10 Energy-Saving Tips for Small Businesses

Article written by EricBank

A small business must aggressively work to cut its monthly bills -- often this can make the difference between profits and losses. Here are 10 suggestions to save money each month by lowering your energy bills and increasing your energy efficiency:

 

.   Request an Energy Audit: In most locations, your utility company will provide a free energy audit for your office or home office. The company evaluates your business' energy usage and recommends energy reductions that can save you money. This process usually involves an onsite visit and can save you hundreds or thousands of dollars a year.

.   Use an Energy Savings Calculator: There are several free online calculators available in which you enter information about your small business and receive advice about how to cut energy costs. The tips should include your upfront costs and payback periods. See for example the Energy Star Portfolio Manager.

.   Cut Lighting Bills: Switch all of your lighting to either compact fluorescent lamps or light-emitting diodes. Consider the use of motion detectors that automatically turn off lights in empty rooms. If possible, install skylights.

.   Conserve Energy Usage: You can use timed power strips, a programmable thermostat and Energy Star appliances to lower your energy usage. Replace desk computers with laptops, which are more energy efficient. Upgrade your plumbing to include an efficient water heater (perhaps solar), low-flow toilets and high efficiency urinals.

.   Slash Delivery Costs: If your small business must make deliveries throughout the day, try to combine trips and to use special GPS-based software to work out the shortest routes and routes that avoid traffic. A hybrid or all-electric vehicle is a great money-saver if you have to make many short deliveries around town each day.

.   Allow Work from Home: Can your business thrive with employees working from home part of the time? If so, you can save on energy costs in the office. You'll also save money this way if your company reimburses commuting costs. 

.   Adopt Virtual Meetings: If your business operates from more than one location or must meet with clients or potential clients, consider setting up virtual meeting technology. The price has fallen in recent years and the technology saves time, energy and resources that you'd waste on travel. 

.   Educate and Reward Employees: You should make energy conservation a company policy. Discuss it with employees and hand out written materials describing what you expect of each worker. Hold a monthly contest for the best new energy-saving ideas and hand out rewards to the winners.

.   Think Green: If you are building or expanding your workspace, think green. This means using thick insulation and drywall, putting in skylights and thermal windows, use low-energy lighting and heating systems, consider solar panels, and, if applicable, landscape your grounds with plants that require little water or care. 

.   Grab the Credit: Tax credits are available to small businesses that increase their energy efficiency. Governments at all levels want to reward you for using more efficient appliances and equipment or adding extra insulation to your office space. See the database of energy-related tax incentives at the U.S. Department of Energy webpage

 

Physical vs Perpetual Inventory

Article written by EricBank

Companies, especially merchandisers and manufacturers, use much of their working capital to obtain or produce merchandise. The decision of how to manage and account for inventoried goods can have profound effects on your cost of operations, the accuracy of your accounting data and your tax bill. You must provide the IRS with accurate valuations for the goods you have on hand and the cost of goods sold (COGS) so that it knows how to tax you properly. The method you use to count your inventory items is one of the most basic decisions you can make relative to inventory management.

 

IRS Requirements

What exactly does the IRS want?

• You must track the costs of goods on hand by practicing sound accounting methods.
• You must assign to your inventory account the costs of your acquired goods.
• You must record  the value of inventory items you transfer, use, or sell.
• Calculate ending inventory's value using the value of beginning inventory, the cost of goods acquired or manufactured during the period and the COGS.
• You should, at reasonable intervals, take physical counts of your inventory and use the information to update your inventory value so that it reflects reality.

Periodic Inventory

The essence of the periodic inventory system is to perform physical counts to determine your stock levels. One feature of this system is that you use a purchases account and debit it with all your inventory purchases. Once the period ends, you clear out the purchases account by adding its balance to the inventory account and resetting the purchases account to zero.

You make a physical count at the close of the period to determine the inventory on hand. This is the point where you adjust your book inventory balance to match the physical count. All sorts of discrepancies can appear, including ones arising from theft, damage, spoilage, obsolescence and sloppy record keeping.

 

Perpetual Inventory

Perpetual inventory systems attempt to keep track of each item from acquisition to disposition. If you have a tiny business, you can perform this task daily by hand. Larger businesses use fancy automated equipment such as point-of-sale cash registers and electronic inventory readers. The inventory receives electronic tags, either bar codes or radio frequency ID tags, which allow readers to track inventory movements.

You don't keep an inventory purchases account under the perpetual system. Instead, you immediately update the inventory account when purchases or sales occur. This system gives you immediate information about stock levels, discounts, returns and allowances.

Comparison of Methods

If your business requires timely information about COGS and inventory on hand, you'll find the perpetual inventory system better suited to your needs. As an added bonus, many of these systems place restocking orders automatically when counts run low. Because you track sales in real time, you always know your COGS. The better you keep detailed and accurate records, the longer you can wait to take a physical inventory, a costly and disruptive procedure. 

