• What is Accounts Receivable Factoring?
• How Does Factoring Receivables Work?
• Accounts Receivable Factoring Examples
• Common Factoring Terminology
• The Benefits of Accounts Receivable Accounting
• Special Considerations for Accounts Receivable Factoring
• The History of Accounts Receivable Factoring

What is Accounts Receivable Factoring?

Put simply, accounts receivable factoring entails selling your outstanding receivables to a third party— known as a factoring company or factor— typically for a set percentage of the outstanding amount. This percentage varies (more on that later on) but it can be as high as 97% of the original value of the receivables. After purchasing your receivables, the factoring company is entitled to the outstanding amount once it’s paid.

Accounts receivable factoring is popular among business owners because it serves as a debt-free alternative to loans as a means to obtaining owed income in advance. There is no interest, no fees, and little hassle — factoring is finalized at the point of sale.

How Does Factoring Receivables Work?

Factoring companies charge a “factoring fee.” — a percentage of the total value of the sold receivables. As mentioned previously, this percentage can fluctuate based on five various factors: industry, amount, quality, time, and type.

1.   Industry

The accounts receivable factoring rate often varies from industry to industry. For example, a factoring company will offer a different rate to a construction company compared to the rate provided to a retail company.

2.   Amount

Some factoring companies offer better rates for high-value or high-volume receivables.

3.   Quality

Quality includes the punctuality and creditworthiness of a business’s customers. Factoring companies will offer ideal rates for receivables with high-quality payers — no factoring company wants to find themselves stuck with non-payers.

4.   Time

When looking at potential receivables, factoring companies will consider the average days outstanding to determine how quickly the items will be paid.

5.   Type

Finally, factoring companies will offer different rates whether using recourse factoring or non-recourse factoring.

Recourse Factoring vs. Non-Recourse Factoring

There are two types of accounts receivable factoring: with and without recourse. The type depends on which party accepts the risk: the selling company or the factoring company. With recourse factoring, the factoring company can demand a refund from the selling company in the event that it cannot collect from customers. However, with non-recourse factoring, the factoring company takes on all the risk of uncollectible receivables; the selling company has no liability for uncollectible receivables.

Typically, factoring companies will charge a lower rate for recourse factoring than for non-recourse factoring. When using non-recourse factoring, the factoring company charges a higher rate to better compensate for the risk. However, with recourse factoring, the selling company is liable for the receivables if they aren’t paid. This can be problematic if your business has a shortage of consistent, quick-paying customers.

Accounts Receivable Factoring Examples

Non-Recourse Factoring

To show non-recourse factoring in action, let’s take a look at a hypothetical small business: a B2B supplier called The Money Store, LLC. Stefan, the owner of The Money Store, needs to cover a pressing liability worth $200,000 but doesn’t have the cash on hand to do so. However, The Money Store’s current accounts receivable are worth $500,000 — more than enough to cover this liability. Stefan subsequently decides to factor his accounts receivable on a non-recourse basis. Because non-recourse factoring shifts the risk to the factoring company, Stefan must pay a premium rate — he only receives $400,000 from $500,000 worth of receivables. Nevertheless, Stefan can now settle his liability with cash to spare.

Let’s say Stefan has a perennial problem client, Zach. Half the time, Zach takes months to fulfill his invoices; half the time, he doesn’t pay them at all. However, because Stefan factored his receivables on a non-recourse basis, Zach is no longer his problem; the factoring company must assume all the risk. This risk has been somewhat mitigated by the premium rate Stefan had to pay, but the factoring company is still on the hook for Zach.

Recourse Factoring

If Stefan factors his receivables on a recourse basis, he gets a better initial rate — let’s say $450,000, with a $50,000 hold back — for the same $500,000 worth of receivables. After buying the receivables, the factoring company collects $490,000; Zach accounts for the $10,000 not collectible. In this case, Zach’s outstanding amount is Stefan’s responsibility as this amount is deducted from the holdback before the factoring company remits it to Stefan.

It is essential to exercise caution when factoring on a recourse basis; although one inconsistent customer won’t pose a huge problem, a high volume of nonpayers can quickly turn your accounts into a bottomless pit.

