The Business Cycle and Your Business

Closely related to working capital is the business cycle. In general, the business cycle is the same for all businesses. For you, however, the timing and issues are different depending on what industry you are in. I want you to learn about the business cycle because it is the rhythm of your business cycle that undermines all of your decisions.

The business cycle keeps time for your company. The pace of your business cycle will determine how much working capital you have. Like a carefully engineered machine or a finely synchronized orchestra, your business cycle is influenced by everything you and all your employees do.

The business cycle is a closed system that really begins when you purchase raw materials or something to resell. If you are in the service industry, then you are buying labor or maybe expertise.

Let's look at the business cycle of Claire's Chocolates. On Friday, Claire places an order for 200 pounds of dark chocolate at $3.35 per pound. The delivery comes in Monday morning and Claire is ready to make her weekly supply of fresh hand-made chocolates. All week, she single handedly makes and sells the chocolates in her shop. By Friday evening when she locks the doors she has sold every pound of chocolate. In fact, she can not even open the store on Saturday because she is out of chocolates.

Claire checks the register and discovers she has earned $1,398 because she sold all 200 pounds of chocolate at $6.99 per pound. Wow! She takes the money to the bank. Let's take Claire's weekly activity and apply a business cycle perspective.

On Friday, Claire placed a chocolate order incurring $670 in current liabilities because she put the 200 pound chocolate order on her supplier charge account. Come Monday she converted the $670 worth of raw dark chocolate to hand-made chocolates. She then sold the hand-made chocolates, further converting the $670 from raw chocolate to shelf inventory to cash.

By Friday, what started out as a purchase order to the supplier was turned into cash for Claire's bank account. How? All by the business cycle. It is remarkable how it all happens so quickly. But you can also see where the pitfalls lie.

Does Claire get to keep all of the cash she made? Of course not. Claire still has to pay off the $670 she owes her chocolate supplier. And Claire has other expenses too - electricity, plastic wrap, boxes, refrigeration. Still, if we were to pause the business cycle of Claire's Chocolates on Wednesday we could calculate her working capital.

To keep this illustration simple, let's pretend the only thing in Claire's business cycle is the 200 pounds of dark chocolate. Realistically, she is making and selling all varieties of chocolates.

So on Monday, if we calculate the working capital, we get current assets of $670 for raw chocolate inventory. But Claire also has a current liability of $670 for the same raw chocolate. By Monday afternoon, however, Claire has moved the raw chocolate into a shelf ready hand-made chocolate inventory. Due to the added value, her inventory is now worth $866.

Claire now has $866 minus $670, equaling $196 in working capital. By Friday, when Claire has converted all of her chocolates into cash she will have $1,398 minus $670, equaling $728 in working capital. Then Claire gets to decide how to use the working capital.

The key to managing your business cycle is velocity - keep things moving. Like Claire, you can convert your inventory to cash rapidly by operating efficiently. When your inventory sits around, your business cycle is stalled.

A common business cycle problem for many small business owners is the final step where you book your sales. Small companies spend so much time on operations and customer service that they never get around to doing the billing.

If you do not get to your invoicing then your business cycle is stalled. Jump start your cycle and keep things moving so you can bring in cash to fuel your growth to make more cash.

 About the Author
ProfessorNow.com? offers free educational courses in an easy to follow format in various subjects view a free online course covering the subject of this article.

read more

Payroll Outsourcing Meets High Tech: Paying Employees Online

One of the hottest trends in the outsourcing field is online payroll processing. As long as you have access to the Internet, you can have a payroll processing company available to you at all times. You can even print your paychecks from your desktop computer once you have given all of the information to the payroll outsourcing company to prepare the checks.

These advantages, convenience and professional support, have made online payroll processing a very attractive alternative for businesses. These companies will set up all of the information for proper processing of you payroll.

A company manager can input employee information at any time and the information is stored. Only when the information is transmitted to the payroll outsourcing company will the payroll be processed. This means that changes such as new employee, address changes, etc. can be entered when they are received instead of all information having to be keyed in at the busy time when payroll is being prepared. It is recommended that a separate computer system is used for this purpose to avoid security risks.

