to $5,000. $500 divided by $1,000 in sales equals 50%. $500 divided by $5,000 in sales equals 10%. (It is that old math axiom in action here: A numerator divided into a larger denominator produces a smaller fraction.)
So why is this important? Knowing the difference between direct and indirect costs provides you with a couple of valuable management tools, break-even analysis, and your contribution margin. Break-even analysis is a handy management tool for quickly determining if a solution is feasible. Contribution margin is the remaining profit after direct costs are taken out of a sale. For example, if you sell a bookcase for $250 and it cost you $75 to make your contribution margin is $175 or 70%. The contribution pays for all the Fixed expenses/overhead.
A good way of organizing these costs is to put all the direct costs in the "Cost of Goods" section and the indirect costs in the expense area of your income statement. By doing this Gross Profit equals Contribution Margin and is automatically calculated for you.
Another reason to identify your direct costs is when bidding in a competitive environment. Ever wonder how your competitor beat you on a bid??
Imagine a situation where you know you have covered your overhead expenses for the month with normally bid projects. A quick project comes up for bid around the 15th of the month and you have a crew available to work on it. You figure it will be very competitive and if you use your usual estimating process on it you will not get the project. Since you have already covered all your expenses for the month and any margin above your direct costs is profit. Plus you have a crew that it would be better to have working on a project and being paid by a client versus cleaning the shop being paid by your profits. You decide to aggressively go after the project with a bid slightly above your direct costs.
Business Equipment Needs
Every business requires equipment at some point. Your business may need computers, vehicles, manufacturing machines, factory equipment and is entirely dependent on the type of business you are running.
Imagine the business equipment needs of a simple business like a coffee shop, for example. You'll need to acquire, in addition to business premises, one or more good quality coffee makers or espresso machines, tables and chairs for your customers, refrigeration units, storage units, a dishwasher and mugs and serving ware. That's quite a list, and quite an outlay for a new business - all before you open your doors. There are, however, a number of different ways that you can acquire equipment and other assets for your business without having to part with your liquid assets by making payments up front.
Operating Lease
An operating lease allows you to acquire the equipment you need for your business without a large initial outlay. In addition, you get up to 90% of the resale value.
The advantages of an operating lease include:
* lower rental fees
* the ability to use the equipment without owning it
* there is no need to dig into other lines of credit to finance a purchase
* your rental fees may be deductible from taxes as operating expenses
* there are other tax advantages, including avoidance of depreciation
Asset Finance Lease
A finance lease allows you to use the equipment you need without owning it. When the lease ends, you may get a percentage of the resale profit in the form of a rental rebate.
The advantages of a business asset finance lease for your equipment include:
* Low initial expenses
* Easily arranged through many vendors
* Monthly fees are a fixed expense
* Leased equipment is a balance sheet asset
* Maintenance contract is often included as part of the monthly rental fee
* Use of equipment without ownership
* Rental fees may be deducted from taxes as operating expense
* Frees up or preserves other lines of credit for other uses
* A percentage of resale price may be available as a rental rebate
Hire Purchase
Hire purchase represents an excellent way to acquire equipment without paying the entire cost up front. The advantages of hire purchase include:
* immediate use of the equipment that you need
* fixed or variable rates of interest available on loans
* the interest on your commercial loans may be tax allowable
* consistent monthly payments make bookkeeping easier
* ownership of the asset at the end of the payment term
* can often be tailored with payment holidays or stepping payments to allow the equipment to start generating profits
* balance sheet asset
Most manufacturers and suppliers will work with you in many different types of finance and purchase arrangements. Once you know the type of equipment you need, shop around to find out what finance and purchase arrangements are available to you. A trained business consultant may be of use in helping you decide between asset finance and hire options.
Imagine the business equipment needs of a simple business like a coffee shop, for example. You'll need to acquire, in addition to business premises, one or more good quality coffee makers or espresso machines, tables and chairs for your customers, refrigeration units, storage units, a dishwasher and mugs and serving ware. That's quite a list, and quite an outlay for a new business - all before you open your doors. There are, however, a number of different ways that you can acquire equipment and other assets for your business without having to part with your liquid assets by making payments up front.
Operating Lease
An operating lease allows you to acquire the equipment you need for your business without a large initial outlay. In addition, you get up to 90% of the resale value.
The advantages of an operating lease include:
* lower rental fees
* the ability to use the equipment without owning it
* there is no need to dig into other lines of credit to finance a purchase
* your rental fees may be deductible from taxes as operating expenses
* there are other tax advantages, including avoidance of depreciation
Asset Finance Lease
A finance lease allows you to use the equipment you need without owning it. When the lease ends, you may get a percentage of the resale profit in the form of a rental rebate.
The advantages of a business asset finance lease for your equipment include:
* Low initial expenses
* Easily arranged through many vendors
* Monthly fees are a fixed expense
* Leased equipment is a balance sheet asset
* Maintenance contract is often included as part of the monthly rental fee
* Use of equipment without ownership
* Rental fees may be deducted from taxes as operating expense
* Frees up or preserves other lines of credit for other uses
* A percentage of resale price may be available as a rental rebate
Hire Purchase
Hire purchase represents an excellent way to acquire equipment without paying the entire cost up front. The advantages of hire purchase include:
* immediate use of the equipment that you need
* fixed or variable rates of interest available on loans
* the interest on your commercial loans may be tax allowable
* consistent monthly payments make bookkeeping easier
* ownership of the asset at the end of the payment term
* can often be tailored with payment holidays or stepping payments to allow the equipment to start generating profits
* balance sheet asset
Most manufacturers and suppliers will work with you in many different types of finance and purchase arrangements. Once you know the type of equipment you need, shop around to find out what finance and purchase arrangements are available to you. A trained business consultant may be of use in helping you decide between asset finance and hire options.
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