Common Factoring Terminology

Advance Rate

The advance rate is the percentage of an invoice the factoring company pays upfront. Once the invoice is fulfilled, the factoring company remits the remaining value back to the selling business. Typically, this comes in the form of a factoring rebate. The reason for the advance rate is to protect the factoring company from risk. If a high enough percentage of the receivables aren’t fulfilled, the factoring company will not issue a factoring rebate and instead use the money to cover any losses.

Factoring Fees

The factoring fee refers to the fee a factoring company charges when providing a factoring service. Typically, this is applied as a percentage of the value of the receivables. For example, a factoring company may charge 5% for an invoice due in 45 days. However, factoring companies may charge on a weekly or monthly basis instead.

Reserve account

Not all factoring companies hold reserve accounts, but many do. Much like with advance rates, where a portion of the receivables’ value is held to mitigate risk, many factoring companies maintain a reserve account to reduce risk further. Reserve accounts typically contain 10–15% of the selling company’s credit line.

Spot factoring

Spot factoring is becoming more and more prevalent. Traditionally, factoring companies would tie selling companies down in long-term contracts. However, spot factoring allows a company to factor a single invoice. This has made accounts receivable factoring easy to access for small businesses. However, the lack of predictable volume means that spot factoring will typically incur a cost premium to make up for the lack of long-term contracts and minimums.

The Benefits of Accounts Receivable Accounting

A growing number of small businesses utilize accounts receivable factoring to stabilize and accelerate cash flow. Factoring your business’s accounts receivable can provide steady, predictable capital, facilitate expansion, and optimize the payables cycle, enabling discount pricing for early vendor payments.

There are five primary advantages to utilizing accounts receivable factoring:

1. It accelerates your cash flow. Accounts receivable factoring provides almost immediate access to money for delivered goods and services instead of having to wait for 30, 60, or 90 days from the time of an invoice. This is especially ideal for innovative, growing businesses that need quick cash turnover.
2. It’s ideal for small and growing businesses. Accounts receivable factoring provides instant cash flow for immediate use. This cash can be used to expand business operations, staff sizes, marketing, or inventory volume.
3. It doesn’t require additional collateral. Unlike with traditional loans, accounts receivable factoring typically does not require you to set aside additional assets as collateral. This makes factoring especially attractive for smaller businesses with fewer available assets to be used as potential collateral.
4. It increases the availability of capital. Typically, accounts receivable factoring will advance up to 85% of the value of your receivables. As your business’s receivables grow, so does your total availability of capital.
5. It can save you time and money. Accounts receivable factoring can save you much time and effort that would be spent chasing collections. This can help lower operating expenses and free up man-hours for other tasks. After all, small businesses can use all the manpower they can get.

Related Reading: What is Double Entry Accounting

Special Considerations for Accounts Receivable Factoring

When a factoring company takes on receivables, it notifies the selling business’s customers. This is because your customers are no longer paying you — they are paying the factoring company. If your customers receive notice that you sold your accounts receivable without hearing it from you first, they may see this as a sign of financial weakness. While accounts receivable factoring is not a sign of financial weakness, it may be misperceived as one.

Once you hire a factoring company, your business will be able to utilize the factoring company’s internal credit department to qualify your customers. For example, the factoring company may affect your ability to do business with customers with questionable credit histories or ratings. Typically, the factoring company would render these receivables ineligible, so they cannot be advanced against. However, it is ultimately up to you as a business owner to make an informed decision to continue working with that customer.

In addition, while accelerating your receivables has significant inherent benefits, there is a cost. Typically, this cost includes the factoring fee — between 0.5% and 3% — plus interest on the advance. As you factor your receivables, be sure to constantly measure your return on investment based on several factors: expansion, better buying power, enhanced product offering, stabilize working capital, and more. Assess these against the factoring expense.

Related Reading: How to Reconcile a Bank Statement

The History of Accounts Receivable Factoring

Factoring’s origins lie in early international trade. Various sources date the origin of accounts receivable factoring back to the Code of Hammurabi.

