What Is A Net Working Capital And Why Is It Important?

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StrategyDriven Managing Your Finances Article |Net Working Capital|What Is A Net Working Capital And Why Is It Important?Many, if not most, businesses need money to develop, survive, and grow. Organizations need the right amount of cash to meet both short-term and long-term needs without high risks of ruining their businesses. Thus, a stable and sufficient net working capital should exist within these companies’ financial accounts.

Net Working Capital: A Brief Overview

Perhaps the simplest definition of net working capital is money that a business has in its bank account. It’s also the measurement of the liquidity, efficiency of operations, and overall financial health of a business entity. Therefore, if a business possesses a working capital of good standing, it can grow through various investments.

Note that it’s possible to grow the net working capital through various means. Organizations can produce additional sales, build long-term relationships with clients, and develop products and services. It’s also possible to acquire additional working capital by borrowing the cash from reliable lending corporations.

Having a lender loan the cash you need to start and maintain projects might help your company grow. You can use the acquired money to purchase equipment to streamline processes or hire additional workers to finish tasks quickly.

Calculating Net Working Capital

Always keep in mind that money is a finite resource. Hence, it would be best to learn how to calculate working capital to let you know the amount of money needed to develop, sustain, or grow business operations.

Don’t worry, as it’s not severely challenging to calculate your company’s working capital. It’s as straightforward as subtracting your business’ current liabilities from its current assets.
Your firm’s current assets may include (but not limited to) the following:

  • Current inventory
  • Cash and cash equivalent
  • Accounts receivables
  • Prepaid expenses
  • Marketable investments and securities
  • Other liquid assets

As for your current liabilities, these may include the following:

  • Accounts payables
  • Taxes
  • Accumulated expenses
  • Interest payables
  • Short-term loans

For example, a small business wants to calculate its net working capital and compiles all the data required to acquire this figure. After gathering all the necessary receipts, documents, and files, the company might find its current assets at USD$100,000. They then need to collect and calculate payables, such as taxes, loans, and other expenses. Now, it finds that the business has USD$45,000 in current liabilities. Using the formula of subtracting current liabilities from current assets, the net working capital is USD$55,000. Hence, the company could use this amount to cover operational costs and meet other short-term obligations.

It’s highly recommended for entrepreneurs to know how to calculate their company’s net working capital. The ability to be aware of your business’ income sources helps you check whether you have a steady income source to thrive and survive.

Importance Of Net Working Capital

Without a sufficient amount in one’s net working capital could lead to mild or serious issues. Avoid these concerns by looking at the various reasons why a working capital is essential in developing and maintaining a business.

  • Maintain Smooth Operations

Maintaining smooth business operations is crucial to the profitability of relatively any company. A successful business thrives on providing products or services that people want to purchase.

Providing your business with a stable and sufficient working capital helps the organization maintain smooth operations. Otherwise, you might encounter certain problems, such as the lack of funds to provide workers’ salaries.
If this scenario happens, it could lead to more serious risks. Your employees might go on strike and may not return to their working stations until you provide them with their just financial compensations.

Another problem you might run into is the lack of stable finances to continue producing goods for customers. If your sales representative tells your customers that you don’t have enough stocks for a particular item, you’re going to lose valuable sales. Furthermore, customers might opt to purchase from your competitors instead, and this scenario accounts for lost short-term and long-term sales opportunities.

  • Improve Company Earnings And Profitability

Many small businesses don’t have the financial resources available to sustain their operations and make them grow, unlike large corporations. Therefore, it might be tough to create a profit without knowing and possessing financial stability in the business’s net working capital.
If so, begin by asking yourself how you plan to handle your working capital. Using the formula mentioned above would calculate your company’s net working capital to know the budget for your short-term and long-term projects. In turn, you can figure out the company’s earning potentials and maintain profitability to access eventual growth opportunities.

  • Minimize Costs While Maximizing Returns

Knowing your company’s net working capital also helps you minimize costs while maximizing revenue potentials. It’s because knowing the figure in that aspect enables you to balance various benefits versus the costs.

