by Mark | Feb 22, 2022 | Business, Business Advisory, client, Tax Deductions, tax planning
An IRS Audit: How to Avoid the Red Flags
Although the chances of an audit are rare, the fact is tax audits are a fairly routine business for the IRS. That said, audits can be especially scary for small business owners. After all, there are certainly horror stories in which IRS audits have resulted in company closures.
Fundamentally, an IRS audit is an evaluation of your business’s financial accounts and information. As such, you’ll find most audits are a result of discrepancies on tax returns. The IRS is simply reviewing your entries to ensure everything is in order. Sometimes an audit is random, and other times it can be based on suspected suspicious activity.
So, here are some red flags that could trigger an IRS audit of your business.
1. Data Entry Errors
The more manual your accounting and expense management functions are, the more likely you are to make errors when filing your taxes. Your accounting system is crucial to understanding business performance and is also vital to tax preparation.
While most accounting functions are digitized nowadays, data entry blunders like treating expenses as income or duplicating an entry could trigger a letter from the IRS. An audit can be triggered by something as simple as misspelling your business name. This is where e-filing comes in handy because you can load vital information from past tax returns.
If your math is a little shaky, soliciting the services of a tax preparer near you could save you the headache of an IRS audit.
2. Failing to Report Some Income
Underreporting your income on your tax return is a top audit trigger. The IRS compares your income from one tax year to the next. A noticeable discrepancy without supporting information can make Uncle Sam sit up and take notice.
The IRS wants what it’s owed and will go to great lengths to verify the reported amount of tax is correct according to tax laws. So, it’s only a question of when before it spots your omission. This is especially true for cash-heavy businesses like barbershops and nail salons.
3. Questionable Business Deductions
It’s not uncommon for small business owners to have itemized deductions on their returns, like home office deductions. While these tax deductions can reduce your taxable income, they can also raise red flags when they don’t measure up to your income. Same case if you’ve made significant contributions to charity.
The IRS also compares your tax returns to those of other businesses in your industry – anything that’s out of the ordinary may subject you to further scrutiny.
4. Excessive Business Expenses
The IRS stipulates that a business expense has to be both ordinary and necessary to qualify as a deduction. For instance, a professional painter could claim paint and paintbrushes as business expenses, but a software engineer who paints as a hobby cannot.
If you have large expenses, it’s pertinent to keep all your receipts in case you are asked for verification. However, matters get a little more complicated when it comes to entertainment, travel, and meal expenses, as they may blur the lines between personal and business expenses.
5. Earning Substantial Income
One in 100 businesses get audited each year, and usually the ones that earn more than $1 million per year, especially if they report a significant change in income. It’s not unheard of for companies to start raking in millions in revenue seemingly “out of the blue”, particularly in the age of social media when branding has a direct impact on your bottom line.
Don’t be surprised if you hear from an IRS agent when you start showing a substantial increase from year to year. That’s also a great time to bring in a business advisor to develop a growth strategy.
6. Reporting Too Many Losses on a Schedule C
If you claim a business loss each time you file a tax return, you may be due for a tax audit. While it’s not uncommon for small businesses to have losses, having many years of Schedule C losses could have the IRS questioning the legitimacy of your business. If you don’t turn a profit, the IRS may consider your business a hobby which could limit your tax deductions.
Keep all your business documentation that shows your company’s revenue and expenses throughout the year to cover all your bases.
7. Being Self-Employed
Unfortunately, the IRS tends to scrutinize self-employed individuals, especially if they fail to report a profit for at least three out of five years. This applies to freelancers and anyone working in the gig economy as well. Yet again, the IRS could claim your business to be a hobby, which would disqualify you from claiming certain business deductions.
As a small business owner, you should consider forming an LLC to lower your audit risk. Consult a tax professional near you to determine which entity would work best for you.
8. Misclassification of Employees
Some businesses intentionally misclassify employees as part-time workers or independent contractors for several reasons:
- To lower labor costs
- To avoid paying certain small business taxes
- To reduce business insurance expenses
It’s important to classify your employees appropriately and keep documentation of any independent contractors you hire.