Like all financial concepts, factoring has evolved over the centuries. Factoring owes its evolution chiefly to changes in the prevailing business organization, technology, and modifications to the common law framework in the Western World.

In the twentieth-century United States, factoring became the pre-eminent method of accruing capital for growth, especially within the textiles sector. This occurred in part due to the United States banking system’s structure, filled with a plethora of small banks with limitations on advance amounts.

At the start of the 21st century, policymakers recognized the rationale for maintaining factoring as a financial instrument; factoring is ideal for the growing demands of innovative, rapidly growing businesses.

Related Reading: Accounting Terms

Outsourcing Your Accounting

It’s easy to think of accounting and bookkeeping as necessary evils to keep the IRS off your back. But a highly competent financial team can provide essential business insights, find crucial tax savings, and allow business owners to spend less time stressing the financials and more time serving customers. Sign up to get a custom quote today for FinancePal’s professional financial services.

The post Accounts Receivable Factoring appeared first on financepal.

• What is Burn Rate?
• How to Calculate Burn Rate
• Calculating Average Burn Rate
• Burn Rate and Cash Runaway
• Burn Rate and Cash Runway Example
• How to Reduce Burn Rate

What is Burn Rate?

In simplest terms, burn rate is the rate at which a company loses — or “burns through” — its capital over the course of conducting business operations. The concept of managing your burn rate has become incredibly prevalent in today’s startup sphere as more and more new businesses take longer and longer to turn a profit.

Burn rate is chiefly used to calculate a business’s “cash runway” — the amount of time a business can operate at a loss before the coffers run dry.

​​The term became ingrained in the business lexicon during the rise of startup culture, where many businesses undertake multiple investment rounds before achieving profitability. In between investment rounds, burn rate becomes a crucial metric as it dictates when additional funding stages need to take place in order to avoid insolvency.

Burn rate gained some infamy as a metric due to its role in the dot-com bust; a prevailing financial theory at the time stated that a high burn rate directly correlated with the rate at which the business acquired new clients. Needless to say, this theory was dead wrong, and many startup finance experts have since changed their tune on how to handle burn rate.

How to Calculate Burn Rate

Vital as it is, calculating startup burn rate is a relatively straightforward process. There are two types of burn rate: gross burn rate and net burn rate.

Gross burn rate refers to the amount of cash spent in a single month. To calculate net burn rate, you need to find your net spend by subtracting your revenue from your expenses. While gross burn rate has specific applications in accounting for startups, net burn rate is more helpful in providing a more unambiguous indication of cash runway. Unless you are an accountant, the term “burn rate” simply refers to net burn rate for all practical purposes.

There are two primary methods to calculate your burn rate; one entails using venture capital funding or other investments, and the other does not.

Calculating Burn Rate with Venture Capital or Investment Funding

Calculating your burn rate with venture capital or other investment funding is as simple as looking at the cash flow statement; it will contain all the information you need.

To calculate burn rate for a given month, subtract the cash balance for the month from the cash balance in the previous month like so:

Burn Rate = Previous Month’s Cash Balance – Current Month’s Cash Balance

Calculating Burn Rate without Venture Capital or Investment Funding

Much like when including venture capital or other investment funding, you will gather direct vs. indirect cash flow information from your cash flow statement. The primary difference is that you will exclude all capital from outside investments. Your formula will look more like this:

Burn Rate = (Previous Month’s Cash Balance – Outside Investments) – (Current Month’s Cash Balance – Outside Investments)

Negative or Zero Burn Rate

Typically, the burn rate calculations yield a positive number. But there are a few circumstances that may result in your burn rate coming back negative. If this happens, it simply indicates that your business earned more money than it spent in the past month. If you just underwent a successful round of funding, for example, your burn rate could be negative if calculated with venture capital or investment funding.

If you specifically excluded investor funding in your calculations, it means that your business’s revenues exceeded its expenses. In the event that your burn rate is zero, it simply means that your business earns the same amount of money as it spends.

Once your startup or business earns more than it spends, burn rate is rendered meaningless as a metric; it is only used for companies that are not yet profitable.