For example, you might find that your organization is holding high inventory levels. Note that several benefits may come from having plenty of stock to offer to clients. That idea might not always be the most efficient solution, especially for startups and small businesses.
Excess inventory will take up valuable storage space. Hence, your company may not have enough room for other products, unless you’re willing to spend extra cash for additional storage. Furthermore, you need to add the costs of financing and insuring the inventory in case of losses. In turn, the excess stocks may lead to more costs for your organization if you can’t dispose of them soon.

It’s possible to figure out the right number of products needed for your business’ storage while satiating the needs of your loyal customers without spending too much of the company’s financial assets. You could achieve the answer to this particular concern by calculating your business’s net working capital.

  • Helps Identify And Solve Efficiency Issues

When your company has problems with the flow of funds, it might be because you may have too little money for your accounts receivables. But you might not know about this issue if you don’t know how to calculate for your firm’s net working capital.

In turn, you can identify and solve efficiency issues in your business. Identifying your organization’s working capital allows you to look at where your money is coming from and where it’s going. Thus, you can formulate plans to solve productivity issues to increase the business’ cash flow.

Conclusion

A company’s net working capital helps meet its short-term goals, which might lead to long-term solutions. Calculating the working capital and understanding its importance allows entrepreneurs to develop actionable strategies and implement projects based on their spending power.

Ensuring Money Doesn’t Become A Problem For Your Business

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StrategyDriven Managing Your Finances Article |Money|Ensuring Money Doesn't Become A Problem For Your BusinessYour business is precious, and you need to protect it in any way that you can. Now, this is far easier said than done when there are so many elements that need to be considered. In this article, we are going to be focusing on one in particular, and that is money. You’ve got to be able to ensure that money isn’t going to become a problem for your business, and in this article, we’re going to be showing you how. Keep reading if you’d like to find out more.

Hire An Accountant

First, we suggest that you hire an accountant. If you have a professional on your team, things are far less likely to go wrong. Managing the finances of a business is tough even when it is something that you have been trained to do. If you haven’t had any training in finance, then it is going to be even tougher and more mistakes are likely to be made. We don’t want you to make this mistake, which is why an accountant is going to be a good idea. Not only will you have peace of mind that everything is being handled with care, they may also be able to provide you with some advice on how you can make your business more cost-effective.

The more money your business has, the better off you are going to be. If something is going wrong, an accountant will be able to pick up on it sooner rather than later. This gives you time to fix it before it becomes a problem for you.

However, if you want to get the most out of the services of an accountant, you need to find one with valuable years of experience and reputation. Hence, when looking for an accountant, it’s best to check their qualifications, ask about their availability, the method of accounting they’ll use, and the fees they’ll charge for their services. By doing this, you’ll figure out whether your prospect is the right fit for your business needs. 

Work With A Money Mentor 

While your accountant handles the financial aspect of your business, you may also need to work with a money mentor to make sure money won’t be a problem for your business. Sometimes, as a business owner, it’s easy to think that you can’t make enough money due to some external reasons, such as economic downfall or customers being broke. But, if you also believe that you can’t do anything about these factors, which make the earning process more difficult, it could be a money block that hinders you from making money for your business. 

That’s why, as mentioned, it may be best to consult with a money mentor to help you with the problem. They can also advise you as to how to stop struggling with your money blocks and what you should do to ensure they’ll no longer become a problem for your business. 

If You’ve Got Debt..

While debt isn’t the worst thing in the world, it isn’t the best either and you want to avoid this as much as you can. However, if it’s the case that you already have debt, there isn’t much that you can do. If you have ever skipped out on debt and have used a new name to create your company and a creditor uses batch skip tracing to find you, it could be a problem for your business. The best thing that you can do is pay off any debt that you or your business has as quickly as possible.

Thankfully, there are ways that can help you pay off your business debts. For example, if you’re struggling with funds, you may consider reducing some business overheads to free up some funds for your debts. You may also improve your company’s cash flow by ensuring the customers will pay on time and negotiating credit with your suppliers. 

