Analyzing a company’s Accounts Receivables is an effective way to measure its current cash flows and the likelihood of maintaining healthy cash flows. According to the U.S. Chamber of Commerce’s Small Business Index (Third Quarter 2024), 68 percent of small business owners reported being content with their third quarter cash flow performance. This illustrates the importance for small business owners to do everything possible to maintain healthy cash flows, including evaluating the quality of accounts receivables (A/R).
Defining Accounts Receivables
This account or line item on the balance sheet gives the business’ managers/owners and investors a measure on how much money a business expects to receive from selling goods or services. It’s an important metric because it’s a measure of what’s owed, but not yet collected from rendered services/goods.
Consideration for Uncollectable Accounts Receivables
While businesses hope to collect 100 percent of their A/Rs, businesses take a realistic view that not everyone will pay up. For whatever reason, A/Rs aren’t always collected and must be accounted for as uncollectable. Therefore, a contra account is setup to account for accounts receivables that turn into bad debt. This contra account is linked to the accounts receivable, an asset reported on the balance sheet, offsetting the accounts receivable balance. However, there are many metrics for companies to manage their health internally, and some of these metrics are discussed below.
Accounts Receivable-to-Sales Ratio
This is determined by taking a “snapshot” of the ratio or division of the accounts receivables divided by sales over a period of time. The resulting calculation is the percentage of a business’ unpaid sales. The higher the accounts receivable-to-sales ratio, the riskier the company’s financial health. It indicates a business has accounts receivables with a low likelihood of being collected. It’s calculated as follows:
AR to Sales = AR / Sales
Since it measures the mix of how much a business relies on cash versus credit, it can prompt an analyst to determine whether a company is able to operate on minimal cash with low fixed costs and limited outstanding debt. It can also prompt an analyst to determine if a company is subject to cyclical sales and is dependent on the business cycle and whether it’s the right time to invest in a company or hold off until a better entry point is established.
Accounts Receivable Turnover Ratio
This calculation determines how fast a business can convert its accounts receivables into cash. It calculates this over a discrete period, be it a month, quarter, year, etc. It’s calculated as the sales over a period divided by the average accounts receivables balance over the same period. It’s calculated as follows:
ARTR = Net Credit Sales / Average Accounts Receivable
Net Credit Sales = Sales on Credit – Sales Returns – Sales Allowances
Average Accounts Receivable = (Starting + Ending A/R Over a Fixed Time) / 2
The higher the ratio, the less friction businesses have in converting their accounts receivables into cash. One important consideration to keep in mind is that if total sales are used for this calculation, which some business do, the results don’t reflect the original formula because it doesn’t remove the sales on credit or sales allowances.
Days Sales Outstanding (DSO)
This metric reveals how fast (in average number of days) a company is able to turn its receivables into cash. It’s the average accounts receivables divided by net credit sales multiplied by 365. It’s calculated as follows:
DSO = (A/R / net credit sales) x 365 days
The lower the DSO, the better quality and the more efficient a company is in converting its accounts receivables into cash. The higher the DSO, and especially when it goes beyond 90 days, can represent two different financial measures. The first is that the business’ accounts receivables might not be collectable. The second is that the company might be able to make sales but with deteriorating earnings.
While there are many ways to analyze a company’s health, along with many ways to analyze the quality of existing and future accounts receivables, these are a few ways to evaluate a company’s present financial health and prospects for the future.
Sources
https://www.uschamber.com/sbindex/key-findings
Alan F Burke CPA
How to Measure the Quality of Accounts Receivable
October 1, 2024 · Blog, General Business News
⏱ 4 min read
Analyzing a company’s Accounts Receivables is an effective way to measure its current cash flows and the likelihood of maintaining healthy cash flows. According to the U.S. Chamber of Commerce’s Small Business Index (Third Quarter 2024), 68 percent of small business owners reported being content with their third quarter cash flow performance. This illustrates the importance for small business owners to do everything possible to maintain healthy cash flows, including evaluating the quality of accounts receivables (A/R).