Calculating Average Burn Rate

Burn rate isn’t restricted to a monthly basis. In fact, it is easy to calculate your average burn rate over any specific period. To do so, execute a simple mean function: repeat the process above for as many months as desired. Add the monthly burn rates together and divide the sum by the number of months included. For example, you would add six consecutive monthly burn rates together before dividing by six to get your six-month average burn rate.

Burn Rate and Cash Runway

One of the primary uses of burn rate is to calculate runway — the amount of time a business can operate at a loss before you run out of cash. Because burn rate reflects the monthly rate which your business burns through capital, you extrapolate burn trends to figure how many months you have before you “burn” through your cash.

How to Calculate Cash Runway

To calculate cash runway, divide the amount of money you have now by your average burn rate, like so:

Runway = Total Capital ⁄ Average Burn Rate

The resulting figure is how many months you have left before your coffers run dry — assuming constant expenses and revenue and no additional outside investment, of course.

Burn Rate and Cash Runway Example

For the sake of example, let’s say your current cash holdings total $250,000. Last month’s cash holdings totaled $300,000. To calculate your burn rate for the most recent month, subtract 250,000 from 300,000.

Burn Rate = $300,000 – $250,000 = $50,000

Then, to calculate your cash runway, divide your current cash holdings ($250,000) by your monthly burn rate ($50,000).

$250,000 / $50,000 = 5 months

In this example, your business can only operate for five more months before running out of cash. That gives you five months to secure additional investment or mitigate your current burn rate if you need more time.

Related Reading: Accounting Cycle

How to Reduce Burn Rate

If your burn rate turns out higher than expected or otherwise makes you feel uneasy, it may be worthwhile to  employ one of the following strategies to help lower your burn rate. This can be accomplished either by lowering expenses, increasing revenue, or securing additional investments.

1. Go for an MVP — A Minimum Viable Product

A minimum viable product is a sort of early access release — a prototype made available to select customers before the final product is ready for the marketplace. This allows you to obtain initial feedback that will enable you to cut costs on product features that your customers may not want.

1. Focus on return-bearing investments

Every startup owner dreams of rapid scaling. However, truth be told, premature scaling has killed many otherwise promising startups. Instead of spending your dwindling capital on additional workforce or office space, try pledging it towards return-bearing spend only, such as supplemental raw materials for increased manufacturing output.

1. Slash Overhead

Sometimes you have to lose before you can win. If absolutely necessary, consider downsizing your workforce or scaling down production if the lower overhead means you can survive until your next investment round.

Conclusion

Burn rate is a crucial metric that every startup needs to track diligently. Not only does it forebode the potential lifespan of your business, but a favorable burn rate can attract additional investors; cash consumption signals investors whether the company has the potential to be self-sustaining or if it will perpetually need additional financing.

It is easy to think of accounting and bookkeeping as necessary evils to keep the IRS off your back. But a highly competent financial team can provide essential business insights, find crucial tax savings, and allow business owners to spend less time stressing the financials and more time serving customers. Sign up to get a custom quote today for FinancePal’s professional financial services.

The post How to Calculate Burn Rate appeared first on financepal.

When applying for a business loan, it is crucial to account for the 5 C’s of credit — character, capacity, capital, collateral, and conditions — to maximize your chances of favorable terms and loan approval. Commonly used as metrics by any lender, the 5 C’s paint an objective, holistic picture of your — and your business’s — creditworthiness. This article examines the five C’s of credit: what they are, how they are measured, their significance — and how you can master your C’s.

What are the 5 C’s of Credit?

The 5 C’s of Credit refer to character, capacity, capital, collateral, and conditions. Lenders utilize these five metrics to determine creditworthiness, adjust terms, and extend loan approval.

1. Character

Commonly referred to as Character, the first C of Credit is assessed based on credit history. The borrower’s credit history is considered using their credit reports generated by the three major credit bureaus — TransUnion, Experian, and Equifax. The purpose of scrutinizing these credit reports is to determine “creditworthiness” — basically, the quality of the borrower. To assess creditworthiness, lenders consider whether the borrower has taken out loans in the past — and if they have repaid them on time. Lenders will also look into information regarding collection accounts and bankruptcies.