Avoid the Dreaded IRS Tax Audit with FMA CPA
Talk to FMA CPA about your accounting practices, income, or deductions to determine what could trigger an IRS audit. We’re a CPA firm in Clearwater offering business advisory services designed to help you understand your business better and keep you on Uncle Sam’s good side.
Contact us for comprehensive tax preparation services and any questions you might have.
by Mark | Jul 20, 2021 | Business, Business Advisory, client
4 Reasons Why Your Small Business Needs Business Advisory Services
Whether you’re a well-established entity or just starting out, you make decisions about your business every day. A solid business advisory team knows the ins and outs of the game – they know exactly what your business needs, and thereby, can help you solve the unique obstacles that hinder the growth of your business.
Managing a small business can be challenging; you’ll run into roadblocks at every stage of development, from starting your business to expanding. This is where business advisory services come in. Experienced advisors can equip you with the knowledge, expertise, and tools necessary to manage every function of your small business with confidence.
Business advisors can work independently or as part of your business. Their job is to provide you peace of mind by taking care of the day-to-day accounting and tax compliance needs. However, the real value of business advisory services lies in helping you successfully address your business needs and uncover opportunities.
Innovative Solutions to Your Business Needs
Business advisory services are designed to help small business owners like you solve their biggest business challenges. Here’s how business advisors can help you meet your challenges and seize new opportunities.
Make sound financial business decisions
Whether you’re starting or expanding a business, you need to obtain finance. There are several factors you need to consider before sourcing financial aspects like business loans. For instance, you’ll need to carefully consider the type of loan as it could significantly affect your tax obligations and cash flow.
In addition, you’ll have to:
- Have a solid business idea
- Develop a sound business plan
- Consider the repayment timeframe and your ability to repay the loan
- Determine how much financing you need
Considering the above factors, you need to seek professional advice in order to choose the best possible option.
The day-to-day operations of running a successful business don’t leave much room to strategize for the future. Business advisors can draft strategic and marketing plans and create a road map to help you achieve your business goals.
Depending on the type of business, advisors can provide expertise based on your niche and the specifics outlooks of your business. Looking to expand into the world of online business? Then you’ll need a business advisor to create a strategic plan to help you scale accordingly.
Digital Marketing and Social Media Strategy
You probably don’t have the time to keep up with the latest trends in marketing. Business advisory services can help improve your customer experience with deeper engagement. Marketing strategies nowadays must include everything from video campaigns to social media strategy.
Business advisory consultants can help narrow down your target audience, launch a successful marketing strategy, and build a community around your brand and its offers.
Small Business Administration
Business advisors can handle the finer details, so you can focus on growing your business. From accounting advisory services to human resources, business advisory services can be tailored to your small business needs. Working with advisors can optimize your business, improve performance and efficiency and create solutions to any challenges you might experience.
Partnering with a business consultant means you don’t have to sweat the small stuff. Experienced business advisors can help you take advantage of opportunities while avoiding costly mistakes. This way, you can manage risk better, improve performance and sustain results.
Beyond the Balance Sheet
You need more than a good idea and high-quality products and services to build a successful business and a strong customer base.
FMA CPA offers business advisory services in Tampa bringing a fresh, objective perspective backed by years of expertise to help small business owners address the unique challenges facing them. Our advisory services are geared towards meeting small business needs and informing organizations on how to be successful and grow sustainably.
Call us today to discuss your business needs. We can provide strategic advice into all your small business concerns. For instance, like when you want to start a sole proprietorship. We also provide vital data-driven insights and can help you solve your cash flow and credit card queries.
by Mark | May 10, 2021 | Business, Business Advisory, client
How to develop a strong brand identity for your business.
Your brand identity is the unique value that sets your business apart from every other business on the block. It influences the way people think about your products and company as a whole. Too many business owners overlook the importance of this important element and go straight to marketing. They promote the business without giving much thought to how the brand identity of their business impacts the final outcome.
Developing a strong brand identity is an important factor in the success of your business. It can project the image you want to portray to the world and highlight your values to attract your ideal client. In many ways, a strong brand identity is the nucleus of your company’s success.