Defining Accounts Receivables
This account or line item on the balance sheet gives the business’ managers/owners and investors a measure on how much money a business expects to receive from selling goods or services. It’s an important metric because it’s a measure of what’s owed, but not yet collected from rendered services/goods.
Consideration for Uncollectable Accounts Receivables
While businesses hope to collect 100 percent of their A/Rs, businesses take a realistic view that not everyone will pay up. For whatever reason, A/Rs aren’t always collected and must be accounted for as uncollectable. Therefore, a contra account is setup to account for accounts receivables that turn into bad debt. This contra account is linked to the accounts receivable, an asset reported on the balance sheet, offsetting the accounts receivable balance. However, there are many metrics for companies to manage their health internally, and some of these metrics are discussed below.
Accounts Receivable-to-Sales Ratio
This is determined by taking a “snapshot” of the ratio or division of the accounts receivables divided by sales over a period of time. The resulting calculation is the percentage of a business’ unpaid sales. The higher the accounts receivable-to-sales ratio, the riskier the company’s financial health. It indicates a business has accounts receivables with a low likelihood of being collected. It’s calculated as follows:
AR to Sales = AR / Sales
Since it measures the mix of how much a business relies on cash versus credit, it can prompt an analyst to determine whether a company is able to operate on minimal cash with low fixed costs and limited outstanding debt. It can also prompt an analyst to determine if a company is subject to cyclical sales and is dependent on the business cycle and whether it’s the right time to invest in a company or hold off until a better entry point is established.
Accounts Receivable Turnover Ratio
This calculation determines how fast a business can convert its accounts receivables into cash. It calculates this over a discrete period, be it a month, quarter, year, etc. It’s calculated as the sales over a period divided by the average accounts receivables balance over the same period. It’s calculated as follows:
ARTR = Net Credit Sales / Average Accounts Receivable
Net Credit Sales = Sales on Credit – Sales Returns – Sales Allowances
Average Accounts Receivable = (Starting + Ending A/R Over a Fixed Time) / 2
The higher the ratio, the less friction businesses have in converting their accounts receivables into cash. One important consideration to keep in mind is that if total sales are used for this calculation, which some business do, the results don’t reflect the original formula because it doesn’t remove the sales on credit or sales allowances.
Days Sales Outstanding (DSO)
This metric reveals how fast (in average number of days) a company is able to turn its receivables into cash. It’s the average accounts receivables divided by net credit sales multiplied by 365. It’s calculated as follows:
DSO = (A/R / net credit sales) x 365 days
The lower the DSO, the better quality and the more efficient a company is in converting its accounts receivables into cash. The higher the DSO, and especially when it goes beyond 90 days, can represent two different financial measures. The first is that the business’ accounts receivables might not be collectable. The second is that the company might be able to make sales but with deteriorating earnings.
While there are many ways to analyze a company’s health, along with many ways to analyze the quality of existing and future accounts receivables, these are a few ways to evaluate a company’s present financial health and prospects for the future.
Sources
https://www.uschamber.com/sbindex/key-findings
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Annuities are one of many products that folks have in their nest egg. But first, what exactly is an annuity?
Simply put, it’s a contract with an insurance company that promises to pay the buyer a steady stream of income in the future. It can be either a fixed or variable income stream. The term “annuity” can also refer to a sum of money payable yearly or at other regular intervals.
There are some things to know before you charge headlong into putting your assets into an annuity. So, here are a few watchouts to consider before you head in that direction.
Ask the Right Questions
First up, what kind of annuity is it? What about the fees and optional riders? Is there a Market Value Adjustment, aka MVA? What is the AM Best rating and Comdex rating? How long is the rate guaranteed? How much can you take out penalty-free? How is the gain calculated for index annuities? Is there a surrender charge assessed if I die? How long is the contract term? How is their service? Lots of questions, yes, but the more you ask, the better.