It is easy to understand why web based payroll processing by outsourcing has become so popular. A company has the choice of going directly to the providers website and inputting all the necessary data, and the payroll processing company then does all of the calculations. Since the security of this sensitive data is so important, secure socket layer encryption is used to prevent anyone else from accessing or changing the data. These secure data centers have multiple firewalls for safety. Alternately, the company can store all of the information on its own computer and then transmit that information to the payroll processing company when the payroll date approaches.

Another distinct advantage of online payroll outsourcing is that it virtually guarantees that payroll taxes will be paid on time. Companies can also more readily supply credit information for an employee because this can be done directly with the bank. A company considering online payroll outsourcing should research the available options and make sure they choose the outsourcing company that will give them quick, accurate results while providing top notch customer support.

A really big benefit, however, is the ability to rely on accurate accounting reports and not have to be concerned with audit problems or sarbanes oxley. Outsourcing will take the risk off of your company and put it on the outsourcing company (check your contract). When it comes to audit and sarbanes oxley (if your company happens to be public), you do not want to fool around at all. 

 About the Author
MJ Batta writes job outsourcing related topics and hosts a job outsourcing research site at outsourcing-american-jobs.com and a special outsourcing report at researchthisstuff.com

read more

The Importance of Capital

In general, capital is a term used to define resources used to make money. Basically, you use capital to make something else. If you are interested in economics, there is a lot to learn about the concept of capital as an input into the production process.

But we are talking about accounting and finance for your small business, so we will lean towards the accounting interpretation of fixed capital. In practical accounting terms, you can think of fixed capital as fixed assets. The fixed capital assets are used to make something which is then sold for revenue. This is how you convert your capital to cash.

If you want to see your capital, pull out your balance sheet and look on the asset side. Do you see machinery, buildings, trucks, or trailers? If your balance sheet does not include that level of detail you may need to ask the accountant for an asset listing. For those of you who are already hands on, you may have created the asset listing yourself.

In addition to your fixed capital, you should have some working capital. The working capital is what you use everyday in operations - think of it as your on hand capital. Remember from our earlier discussions that resources like inventory and raw materials are assets?

If you take your current assets, like cash, raw materials and inventory, then subtract your current liabilities, like accounts payable, you will get your working capital. Hopefully, the amount of working capital you have is enough to get you through a few weeks of tough times. The working capital is what you need to manage everyday because if you do not, it will diminish and you could run out.

Running out of working capital is bad because that means you are off balance. Your assets, including cash, will begin to pale against your liabilities. It is not easy, however, to manage the working capital. It takes hard work and understanding. We will talk a lot more about working capital in lesson two.

Most small businesses begin getting capital when they first start out. You plan to make money and you need to have some capital to use in making money. Some small businesses can take off from the beginning and do not need another infusion of capital.

If your business is growing at a rate that lets you reinvest earnings and keep growing then you might not need to look for more capital. But some business plans require regular infusions of capital, especially in the beginning growth stages, to stay on target.

It is okay to need more capital so long as your growth plans and future profits can support the payback of more capital. Some capital is secured through collateral and is not really at risk until you can not make a payment and the equipment is taken away. This could have disastrous effects on related parts of your production system.

 About the Author
ProfessorNow.com? offers free educational courses in an easy to follow format in various subjects. View a free online course covering the subject of this article.

read more

How to Monitor Your Cash Flows With A Cash Flow Statement

A cash flow statement is a financial reporting document displaying the cash outflows and inflows of a company on a monthly or quarterly basis. This report reflects the effects of changes to the balance sheet and income accounts on the cash position as well as analyzing the operating, investing and other financial aspects of the company. When analyzed, the cash flow statement helps assess the short term capability and practicality of the company as to whether it will be able to fulfill its obligations to pay its bills or not.

Those who may be interested in studying the cash flow statement include:

- The accounting department
- Creditors and other lenders who need to assess the repayment capability of the company
- Investors who will judge whether the company is economically sound and viable
- Contractors and would-be employees who need to know whether the company will be able to fulfill its financial obligations

Companies that have limited fluid assets and which are just beginning operations are most in need of cash flow statements because they may be vulnerable and may experience cash shortfalls in spite of having healthy Accounts Receivables balances.