What exactly is a brand identity and how does it benefit your business?
What is Brand Identity?
Is it your company name? Your tagline? Your logo? It’s all that and more. Brand identity is defined as the visual expression of a brand. It is the total sum of the elements that portray the right image of your company and tell your story in a familiar and meaningful way. It amplifies differentiation, fuels recognition, and encourages people to engage.
Your brand identity is the most important asset because it influences the decisions of customers. For example, in a recent street survey, people were asked to name the first thing that comes to mind when they hear the word McDonald’s. Unanimously, it was their hamburgers. When thoughtfully designed, your brand identity should provide important visual cues that are psychologically persuasive.
A brand identity typically includes:
- Company name
- Color palette
- Graphic Elements
- Web design
- Video and motion
- Interactive elements
- Product quality and pricing
- Customer service
Your brand identity design should have a distinct visual language that will be consistently applied to everything, from your packaging to your website.
The Keys to a Strong Brand Identity
A strong brand identity guides you in making important decisions that deliver consistent company experience to customers, employees, brand ambassadors, and stakeholders. Make sure your brand identity is:
- Unique: catches people attention and stands out from the competition
- Cohesive: each aspect complements your brand
- Memorable: makes a visual impact
- Scalable and flexible: can grow with the brand
- Easy to develop; intuitive and clear for designers
- Has a clear message and solid philosophy
Benefits of a Strong Brand Identity
Makes Your Business Memorable
Never underestimate the power of familiarity. While many people take the time to research and compare options when buying a product or hiring a service, others just choose whatever they can recognize. Established companies like KFC, Starbucks, and Coca-Cola spend billions every year on advertising to capitalize on the concept of brand recognition. People often trust what they know and become suspicious of what they don’t recognize.
When you build a brand identity and use it consistently, you’ll increase the chances of customers picking your product from the sea of others that are surrounding it or contacting you for more information about your services.
Build Loyalty and Trust with Your Audience
While a strong brand will influence consumers to choose your product or service, it will also help to keep existing customers loyal. A strong brand identity will set you apart from your competitors, convey your values, and build an emotional connection with customers. Individuals who have tried your product based on its brand and have been happy with the results are more like to come back for more.
When you combine great products or services with powerful branding that hits all the right notes with buyers, you’ll develop a long-term relationship with customers, leading to continued customer loyalty. By the same token, loyal customers who love your branding and believe in your mission will want to share your business with others. Essentially, a strong brand will make its own ambassadors and others will hop on board. This could bring increased profits and set your business on the path of growth and success.
Maximize New Product Launches
No matter your vertical, opportunities to expand and grow your business will always exist. Creative innovative solutions based on your customer’s needs and wants are good business. In the business world, however, few efforts are more difficult than getting people to try a new product or service offering to the market. The success of your launch may have less to do with your amazing product and more with how strong your brand identity is.
Businesses with established brands and a loyal customer base have a leg up when it comes to new product launches. It’s easier, less expensive, and less risky to introduce new products or services to customers who already trust you than to convince new shoppers to try something different.
For instance, if a customer has already purchased your shirts and found them to be of good quality and value, he’ll be more inclined to try your new line of pants when you release them next month. A strong brand identity coupled with consistent marketing will work together to help your new product or service reach to current and new audience.
Filter Leads on Your Behalf
Curating a strong brand identity filters out bad leads on your behalf. The truth is, your business does not target everyone. Your ideal customers are people who are most aligned with your core values. These are the people you want to ultimately win over and won’t have a problem buying from you.
Let’s say you sell designer sunglasses. Your ideal customer isn’t Jane who gladly wears $7 sunglasses from the local discount or drug store. Your ideal customer is Andrea who knows cheap sunglasses do not always protect your eyes and has been planning to buy authentic designer sunglasses since last summer.
A strong brand identity will be appealing to Andrea and detracting to Jane, making it easier for you to close sales and get a new loyal customer. To create a strong brand identity, keep the message clear and consistent. Wasted time and effort reaching out to every consumer and a muddled mix of marketing messages will only lessen the impact of your brand and the success of your products or services.