The purpose of determining a borrower’s character, or credit history, is to provide lenders with information that can be used to gauge a borrower’s credit risk. Many lenders require potential borrowers to have a minimum credit score before approving them for a loan. These credit score requirements may differ between lenders and loan packages. As logic indicates, having a higher credit score increases the likelihood of loan approval. A borrower’s credit score doesn’t just determine the likelihood of approval; a better credit score can lead to more favorable loan rates and terms.

2. Capacity

Capacity measures the borrower’s projected ability to repay a loan by considering their income against recurring debts. When determining a borrower’s capacity, the primary metric to consider is the borrower’s debt-to-income (DTI) ratio. To calculate DTI, lenders divide the sum of the prospective borrower’s total monthly debt payments by their gross monthly income. A lower DTI improves the borrower’s chance of qualification. For most lenders, the DTI “sweet spot” would be — at most — 35%.

If your DTI is high enough, you may actually be prohibited from receiving certain loans. For example, with a DTI of 44% or higher, a borrower will generally not qualify for a new mortgage.

3. Capital

When considering a borrower, lenders take stock of any capital that the borrower earmarks for a potential investment; in principle, more capital decreases the chance of default. For example, a borrower with the capital to pay down a home will find it much easier to be approved for a mortgage. This correlation even extends to specialized accessible mortgages, such as Federal Housing Administration (FHA) or Veterans Affairs (VA) loans, which often require potential borrowers to use their capital to cover at least 3.5% of a home’s buying price.

Capital is also crucial for any borrower seeking to obtain optimal loan rates or terms. Let’s take another example using mortgages: with a down payment of at least 20%, many borrowers can avoid the lender requiring the purchase of additional mortgage insurance.

4. Collateral

Put simply, collateral is a tool to give the borrower further incentive to avoid defaulting on loans. In addition, Collateral acts as insurance for the lender; if the borrower defaults on the outstanding amount, the lender can repossess the collateral. Collateral is often used for auto loans and mortgages since the collateral object is typically the subject of the loan: in this case, cars or houses, respectively. Because of this, collateral-backed loans are often categorized as “secured.” Secured loans are widely considered to be less risky for lenders to issue due to the recourse they offer — and as a result, collateral-secured loans typically qualify for lower interest rates and better terms compared to unsecured financing.

5. Conditions

When considering giving a loan, lenders take into account the conditions of the loan — interest rate, principal amount, and more. How conditions’ favorability influences the lender’s propensity to approve the prospective borrower. For the sake of example, consider a potential borrower who applies for an auto loan. Because this loan has an express inherent purpose, a lender may be predisposed to approve the loans. On the other side of the spectrum sit what are known as signature loans. As opposed to auto and home loans, signature loans do not have an express inherent purpose. Because of this, lenders are warier to approve borrowers who apply for signature loans.

The interest rate, principal amount, and purpose of a loan are conditions that the borrower influences. However, lenders may also consider conditions that are outside of the borrower’s control. These conditions include, but are not limited to, the current performance of the economy and pending legislation.

Related Reading: Small Business Tax Preparation

Why are the 5 C’s important?

The five C’s of credit are crucial when applying for a business loan. Together, they paint a clear, objective picture of your creditworthiness to potential lenders, including underwriters, banks, or credit unions. The health of your five C’s can have a drastic impact on your loan application process, influencing rates, terms — and even approval. 

Related Reading: Double Taxation

How to Master the 5 C’s of Credit

Character

To master your business’s character, build a relationship with your bank or primary lender. By building a relationship that conveys your business in a positive light, your lender may be more inclined to offer favorable terms and approval.

Capacity

Have your accountants stay on top of your cash flow. Also, try paying down your debt before you apply for more loans.

Capital

Maintain an updated Statement of Owner’s Equity, which documents your investments into the company. Small businesses owners who tie more personal money into their business tend to be viewed more favorably by lenders. In addition, know how to value of your small business.