If you run a small business without the need for real-time information, you can save the cost of fancy gadgets by adopting the periodic method. And a teeny tiny business can always use the time-honored method of recording stock with pencil and paper to implement the periodic method.

Building Business Credit

This is a common theme I address with our small business owners.  I hope you find it helpful!

The Phoenix Business Journal included a pretty succinct article today about the importance of using credit even if you don't need it, to build your business credit score.

3 steps to building strong credit for your business

Sales Volume Impact Upon Total Variable Cost

Article written by EricBank

The minimum volume of sales necessary for your business to meet its profit targets can be decided using cost data. The sum of variable and fixed costs must be associated with every dollar of sales revenue. The company subtracts total costs from sales to compute operating profit. If you hold prices at current levels, higher variable costs are needed in order to increase sales volume.

 

Fixed and Variable Costs

The use of long-lived assets, such as machinery, land, factories, warehouses, vehicles and other items, are the direct sources of fixed costs. Other fixed costs, including selling and administrative expenses, are indirect. By definition, fixed costs such as leases, mortgages, depreciation and property taxes, do not change with production levels. In contrast, direct material costs (raw goods, packaging/shipping, direct labor) and electricity costs are variable, meaning they incrementally increase with operational output. The increase in unit variable costs may be straight-line for small increases in output, but can rise exponentially as production rises, due to items such as short-term rental of additional storage space, penalty electrical usage fees and payment of overtime wages.

Cost-Volume-Profit Analysis

Your company's survival requires profitable operations. To help figure the relationship between profits and production activity, you can perform a cost-volume-profit (CVP) analysis. The analysis helps you determine whether to change production levels, product mix and/or pricing. CVP requires you to calculate your contribution margin ratio:

[E1] Contribution Margin Ratio = (Sales - Total Variable Costs) / Sales

For example, if a company spends variable costs of $80,000 monthly to sell $200,000 of canned beans per month, then the contribution margin ratio equals 60 percent (($200,000 - $80,000) / $200,000). This means that the sale of each $1 dollar can of beans contributes 40 cents to variable costs and 60 cents to fixed costs.

 

Break-Even Point

The primary CVP equation expresses operating profit:

[E2] Operating Profit = Sales - Total Fixed Costs - Total Variable Costs

The break-even point (BEP) occurs at the point of minimum required production, creating zero operating profit.

[E3] At BEP: Sales = Total Variable Costs + Total Fixed Costs

By substituting E1 into E3, you get:

[E4] At BEP, Sales = Total Fixed Costs / Contribution Margin Ratio

For example, suppose the bean canning company has monthly fixed costs of $102,000. With a 60 percent contribution margin ratio, it must sell ($102,000 / 60 percent), or $170,000 of canned beans monthly to break even.

Required Profit

Now you have to calculate the sales volume necessary to provide your required profit:

[E5] Required Sales = (Required Profit + Total Fixed Cost) / Contribution Margin Ratio

For example, if the bean canning company requires $30,000 a month in operating profit, the required monthly sales volume is $220,000: (($102,000 + $30,000) / 60 percent). You will get a handle on your required sales volume by understanding your fixed and variable costs. You can also figure how many additional cans of beans to sell to attain your profit target by performing CVP on a unit basis.

How to Dispose of Accounts Receivable

Article written by EricBank

Many a small business has found itself in a cash crunch from time to time. This can be especially vexing for business-to-business (B2B) companies, which extend trade credit to other businesses and therefore depend on accounts receivable for payments -- a process that can take weeks or months. Retail businesses usually rely on credit card and cash purchases, which are normally not problematic as payment is immediate or prompt. But B2Bs might have A/R balances that represent a substantial part of working capital. In a crunch, a B2B has several options to quickly turn an A/R balance into cash.

Factoring

A bank or finance company that buys your A/R book is called a factor. The factor assumes title to the invoices in your A/R book when it buys it. In some contracts, you must guarantee that the factor receives full payment for all invoices -- this a contract with recourse. When the factor assumes all the risk of payment, it's called a non-recourse contract. Obviously, you receive less cash for a non-recourse contract. You usually receive a certain percentage of the A/R's book value and possibly a percentage of collections once they exceed the percentage you received. For instance, you might receive 80 percent of book value and 40 percent of all collections received after the factor has collected the 80 percent from your customers. You also might have to pay the factor a fee.

Auction

An online receivables exchange is a handy alternative to a standard factoring arrangement. The way it works is that you select some or all of your A/R invoices and list them on the exchange. Bidding then commences among financial institutions and banks, hopefully helping to boost the amount you'll receive for the invoices. The auction is pretty flexible, because you get to choose which invoices to unload and there aren't any long-term commitments. The risk is that the bid will be lower than the percentage you would have received from a straight-up factoring arrangement.