Choose a path and stick to it so the true value of your offerings will drive a customer when it’s time to make a purchase or contract your services.
Convey Stability and Increase Credibility
A strong branding identity increases your company’s credibility with customers and other businesses in your industry. A well-defined brand identity develops an image for your business that says “We won’t take your money and run away, we’re here to stay.” It eliminates any doubt about your company’s viability by having a clear message and crisp image. Outstanding customer service paired with interesting visuals and innovative marketing will establish your company as a serious professional.
What’s more, a strong brand identity can make your company appear stronger and bigger than competitors. When prospects see a professional brand consistently used on your website, social media profiles, or business cards, they get the image of a more established company that deserves their business.
As a bonus, people also expect to pay more for a more established business. Send them to a poorly designed promotional offer or janky website and they’ll think you’re small or “scammy” and not worthy of their business. Going the extra mile with a powerful brand identity fosters credibility and trust.
A strong brand identity can give considerable advantage in negotiating with manufacturers, distributors, and suppliers. When vendors recognize that consumers are enthusiastically buying your products, they’ll want to work with you. This will put you in a desirable bargaining position.
When a business is doing an excellent job with branding, people notice. In most cases, those people are concept builders, social media marketers, content creators, and influencers. This caliber of thinkers will want to be part of what your company is doing. When you bring them on board, you’ll harness their creative power and following to grow your business further.
Good branding is primarily meant to give confidence to the consumer, but it also allows the business owner to appreciate what they have developed and built. With a strong brand identity, all of the time, money, energy, and effort that has gone into creating your business comes together to form a complete and professional presentation.
The goal of branding is to expand the original product or service. It helps grab the public’s eye and convinces them to try your product or service. Gaining consumer trust and loyalty gives you a sense of achievement and confidence to push further.
How to Strengthen Your Brand Identity
The steps a company should take to develop a strong and cohesive brand identity will vary, but some steps apply broadly to most:
- Assess Your Business and the Market – A look at your company’s opportunities, threats, strengths, and weaknesses is a great way to help you understand who you are as a brand and what situation you are in. This can help determine your goals and what you need to do to achieve them.
- For example, if you’re pursuing a niche luxury market for jewelry, your business ads should be designed to appeal to your target audience. Researching your audience and learning what they want is critical to creating a brand people will love.
- Give a Clear Message – Just because it makes sense to you doesn’t mean it will make sense to everyone. Don’t try to combine every conceivable brand personality to excite your customers. Your brand identity should create a consistent perception and deliver a coherent message. Know the message you want to communicate and use the right language and visuals to pass it.
- Define Your Brand’s Unique Selling Proposition – Your unique selling proposition (USP) is what makes your company different from your competitors. Your brand identity should express this clearly. To develop a USP, consider your company’s unique personality, resources, and customers. Think about what motivates your customers and what would persuade them to choose your products and services instead of your competitors’.
- Deliver the Experience Your Customers Expect – From your website, emails, phone conversations, and customer service, make sure every interaction lives up to the customer’s expectations. Treat your customers how you’d like to be treated.
If you have a business, you have a brand. But strong brand development does not happen overnight. It requires research, organization, and planning. If you’re feeling overwhelmed or don’t have the experience to handle the project yourself, consider bringing in FMA C.P.A., for some expert help. We can help guide you towards your goals and get your brand on the right track. Contact us today to schedule a free consultation for competitive business advisory services.
by Mark | Jan 8, 2021 | Business, Business Advisory, client
How Financial Advisory Services Can Help You Unlock Growth
Businesses prioritize change based on various factors like socio-economic environment plus the age of the venture. But even with the ideal bookkeeping system in place to help you keep track of actual results, many business owners often lack the time or skills to make real time decisions centered on such data, or to define their goals with a financial forecast.
As a business owner, you can leverage expert advice and benefit from the objective point of view. Learn how such a strategy can help you successfully prioritize your business operations.
What’s the Meaning of Financial Advisory Services?
Financial advisory services aim at helping your business overcome weaknesses, identify strengths, and maximize their potential to unlock growth. Advisors can either be accountants, business coaches, or mentors who provide strategies and financial guidance to help you develop and implement business projects—with a focus on supporting you achieve your financial goals.