Learn About New Features and Products
Here’s something interesting to ponder: Did you know that 99 percent of index annuities don’t include dividends? Or that 99 percent of index annuities only lock in the rates for 1 to 2 years? In fact, there are new products that include dividends and lock-in rates for the length of the term. Who knew? Here’s a list of the 10 best annuity companies as of September 2024 you might want to check out.
Vet the History of the Company
This is key. For instance, how long have they held their AM Best rating? How long have they been operating under their current name? And finally, did you know that start-ups buy shell companies formed 75+ years ago to advertise they’ve been around since then? Yep, make sure you do your research.
Watch Out for Fees on Variable Annuities
Here’s the thing: Variable annuities have lots of different layers of fees. Make sure you secure an itemized breakdown of all of the fees before you commit. If your variable annuity earns 7 percent to 9 percent gross and you pay 3 percent to 4 percent in fees, you might be better off in a fixed-rate product.
Check Out Long-Term Care Riders
Believe it or not, some annuities offer 200 percent to 300 percent of your initial deposit in long-term care benefits with an optional rider. In fact, long-term care riders on life insurance policies can be more affordable than standalone long-term care policies. However, should you not utilizeyour long-term care benefits, your heirs will get the full death benefit from your life insurance policy, less what you owe on any of your policy loans.
Take a Look at All Types of Annuities
Typically, most banks sell only five to eight annuity companies. So don’t rely on just your bank. If you do, you’ll miss out on 95 percent of the products that are out there. And this is important to know: Lots of insurance agents and “advisors” focus on selling a few index or variable annuities. Make sure you shop around before buying.
Annuities are just one of many diversified assets you might want to include in your investment portfolio – as you know, diversity is crucial. But when it comes to annuities, there are specific questions and things to think about. Make sure you do your due diligence before you invest.
Sources
11 Annuity Tips You Should Know (annuityresources.org)
Long-Term Care Rider: What It Is, How It Works (investopedia.com)
Alan F Burke CPA
6 Things To Know About Annuities
October 1, 2024 · Blog, Tip of the Month
⏱ 4 min read
Annuities are one of many products that folks have in their nest egg. But first, what exactly is an annuity?
Simply put, it’s a contract with an insurance company that promises to pay the buyer a steady stream of income in the future. It can be either a fixed or variable income stream. The term “annuity” can also refer to a sum of money payable yearly or at other regular intervals.
There are some things to know before you charge headlong into putting your assets into an annuity. So, here are a few watchouts to consider before you head in that direction.
Ask the Right Questions
First up, what kind of annuity is it? What about the fees and optional riders? Is there a Market Value Adjustment, aka MVA? What is the AM Best rating and Comdex rating? How long is the rate guaranteed? How much can you take out penalty-free? How is the gain calculated for index annuities? Is there a surrender charge assessed if I die? How long is the contract term? How is their service? Lots of questions, yes, but the more you ask, the better.
Learn About New Features and Products
Here’s something interesting to ponder: Did you know that 99 percent of index annuities don’t include dividends? Or that 99 percent of index annuities only lock in the rates for 1 to 2 years? In fact, there are new products that include dividends and lock-in rates for the length of the term. Who knew? Here’s a list of the 10 best annuity companies as of September 2024 you might want to check out.
Vet the History of the Company
This is key. For instance, how long have they held their AM Best rating? How long have they been operating under their current name? And finally, did you know that start-ups buy shell companies formed 75+ years ago to advertise they’ve been around since then? Yep, make sure you do your research.
Watch Out for Fees on Variable Annuities
Here’s the thing: Variable annuities have lots of different layers of fees. Make sure you secure an itemized breakdown of all of the fees before you commit. If your variable annuity earns 7 percent to 9 percent gross and you pay 3 percent to 4 percent in fees, you might be better off in a fixed-rate product.
Check Out Long-Term Care Riders
Believe it or not, some annuities offer 200 percent to 300 percent of your initial deposit in long-term care benefits with an optional rider. In fact, long-term care riders on life insurance policies can be more affordable than standalone long-term care policies. However, should you not utilizeyour long-term care benefits, your heirs will get the full death benefit from your life insurance policy, less what you owe on any of your policy loans.