Pledging

 

Maybe you don't want to sell your A/R book, but still need some fast cash. Consider pledging the book as collateral for a loan from a bank or finance company. This is a recourse arrangement, but you retain title to the invoices. One good feature is that the process is invisible to your customers -- they continue to pay you, not some third party. In some cases, the lender might have you set up a lock box to receive the payments, but it will be in your name. Your balance sheet continues to list the pledged A/R balance as an asset, although you might have to add a footnote if you publish your financials.

Assignment

Assignment is a hybrid of pledging and factoring. The financial company or bank (the "assignee") pays you cash for the rights to your A/R collections. You use the A/R book as collateral for a promissory note that you sign with the assignee. It's still your job to collect your A/R invoices, but you forward the money to the assignee. The assignee has recourse in case any of the customers are deadbeats. The balance sheet requirements are similar to those for pledging, though you'll also have to show notes payable.

To count or not to count

Effects of Inventory Errors

Article written by EricBank

The difference between inventory selling price and acquisition cost is the basis for a merchandizing company's profits. The speed at which you restock inventory depends on your sales volume. To figure how quickly you are moving inventory, you can compute a measure called turnover. However, you have to avoid inventory inaccuracies lest you end up with misleading results.

Inventory Costs

As we've discussed in previous blogs, the cost of goods sold and gross profits are calculated thusly:

COGS = inventory purchases + beginning inventory - ending inventory

Gross profits = net sales - COGS = (sales - refunds -discounts) - COGS

To satisfy the IRS, you'll have to make a physical inventory count at reasonable intervals and apply adjustments to balance sheet inventory to realign it with the actual counts. You should look upon the requirement to take physical counts as a blessing, because you'll inevitably find discrepancies arising from shrinkage, damage, spoilage and other reasons.

Turnover Ratio

A successful merchandizer sells stock on hand and replenishes it with more inventory. Use the inventory turnover ratio to quantify this process:

Turnover ratio = COGS / average turnover

                      = COGS / ((beginning inventory + ending inventory) / 2)

Your goal is to increase your turnover ratio, because that indicates you are operating efficiently. A falling ratio is a red flag, since it means you have too much stock on hand. This is risky, because it increases storage costs and the chances that your older stock will become obsolete or spoiled. Ideally, you would never experience a stock-out and would only carry the amount of inventory you immediately need. Returning to reality, you have to settle for a respectable turnover ratio while keeping stock-outs and backorders to a minimum. Naturally, what constitutes a good turnover ratio depends on the industry you're in.

Effect of Errors

Let's examine sources of error in the turnover ratio's numerator, which is COGS, and in its denominator. COGS errors can occur for numerous reasons. For example, you are supposed to write down obsolete inventory, and failure to do so will understate your COGS, because it needs to absorb the loss in value of the obsolete stock. Your turnover ratio will be misleadingly low if you understate COGS. Denominator errors can crop up if you miscount or improperly record ending inventory. For example, you'll overstate turnover ratio and understate ending inventory if you fail to count everything you've stocked. Of course, errors in reporting your COGS or ending inventory will skew your tax bill, which is never a good thing.

Considerations

One excellent strategy to catch errors early on is through cycle counting. In case you're not familiar with the term, it refers to taking a partial count every day until you cycle through all your stock. Then you start all over again. Damaged and missing inventory will turn up during these spot checks. Keep in mind that, under generally accepted accounting principles, you have to restate your prior-period financial results arising from "material" errors, which are errors that result in incorrect actions. Sometimes, errors cancel over time. For example, overstating net income and ending inventory in one period will usually lead to understating these in the next period.

Let the Blame Game begin!

Today I'm seeing all over the news (yes, it's accounting news mostly) that the IRS Commissioner John Koskinen wrote a letter to Congress urging them to make a decision about the tax code for 2014, to prevent delays to the 2014 tax filing.

Does anyone else see a problem with this?

This has happened to us the last three years in a row and even when the "opening" date gets pushed back, the "closing" dates do not!  This only hurts the US population the Congress professes to care about most - the cash strapped!!

• The IRS can't get the parameters in place to get the e-file system ready to receive transmissions on time.
• The software provider can't get the software to the tax preparers.
• There is an increased risk of error.
• There is an increased risk of fraud.
• I could keep going, but I won't bore you with THOSE details.

But, what irritates me the most, is why should I have to wait until January of 2015, after Congress has it's holiday, to know what my income tax situation will be for 2014?  I know this time of year drives me crazy, but am I really crazy?

If you want more details, here is a more complete article about it:
http://www.accountingtoday.com/news/irs-watch/irs-chief-warns-congress-possible-delay-tax-season-unresolved-tax-extenders-72264-1.html?utm_campaign=daily%20b%20final-oct%208%202014&utm_medium=email&utm_source=newsletter&ET=webcpa%3Ae3164828%3A4397047a%3A&st=email