Why Should You Invest in Business Advisory Services?
Several unique benefits come with business advisory services. So, let’s take a look at how a financial advisor can help accelerate and improve your business success.
1. Develop a Holistic Financial Plan
With the pandemic hitting businesses differently, many business owners cannot cater to their bills or reasonably meet their financial obligations. Others are afraid of exhausting their life’s savings and, in worse cases, going bankrupt.
Even during the best of times, handling your daily budget while balancing your future needs with your current obligations can be quite challenging. With financial advice, you’ll be able to see your financial life in an integrated and more comprehensive way.
Investing in financial advisory services comes with a lot of benefits since it cuts across all sectors of your business and personal life. Through holistic financial planning, you’ll be better-placed to fittingly plan for your children’s education, care for your aging parents, or even create an appropriate estate plan.
By looking at your business, advisors can offer insurance planning, risk management and even business tax services. What’s more, they can help you see the bigger picture while you’re making the most critical decisions. Business financial services also offer support in calculating your assets under management (AUM).
2. Prepare Your Business for Different Stages of Business Growth
When providing for future developments of your business, you can easily be carried away with emotions. Owing to the magnitude or sensitivity of some operations, decisions can often be unfavorably swayed by excitement or fear.
Even so, an investment advisor can provide you with the right perspective necessary for dealing with plans and investments.
To expand your business successfully, you need an objective, a plan and the tactics to make it happen. Be sure to maximize on the much-needed clarity financial professionals provide enterprises. This strategy helps you focus your vision in the right direction besides supporting you stabilize and grow your business.
If your business isn’t turning out to your expectations, seeking investment advice might come in handy. A financial advisor can work with your employees by offering assistance on pertinent issues they face or help assess their capacity to achieve business goals on time.
For instance, if there’s a market problem, you can count on financial advice to help you navigate emergent issues. Likewise, these services allow you to exploit the crowded marketplace or else provide an avenue for you to develop a niche market.
Keep in mind that good ideas aren’t enough to run a business. You need to back up those fantastic ideas in financial terms. And a right way of understanding this concept is through financial advisory.
What other ways are financial advisory services essential in a business? Check out these additional essential benefits!
3. Plan Personal & Business Finances
Most business owners always start their businesses for personal financial gains. With the intricate and consuming nature of starting and building your business, it’s common to primarily focus on business finances and turn a blind eye on your personal finances.
After choosing a financial advisor, the experts can help you determine whether your business finances and personal finances are in good order. It would be best to coordinate the two for investments, tax and cash flow purposes. Just like your business accountant examines your finances, prepares financial reports, and provides bookkeeping services, your advisor may also do all that and even much more.
These financial professionals play an essential role in your personal and business life by ensuring proper coordination of the two, which is crucial to your long-term success. Don’t fall into the trap of thinking you’ll be reducing costs by not hiring financial advisors.
That’s a false economy! The truth is, hiring a financial advisor will not only propel your business to greater heights but also save you time and money.
4. Streamlined Operations
With an advisor on board, you’ll be able to streamline your operations and this can help you:
- Reduce time wastage
- Fine-tune your strategies
- Optimize your employees
- Make decisions that benefit your business
When exploring new business environments, it’s wise to have an experienced CPA in Clearwater on board to help you navigate the unknown realm of financial dealings. Besides, leveraging business financial services can give you the confidence to concentrate more on the vital aspects of your business.
World-Class Business Advisory Services in Clearwater
As a top-rated firm that offers investment management services, FMA CPA is dedicated to helping business owners build wealth and become more efficient in managing their businesses. From calculating personal tax to making specific investments, we’ll be there in every step of your journey.
For the best financial advice and business advisory in Clearwater, give us a call today!
by Mark | Jan 1, 2021 | Business, Business Advisory, client
Learn more about the benefits of business advisory services consulting.
In today’s ever changing economic environment, what must your organization do to be a success? As a business owner, you must find ways to outsmart your competition, consolidate your venture’s operations, and likewise, increase revenues while maintaining a firm grip on the firm’s expenses.