Collateral

Choosing the optimal business structure is crucial to prevent your personal assets from being seized as collateral. Talk with an attorney about forming a legal entity if you haven’t already.

Conditions

Stay on top of the ebbs and flows within the economy. If you become skilled at predicting the shifts, you can stay ahead of the curve and optimize the timing of your loans.

Our knowledgeable financial experts can help your business ensure you remain in good standing and preserve your fiscal health. Sign up to get a custom quote today for FinancePal’s professional financial services.

The post The 5 C’s of Credit appeared first on financepal.

It’s a saying almost as old as recorded history: never borrow more than you can payback. Since the days of ancient Mesopotamia, businesses have been borrowing money to bolster operations with the intent of resolving the debt with the ensuing cash flow. In modern times, companies can determine how their cash flow compares to their debt using a metric called debt service coverage ratio, or DSCR. This article examines the debt service coverage ratio, what it means, how to calculate it, and why it’s essential.

What is the Debt Service Coverage Ratio?

In personal, government, and corporate finance, the debt service coverage ratio is a metric that can be used to determine whether a debtor has enough capital to pay off a creditor. In the business world, the debt service coverage ratio measures how much of a company’s available cash flow can be used to cover its current debt obligations. The debt service coverage ratio is an essential tool for investors, who can use this metric to determine whether a business can settle its debts using cash flow.

What Does the Debt Service Coverage Ratio Mean?

Whether in the context of personal finance, government operations, or corporate finance, the debt service coverage ratio reflects the ability to pay off debt obligations using a specific amount of income.

Before approving a loan, lenders will typically assess a borrower’s debt service coverage ratio. The minimum debt service coverage ratio a lender will demand will vary based on the prevailing economic conditions. In a growing economy where credit is more readily available, lenders may, in turn, be more lenient with their minimums. It is important to note that a glut of less-qualified borrowers can affect macroeconomic stability. This happened in the run-up to the 2008 financial crisis.

If a debt service coverage ratio is less than 1, it indicates negative cash flow — and that the borrower will be unable to cover or pay current debts without falling back on outside help or taking on more debt. 

Let’s take an example: a small business has a debt service coverage ratio of 0.98, which means that, at current net operating income, the borrower will only be able to cover 98% of their debt obligation annually. In this scenario, this would mean that the business owner would need to invest personal funds every month to keep their business above water — or worse, take on more debt. Most lenders take a rather negative view on a negative cash flow; however, if the business has enough resources or backing, they may relent and provide additional support.

Suppose the debt service coverage ratio is too close to 1. In that case, it means that the business is in a precarious position — any decline in cash flow for any reason could cause the company to lose the ability to service its obligations. In some cases, lenders can require a borrower to maintain a minimum debt service coverage ratio for the duration of the loan. In fact, some loan agreements contain a provision that considers falling below the agreed-upon debt service coverage ratio a default.

If a company maintains a debt service coverage ratio greater than 1, it means that the business has enough cash flow to pay its current debt obligations. This is an ideal scenario for lenders and businesses alike.

Why is the Debt Service Coverage Ratio Important?

The debt service coverage ratio is a ubiquitous metric, often referenced by companies and banks when negotiating loan contracts. For example, a company seeking to obtain a line of credit might be obligated to keep its debt service coverage ratio above 1.2. If the DSCR falls below this mark, the lender may consider the loan to be in default. In addition to serving as a crucial risk-management metric for banks, debt service coverage ratios can also provide insights to analysts and investors regarding a business’s financial health.

What is considered a good debt service coverage ratio varies based on a company’s sector, competitors, and development stage. For instance, a smaller company in its nascence might face lower expectations in regards to debt service coverage ratio expectations compared to a mature, well-established business. However, a good rule of thumb is that a debt service coverage ratio above 1.25 is considered strong — and ratios that fall below 1.00 indicate that a business could be in trouble.