Once you have enough funds, you can pay off any debt as soon as possible. Remember, the sooner you are out of debt, the safer your business is going to be financially.

Find An Investor

Finally, if you know that money is tight, then you might want to consider looking for an investor. These people give your business money in exchange for a percentage of ownership. Now, you might not want to give up a percentage of your company, but it might be the only choice that you have. Negotiate with your investor and see what you can come up with between you.

We hope that you have found this article helpful, and now see some of the ways that you can ensure money doesn’t become a problem for your business. Good luck, and we hope that this has given you the answers that you were looking for.

Maximize Tax Savings Using This One Simple Trick

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StrategyDriven Managing Your Finances Management Article | Tax Savings| Maximize Tax Savings Using This One Simple TrickThe San Francisco-based tax law firm of Moskowitz LLP explains how to save big using the new aggregation rules of Section 199A

The Tax Cuts and Jobs Act (TCJA) instituted last year could mean substantial tax savings for many American businesses. This year, savvy entrepreneurs, business owners and certain investors in real estate can maximize deductions and save big on taxes by putting one of the best features of the new tax law to work the “aggregation rules.”

These updated rules allow taxpayers to combine their trades or businesses, rather than calculating deductions separately for each entity. By treating them as a single unit, owners can maximize deductions of up to 20% and reap potentially huge tax savings – but not all businesses or trades qualify and careful considereation must be made to determine if this will decrease or increase taxes in each particular case.

Moskowitz LLP offers three crucial questions to help determine eligibility:

  1. Do the entities share ownership? In order to qualify for aggregation, the same person or group of persons must own 50% or more of each trade or business, or (in the case of a partnership), must own 50% or more of the capital or profits.
  2. Does ownership change from year to year? Aggregation applies only to those entities where the ownership remains the same for the majority of the taxable year – including the last day of the taxable year.
  3. Are the entities interdependent? Taxpayers can aggregate businesses or trades which abide by at least one of the following:
    • They provide products, property, or services that are the same or customarily offered together;
    • They share facilities or significant centralized business elements (like personnel, accounting, legal and/ or information technology resources);
    • They operate in coordination with, or reliance upon, one or more of the businesses in the aggregated group (like supply chain interdependencies).

If the answer is “yes” to any of the above questions, the businesses or trades may be eligible for aggregation. Seeking help from a qualified tax attorney is an essential next step, as aggregation may not be the best solution for every unique situation, and many investments don’t qualify for benefits under these new rules. Qualifying taxpayers must also follow certain guidelines annually in order to qualify for (and maintain) aggregate status, and a seasoned tax attorney can help clarify these.

About the Author

Tax attorney, Steve Moskowitz, founded what would become Moskowitz LLP over 30 years ago, offering clients a full variety of services that include domestic, international, and criminal tax law representation, tax planning, and tax preparation of current and delinquent filings. Having practiced as a CPA for a “Big 8” (now “Big 4”) firm, as well as teaching tax, law and accounting in law school, graduate school and university, Steve has served as a legal analyst for top media outlets, where he appears daily on the radio. Steve knows his profession inside and out, and his message is simple: Don’t go it alone against the IRS. Passionate about helping clients navigate the complex intricacies of tax law, Steve practices as the founding partner of Moskowitz LLP in San Francisco, overseeing a growing team of accomplished tax attorneys and accountants. Visit www.MoskowitzLLP.com or call 415-394-7200 for more information about legal services, valuable tax resources, and to request a consultation.

Why Business Owners Should Detatch From Banks

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StrategyDriven Managing Your Finances Article |Detach from Banks|Why Business Owners Should Detatch From BanksAs a business owner, working with your bank to fund, run and grow your business seems like it’s natural right? Well, it is, and it isn’t. Many people believe that entrepreneurism is all about private ventures, that don’t necessarily involve a bank. It can involve investors, the public in the form of an IPO, or even, family members that are backing you. But why not a bank? Well, banks are inherently linked to the Federal government, so one way or another, big brother has their hand in your pocket. Whether you are taking a loan or credit card from your bank to pay for things in your business, you should reconsider this approach.