Understandably, many business owners struggle in their pursuit to oversee day-to-day operations while also keeping a keen eye on industry trends. Rather than having to wear multiple hats to try and maintain the status quo, you can capitalize on the services of an expert business consultant. Such a strategy allows you to reap the benefit of the impetus and, thereby, stimulate business growth.
Remember, no matter how hard company management works to grow and develop their company, there may come a time when outside help is needed.
Business Consultancy Services
So, who are business consultants? Business consultants are essentially professional advisors. They include business accountants, marketing specialists, and management consultants. The number one benefit that consultants offer is that they provide expertise.
Organizations, big and small, hire business consultants to help them solve particular problems or streamline certain aspects of their business process. In most cases, companies bring consultants on board to solve a specific problem.
As a business owner or manager, you want to make sure that the decisions you make are in the best interest of your company. Maybe you’re experiencing challenges with company culture, or you need to audit your marketing strategy or restructure your business strategy.
Do you need a second opinion? Get in touch with a consultant to help you out with personal tax or business tax services. There is no need to do it all alone.
Many companies are well aware of the short term benefits of business consultancy services. However, businesses rarely consider the benefits of long-term consultancy services.
Here are some reasons you should think about retaining your business consultant in the long term.
Benefits of Long-Term Business Consultancy Services
1. Expertise in Business Management
We’ve already mentioned this, but it’s singularly the most important reason to hire a consultant. Consultants often work with many different companies and are bound to have worked through a similar problem to the one you’re facing with someone else. A long term consultant does not offer a one-size-fits-all solution. Continuous exposure to your business enables them to tailor advice and strategy consulting to the specific challenges your business might be facing.
You’ll benefit from their extensive knowledge of market dynamics, and their recommendations will help your company stay ahead of the game in this era of strong competition.
It is imperative for companies to have an external agency as consultants to provide an outside perspective. After working in the same condition for an extended period, it’s relatively common for internal teams to miss the forest for trees. As a result, organizations can miss addressing critical issues that may impact their business in the future. A business consultant offers the advantage of objectivity and can handle a problem without bias or prejudice. With a fresh pair of eyes, they can analyze a situation and offer solutions without getting caught up in the personal or political aspects of it.
In the long-term, because consultants are objective parties, they come to know the ins and outs of your organization, its history plus culture. This means, they can offer complete transparency into your business and how the internal dynamics affect your company, employees, and bottom-line.
3. Relationship Building
You should think of a good consultant as a long-term investment rather than an expense. The “business” of management consulting is to help other businesses thrive. The number one frustration of clients with consultants almost always has to do with having to explain their problems and company structure. When you work together regularly, this helps develop a relationship that allows the consulting team to quickly jump in and be the experts you need. The relationship you build with your consultant becomes personal, and your consultant becomes your business partner. Hiring a consultant can optimize and develop your core business processes long-term.
4. Save Time and Money
Managers and business owners are expected to know and solve all company problems and still keep up with their day-to-day operations. Taking the time to develop a business plan or develop a marketing strategy can often feel like a luxury, most managers can’t afford. Hiring a consultant is often a more significant upfront investment but saves you time and money in the long run.
Essentially, consultants are additional staff. Hiring temporary expertise allows firms to pay only for the services they require.
Choose the Right Business Consultancy Services – Work with FMA CPA
If you’re looking for business advisory services in Tampa, choose FMA CPA. Our business consulting services can help you adapt to the ever-changing market dynamics and maintain your competitive edge.
Our team specializes in helping companies scale and grow by providing customized methods and procedures that meet your needs. As a top consulting firm, we have a proven track record in assisting and retaining small and large business clients. We help clients find ways to remain competitive and profitable. Give us a call today for the best business consultancy services and schedule a no-cost consultation.
by Mark | Dec 24, 2020 | Business, client
Interpret Your Business Financial Statements
To operate a successful business, you must have a robust understanding of your business’ financial statements because these forms inform all your managerial decisions. In the next section, we’ll take a closer look at three fundamental financial statements also discuss how you should read and analyze them to understand your company’s performance better.