Related Reading: How to Prepare a Profit and Loss Statement

Debt Service Coverage Ratio Formula

There are two ways to calculate your debt service coverage ratio where:

•     Capex = Capital Expenditure
•     Interest = the interest accrued on debts
•     Principal = the initial loan amount
•   EBITDA = Earnings Before Interest, Tax, Depreciation, and Amortization. Often referred to as net operating, EBITDA is calculated by subtracting overhead and operating expenses — rent, cost of goods, freight, utilities, and wages — from revenue. The resulting figure portrays the amount of cash available to keep the business running after subtracting necessary expenses.

Method One (without Capex)

To find your DSCR using the first method, add your interest amount and your principal amount. Then, divide your EBITDA by the resulting sum. This formula will look like this:

Debt Service Coverage Ratio = EBITDA / (Principal + Interest)

Method Two (with Capex)

To find your DSCR using the second method, add your EBITDA and your Capex. Then, divide the sum by your interest amount plus your principal amount. This formula should look like this:

Debt Service Coverage Ratio = (EBITDA + Capex) / (Principal + Interest)

Because capital expenditure (Capex) is not expensed on the income statement (rather, it is considered as an (investment), some businesses may feel more inclined to use the first formula.

Debt Service Coverage Ratio Example

Let’s say a local food truck restaurant wants to purchase a brick-and-mortar location. The food truck owner seeks to obtain a mortgage loan from a local bank. The lender needs to determine the food truck’s debt service coverage ratio. The reason for this is to determine whether the food truck owner will be able to pay off their loan as the physical location generates income.

The food truck owner predicts net operating income to be around $800,000 per year, and the lender notes that debt service will be $300,000 per year. In this case, the debt service coverage ratio formula will look like this:

Debt Service coverage ratio = $850,000 / $300,000 = 2.83

This means the food truck owner can comfortably pay off the debt obligation.

Related Reading: Balance Sheet for Small Businesses

Interest Coverage Ratio vs. Debt Service Coverage Ratio

​​As opposed to the debt service coverage ratio, the interest coverage ratio (ICR) measures whether a company’s cash flow will cover the interest it must pay on all debt obligations during a specific period. Much like with a DSCR, the ICR is expressed as a ratio.

To calculate the interest coverage ratio, divide the EBITDA by the total interest payments due for that same period, like so:

Interest Coverage Ratio = EBITDA / Interest

The higher the ratio of EBITDA to interest payments, the more financially stable the company. This metric only considers interest payments — not payments made on principal debt balances — which lenders may require. 

The debt service coverage ratio is a more comprehensive metric. The DSCR measures a company’s ability to meet its minimum principal and its interest payments — including sinking fund payments — for a given period. Because the debt service coverage ratio takes principal payments and interest into account, the debt service coverage ratio provides a more holistic, comprehensive overview of a business’s financial health.

Related Reading: Taxable Income Formula

It is easy to think of small business accounting and bookkeeping as necessary evils to keep the IRS off your back. But a highly competent financial team can provide essential business insights, find crucial tax savings, and allow business owners to spend less time stressing the financials and more time serving customers. Sign up to get a custom quote today for FinancePal’s professional financial services.

The post Debt Service Coverage Ratio appeared first on financepal.

Protecting Your Business After Covid-19

As the pandemic begins to fizzle out and return-to-work guidelines are put into place, you must consider how you can protect your business assets from post-pandemic liability. As is best practice, follow OSHA’s requirements for small business owners to the letter and implement ways of tracking COVID-19 outbreaks among your employees.

Watch the Workspace + JUSTLAW webinar to learn more:

Post-Pandemic Estate Planning

For business owners, planning your estate is a critical asset protection maneuver. Estate planning entails much more than wills and trusts; effective estate plans provide essential provisions that allow trusted associates to manage your business in the event of incapacitation or death. Put simply, a proper estate plan is the key to protecting a business across generations.