Take a Look at All Types of Annuities
Typically, most banks sell only five to eight annuity companies. So don’t rely on just your bank. If you do, you’ll miss out on 95 percent of the products that are out there. And this is important to know: Lots of insurance agents and “advisors” focus on selling a few index or variable annuities. Make sure you shop around before buying.
Annuities are just one of many diversified assets you might want to include in your investment portfolio – as you know, diversity is crucial. But when it comes to annuities, there are specific questions and things to think about. Make sure you do your due diligence before you invest.
Sources
11 Annuity Tips You Should Know (annuityresources.org)
Long-Term Care Rider: What It Is, How It Works (investopedia.com)
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
On Jan. 1, 2024, the U.S. government debuted the Corporate Transparency Act (CTA). This legislation established the requirement for the majority of private companies, both big and small, to file information with the Financial Crimes Enforcement Network (FinCEN).
As with most new laws, the initial guidance and interpretations have been both challenged and questioned. In response, FinCEN recently turned out new FAQs, which we review below.
Big Question First: To Report or Not
Reporting is generally required by all private, for-profit entities. This includes corporations, LLCs, S-Corps, etc., whenever the company was created by filing a document with the office of the Secretary of State. Entities formed under the laws of jurisdictions outside the United States are also likely subject to reporting if they are registered to do business in the United States.
To help visualize the above, you can take a look at this flowchart published on the FinCEN website.
Screenshot from FinCEN website
While the general rules seem (and are) broad in construction, there are 23 specific exemptions, including publicly traded companies, nonprofits, and certain large operating companies. The FinCEN’s Small Entity Compliance Guide checklist can help in determining if you fall under an exemption.
Now, let’s move on to more specific questions.
Who is a beneficial owner?
An individual who either directly or indirectly exercises substantial controls or owns 25 percent or more of the reporting company.
What constitutes substantial control?
There are four (separate) ways to exercise substantial control:
The individual is a senior officer
Has the authority to appoint or remove officers or a majority of directors
An important decision-maker (regarding strategic, business, or finance)
They have any other form of substantial control as per the FinCEN’s Small Entity Compliance Guide.
Who is a company applicant for a reporting company?
Another of the more perplexing questions revolves around exactly who a company applicant of a reporting company is.
First, only reporting companies created or registered on or after Jan. 1, 2024, need to concern themselves with the company applicant rules; companies formed before are exempt.
There are two possible individuals who could be considered company applicants. One is the person who directly files the documents to create and register the company. This person will always exist and be an applicant of the reporting company. In the case where there were multiple people involved in the filing or registration, the individual who primarily controlled the filing is also considered an applicant.
Thankfully, FinCEN created another handy flowchart to help navigate through this rather confusing decision.
Screenshot from FinCEN website
What about sole proprietorships?
It depends. Sole proprietorships only have to report if the entity was created by filing a document with a secretary of state or similar office. In other words, if you just start freelancing and don’t file anything with a secretary of state office, you are not subject to the reporting requirements. Basically, if you didn’t form an LLC, you don’t need to report. For example, obtaining an employer identification number, a fictitious business name, or a professional or occupational license does not subject you to the FinCEN reporting requirements.
What if my company ceased to exist before the CTA requirements went into effect?
If a company ceased to exist on or before Jan. 1, 2024, then they are NOT subject to the reporting requirements.
Do I have to report more than once?
No, you only have to file an initial report once. There is NOT an annual report. You do, however, need to amend your original filing to update pertinent changes or corrections within 30 days of their occurrence.
What happens if I don’t file a report?
Willful violation can subject one to a fine of up to $500 per day until the violation is resolved. Criminal penalties could also be imposed, resulting in up to two years imprisonment and a fine of up to $10,000.
Conclusion
The FinCEN released its guidance to clarify uncertainties around the new CTA-created reporting requirements. The goal is to ensure full and accurate compliance without undue burden on companies and individuals.