Interpreting Business Financial Statements
Business Financial statements are significant aspects of financial reporting. Business Accountants use these documents to depict a business’s financial performance accurately—these records ensure C.P.A.s provide precise accounting and business tax services.
Understanding Financial Ratios
To analyze your business financial statements, you’ll need to calculate the financial ratio, i.e., a numerical representation of your company’s performance in terms of debts and profits.
How to Read and Interpret a Balance Sheet
A balance sheet provides an accurate portrayal of your assets, the amount you owe (liabilities), and your equity. All balance sheets adhere to the equation below.
Assets = Equity + Liabilities
A balance sheet provides a snapshot of your company’s finances at a specific date. Therefore, to understand your company’s performance, you must examine previous balance sheets. Also, you ought to compare these records with those of other companies working in the same industry.
Calculating your current financial ratio could also help you gauge whether your company is cash strapped. The current ratio formula is as follows:
Current ratio = Current Assets/ Current Liabilities
Example: Current ratio = 40,000/15,000 = 2.66
Note that the recommended current ratio is 2:1. Anything below that number means that your assets are not enough to cover your liabilities. Also, to know whether your business can run using your earnings (equity), your company’s balance sheet should not exceed a debt-to-rate ratio of 2:1.
How to Read and Analyze an Income Statement
Your income statement conveys your company’s expenses and earnings over a specific accounting period. To interpret your income statement, you must understand these essential financial ratios.
Gross profit margin
The gross profit margin relies on the cost of goods sold (COGS) to calculate how much money your business is making.
Gross Profit Margin = (Sales Revenue – COGS) / Sales Revenue
Gross Profit Margin = (7,000 – 4,000) / 7,000= 0.42
Here, the gross profit margin is 0.42, meaning that a business keeps 0.42 US dollars for every dollar as gross profit.
Operating profit margin
Your operating profit margin takes into account both the COGS and other expenses. Here’s the formula:
Operating Profit Margin = Operating Earnings / Sales Revenue
To become a profitable business, you should work on increasing the operating profit margin. The best way to do this is by keeping track of your daily business expenses.
How to Read and Interpret a Cash Flow Statement
Analyzing your cash flow statement should be a priority task when undertaking any business finance operation. A cash flow statement reveals how your company raised funds and how it spent them over a particular period. It also measures your business’ ability to cover expenses.
Ideally, your company should bring in more money than it is spending. There are three main elements of a cash flow statement: operations, investment, and finance.
As a business owner, you’ll come across two ways of recording transactions, namely cash basis and accrual accounting—usually, the former works for small and medium enterprises that don’t take inventory. Cash basis accounting only recognizes actual income and not in its abstract form. In comparison, accrual accounting records all expenses and earnings regardless of whether or not they’ve hit the bank account.
Businesses use these three formulas to determine their cash flows
Current debt coverage ratio
This ratio gives you a clear picture of how much cash debt you owe and whether the net business income can cover such liabilities. See the formula below:
Current debt coverage ratio = net income from operations / average current liabilities
Example: Let’s say your company generated 65,000 USD from operating activities in 2019. The current liabilities at the start and end of the financial year are 55,000 USD and 70,000 USD. Your current liability coverage ratio would be:
Therefore, the ratio will be 1.04:1 (A higher ratio depicts that your business is at a better liquidity position)
Cash flow coverage ratio
This financial ratio also examines whether your business can pay off its debt. The key difference is that this ratio considers the entire debt and not just for a specific period. Here’s the formula:
Cash Flow Coverage Ratio = Net Cash income from Operations / Entire Debt
Cash flow margin ratio
The cash flow margin ratio determines how much your business made for every dollar earned during a particular reporting period. See the formula below:
Cash Flow Margin ratio = Net income from Operations / Net earnings
Let F.M.A., C.P.A. In Clearwater Handle All Your Business Financial Statements’ Needs
Understanding your business financial statements is a core element of business finance. F.M.A., C.P.A. has extensive financial knowledge to provide business advisory services in Clearwater. Not only do we help businesses prosper, but we also work with individuals. Our services include personal tax filing and retirement planning services. For more information and to schedule a no-cost consultation, call us at 727-530-0036 today!