Business loan vs investment

A business loan is quick and easy. But, it always comes with strings attached. But so does investment money. So what’s the difference? Well, with a business loan that a bank or lender provides, you can rarely ever negotiate the terms. It’s usually on a take it or leaves it basis. The upside is, that you get to have the money in your account in just a few hours. However, with investor’s money, you can set some of the rules. An investor may want a piece of the company, you can negotiate how much of it you can give away and what kind of creative control you will retain. You can also commission growth reports that can stagger or step the amount of investment put into the business in accordance with success, and how much the investor is to receive in profits from the same correlation.

Banks can pull the plug

Bank loans are usually entirely in the favor of the financial institution. This means you are kind of at the mercy of a bank that is also at the mercy of the government. Essentially, the buck doesn’t stop with the bank, so they feel they can abuse their relationship with you. Take a look and read any business loan contract, and you will find clauses that allow the bank to pull the plug and ask for early payments that were not in the initial structure or payment. The Debt to Success System reviews banking scam, and in an orderly manner lays out how the banks have gone to a debt-based ‘growth’ system. As global debt mounts up, banks will be more inclined to pinch their purse strings and that in turn means, being more aggressive in their actions towards business loan recipients. DSS can also help you overcome your debts, with their unique debt discharge system that banks and governments don’t want you to know about.

YOU are the investment

Rather than going to the bank for a loan, they should want to invest in YOUR business. Banks go to corporations like Tesla, Apple, Mercedes and Microsoft, not the other way around. But how could you become like them? You need to show consistent profits and a brand that has the potential to spread like wildfire. Banks will be flocking to you to invest and you’ll be contacted by their investment firms.

Banks are not the savior of any business. They do provide some financial services that are useful, but before you turn to them, exhaust all your other options first.

What Happens If You Make A Mistake On Your Tax Return?

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StrategyDriven Managing Your Finances Article | What Happens If You Make A Mistake On Your Tax Return?

Contractor accounts can be just as complicated as any other kind. There will be incoming money as well as outgoings, and there may even be subcontractors to pay. A tax return accountant will be able to organize all of this into a coherent tax return. You will know it is time to complete a return when you receive a form.

What Happens If You Make A Mistake?

Mistakes can easily be made on a self-assessment tax return if you are not used to completing one. Contractor accounts can be made up of many different elements, and it could be that something is missed out. Something that is easy to rectify – and notice – is if the address on your return is wrong. If you have moved, you should let the government know immediately so that they can update their records. If you don’t, you should let them know once you realize there is an error on the form.

Other mistakes may be harder to identify. If you do realize something is wrong, the government need to know straight away. Otherwise, you could be penalized and if the government believe you used the wrong figures on purpose, you can even get a criminal conviction.

Checking and re-checking your tax return before you send it off is essential. Or, if you are worried that you might make a mistake (and it does happen easily), engage an accountant to complete the return for you. Many people leave their tax returns until the last minute because filling it in is a hard task, and a laborious one too. But getting in touch with a contractor accountant will make the work much quicker and easier, and will prevent you from getting a fine or worse. It makes sense to hire an expert to get the job done, leaving you with much less worry. You would hire experts for other aspects of the business, so why not this one? This is especially important if you have gone through a year of change, for example, if you are in the process of acquiring a competitor or you have a second income coming from a different source.

Is It Possible To Avoid Penalties?

If you miss the deadline for sending in your self-assessment tax return, you will generally be fined. However, if you have a ‘reasonable excuse’ for being late, you may be exempt if it was entirely out of your control. Hiring an accountant should mean you never have to have this problem, but if you do your excuse must be made as soon as possible. Examples of reasonable excuses could include documents being lost due to a fire or a flood. Equally, if documents are stolen and you are unable to replace them, this may also count. If you suffered from a life-threatening illness and you had to stay in hospital and where therefore unable to complete your tax return, this will usually also count. So too does the death of a partner just before the filing date (although you may be asked to show that you had started preparations to complete the return before it happened).