Alan F Burke CPA
Important Update on New Company Reporting Laws CTA – BOI
September 1, 2024 · Blog, Tax and Financial News
⏱ 4 min read
On Jan. 1, 2024, the U.S. government debuted the Corporate Transparency Act (CTA). This legislation established the requirement for the majority of private companies, both big and small, to file information with the Financial Crimes Enforcement Network (FinCEN).
As with most new laws, the initial guidance and interpretations have been both challenged and questioned. In response, FinCEN recently turned out new FAQs, which we review below.
Big Question First: To Report or Not
Reporting is generally required by all private, for-profit entities. This includes corporations, LLCs, S-Corps, etc., whenever the company was created by filing a document with the office of the Secretary of State. Entities formed under the laws of jurisdictions outside the United States are also likely subject to reporting if they are registered to do business in the United States.
To help visualize the above, you can take a look at this flowchart published on the FinCEN website.
Screenshot from FinCEN website
While the general rules seem (and are) broad in construction, there are 23 specific exemptions, including publicly traded companies, nonprofits, and certain large operating companies. The FinCEN’s Small Entity Compliance Guide checklist can help in determining if you fall under an exemption.
Now, let’s move on to more specific questions.
Who is a beneficial owner?
An individual who either directly or indirectly exercises substantial controls or owns 25 percent or more of the reporting company.
What constitutes substantial control?
There are four (separate) ways to exercise substantial control:
The individual is a senior officer
Has the authority to appoint or remove officers or a majority of directors
An important decision-maker (regarding strategic, business, or finance)
They have any other form of substantial control as per the FinCEN’s Small Entity Compliance Guide.
Who is a company applicant for a reporting company?
Another of the more perplexing questions revolves around exactly who a company applicant of a reporting company is.
First, only reporting companies created or registered on or after Jan. 1, 2024, need to concern themselves with the company applicant rules; companies formed before are exempt.
There are two possible individuals who could be considered company applicants. One is the person who directly files the documents to create and register the company. This person will always exist and be an applicant of the reporting company. In the case where there were multiple people involved in the filing or registration, the individual who primarily controlled the filing is also considered an applicant.
Thankfully, FinCEN created another handy flowchart to help navigate through this rather confusing decision.
Screenshot from FinCEN website
What about sole proprietorships?
It depends. Sole proprietorships only have to report if the entity was created by filing a document with a secretary of state or similar office. In other words, if you just start freelancing and don’t file anything with a secretary of state office, you are not subject to the reporting requirements. Basically, if you didn’t form an LLC, you don’t need to report. For example, obtaining an employer identification number, a fictitious business name, or a professional or occupational license does not subject you to the FinCEN reporting requirements.
What if my company ceased to exist before the CTA requirements went into effect?
If a company ceased to exist on or before Jan. 1, 2024, then they are NOT subject to the reporting requirements.
Do I have to report more than once?
No, you only have to file an initial report once. There is NOT an annual report. You do, however, need to amend your original filing to update pertinent changes or corrections within 30 days of their occurrence.
What happens if I don’t file a report?
Willful violation can subject one to a fine of up to $500 per day until the violation is resolved. Criminal penalties could also be imposed, resulting in up to two years imprisonment and a fine of up to $10,000.
Conclusion
The FinCEN released its guidance to clarify uncertainties around the new CTA-created reporting requirements. The goal is to ensure full and accurate compliance without undue burden on companies and individuals.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Analyzing a company’s Accounts Receivables is an effective way to measure its current cash flows and the likelihood of maintaining healthy cash flows. According to the U.S. Chamber of Commerce’s Small Business Index (Third Quarter 2024), 68 percent of small business owners reported being content with their third quarter cash flow performance. This illustrates the importance for small business owners to do everything possible to maintain healthy cash flows, including evaluating the quality of accounts receivables (A/R).
Annuities are one of many products that folks have in their nest egg. But first, what exactly is an annuity?
On Jan. 1, 2024, the U.S. government debuted the Corporate Transparency Act (CTA). This legislation established the requirement for the majority of private companies, both big and small, to file information with the Financial Crimes Enforcement Network (FinCEN).