It is important to design a good cash flow statement that will translate the accrual basis of preparing an income statement as well as the balance sheet back into cash basis. The importance of this method is underscored when considering the fact that cash basis statements help in analyzing the actual amounts of cash flowing in and out of the business. Though the accrual basis may accurately reflect the company revenue and expenses the cash flow statement will additionally map out what happens when changes to the balance sheet are made. There are four different kinds of cash flow statements:

- Net cash flow statements that reflect operating activities. The generation of cash inflows and outflows that reflect the daily operating behavior of the business and includes cash received from customers, cash paid to suppliers and employees, and operating expenses, interests as well as taxes, and cash income received from dividend payouts.
- Net cash flow statements pertaining to investing activities. Mainly reflects the sale or purchase of equipment.
- Net cash flow from financing actions. Inclusive of common stock, short or long term loans changes as well as paid out dividends.
- Net changes in cash as well as marketable securities. To check whether the calculated amounts of increases or decreases in cash and marketable securities as arrived at from the above three points are in tune with those reflected in the balance sheet to help ascertain if the calculations were correctly made.

Though there are a number of different people interested in viewing the cash flow statement, each wanting their own perspective of the business, this financial statement is most important to management, lenders, tax officials and investors. The importance of this report is that it reveals the entire picture about the business and this is very helpful as it will reveal whether the business has enough cash or not to meet its obligations.

With cheap cash flow statement documents being available for as low as US$10 it is indeed a bargain to purchase one and use it for one's business instead of going through the hassles of preparing one from scratch. These prepared documents usually take into account the various needs of different businesses and can also be tailor-made to suit individual needs.

 About the Author
Wade Anderson is a CPA and operates DigitalWorkTools.com, the premier internet site for Legal Forms and Business Documents. Find more information on using this document, contracts, forms, and spreadsheets.

read more

Give Your Customers The Credit They Deserve, Use A Credit Application

The credit application form for business to business is a great tool for small business owners, sales and marketing managers and entrepreneurs as well as anybody else who is connected with business in any way to apply and obtain credit. Used by most companies, it provides a lot of functionality for managing the sales and marketing activities of the company and has been designed specifically for making the credit business successful. The credit application, along with credit history keeps tabs on the customer's past performance history in conjunction with an analysis program, helps calculate revenues, and costs.

Typically, the credit application form is an uncomplicated form that requires the following information:

- The name of the company applying for credit
- Years in business that the company has been in
- Complete address and phone numbers
- Nature of the company e.g. sole proprietorship, partnership or corporation
- Names, title, address, phone number of partners, principals or corporate officers
- Names, title, address and phone numbers of financial contacts
- Names, account numbers, contact names and titles, phone numbers of bankers
- Names, contact names and titles, phone numbers of trade references
- Signature and date certifying that the information provided is true and accurate

Once the information has been entered into the credit application form, the company can use it as a determining factor in extending terms. Also used in this determination are the monthly cash flow statements, monthly sales projections as well as reporting milestones and accomplishments for each potential customer. All this information generates better service from the company and is used to report and assess the customer's past credit performance.

According to the terms and conditions of the credit application for businesses, the customer must ensure and warrant that the purchases he makes are intended mainly for use in the business and not for personal and family usage. In addition, the customer agrees to pay interest at an agreed-to rate of interest. In case the customer's check is returned from his bank, he shall agree to pay a fixed charge on these returned checks. The customer also assures the company extending terms shall be paid within reasonable time and in case of litigation and disputes, the customer shall bear the expenses for attorney's fees as well as other legal fees.

The credit application form is a complete document that requires detailed information that should be duly filled out; such pre-formatted forms are readily available in the market and it makes good sense to buy these inexpensive documents rather than try to reinvent the wheel and get caught in the tricky business of making one from scratch. These low cost, exhaustive and detailed forms have already had experts and lawyers draft them to meet any eventuality and so afford a reasonable cost-effective solution to finding an appropriate form that does not take time to fill, and fits individual needs adequately.

 About the Author
Wade Anderson is a CPA and operates DigitalWorkTools.com, the premier internet site for Legal Forms and Business Documents.

read more