In a post-pandemic world, your estate plan should include:

• Will and Trust: The will and trust form the most crucial part of a proper estate plan. A will can ensure that your assets are distributed according to your wishes upon your death, and a trust can protect your assets from the brunt of estate taxes or legal battles.
• Durable Power of Attorney: Drafting a Power of Attorney (POA) ensures that you can choose who will take charge in executing your will should you become incapable of doing so. If your estate plan doesn’t include a POA, the court will choose somebody on your behalf—and they may not share your vision for your estate.
• Healthcare Power of Attorney: Commonly abbreviated as HCPA, this typically puts a spouse or family member in charge of all healthcare-related decisions on your behalf. Usually, an HCPA is invoked if you ever become incapacitated.
• Beneficiary Designations: Designating a beneficiary will allow someone to be put in charge of your assets and possessions that are not dictated in your will. Named beneficiaries must be older than 21 years of age—and must be deemed mentally competent.
• Guardianship Designations: If you have young children or are planning on having children in the future, designating a guardian is essential when planning your estate. In the event of your death or incapacitation, your designated guardian will raise your children in your stead. It is essential to appoint a guardian who you feel comfortable with raising your children. If no guardian is named, the courts will decide who obtains guardianship.

The post Estate Planning for Business Owners appeared first on financepal.

Proteger su negocio después de Covid-19

A medida que la pandemia comienza a desvanecerse y se ponen en práctica las directrices de regreso al trabajo, debe considerar cómo puede proteger los activos de su empresa de la responsabilidad post pandémica. Como es la mejor práctica, siga al pie de la letra los requisitos de la OSHA para los propietarios de pequeñas empresas e implemente formas de rastrear los brotes de COVID-19 entre sus empleados.

Vea el seminario web de Workspace + JUSTLAW para saber más:

Planificación de la herencia post pandemia

Para los propietarios de empresas, la planificación de su patrimonio es una maniobra crítica de protección de activos. La planificación de la sucesión implica mucho más que testamentos y fideicomisos; los planes de sucesión eficaces proporcionan disposiciones esenciales que permiten a los socios de confianza gestionar su negocio en caso de incapacidad o muerte. En pocas palabras, un plan de sucesión adecuado es la clave para proteger un negocio a través de generaciones.

En un mundo post pandémico, su plan de sucesión debe incluir:

• Testamento y fideicomiso: El testamento y el fideicomiso constituyen la parte más crucial de un plan patrimonial adecuado. Un testamento puede garantizar que sus bienes se distribuyan de acuerdo con sus deseos tras su fallecimiento, y un fideicomiso puede proteger sus bienes del peso de los impuestos sobre el patrimonio o de las batallas legales.
• Poder notarial duradero: La redacción de un poder notarial (POA) garantiza que usted pueda elegir quién se encargará de ejecutar su testamento en caso de que usted quede incapacitado para hacerlo. Si su plan de sucesión no incluye un poder notarial, el tribunal elegirá a alguien en su nombre, y puede que no comparta la visión que usted tiene de su patrimonio.
• Poder de asistencia sanitaria: Comúnmente abreviado como HCPA, esto normalmente pone a un cónyuge o miembro de la familia a cargo de todas las decisiones relacionadas con la atención médica en su nombre. Por lo general, un HCPA se invoca si usted queda incapacitado.
• Designación de beneficiarios: La designación de un beneficiario permitirá poner a alguien a cargo de sus activos y posesiones que no estén dictados en su testamento. Los beneficiarios nombrados deben ser mayores de 21 años y deben ser considerados mentalmente competentes.
• Designaciones de tutoría: Si tiene hijos pequeños o piensa tenerlos en el futuro, la designación de un tutor es esencial a la hora de planificar su patrimonio. En caso de que usted fallezca o quede incapacitado, el tutor designado criará a sus hijos en su lugar. Es esencial designar a un tutor con el que se sienta cómodo criando a sus hijos. Si no se nombra un tutor, los tribunales decidirán quién obtiene la tutoría.

The post Planificación de la herencia para los empresarios appeared first on financepal.

1. The Adjusted Net Asset Method

A strong balance sheet can facilitate Asset-based valuation. This is because asset-based valuation largely mirrors what is shown on a business’s balance sheet. To use this method, start by totaling the value of your business’s assets before subtracting its liabilities. This should give you the starting value.

To get a more realistic valuation, you may have to weigh the numbers differently. The adjusted net asset method requires knowledge of the business, your industry, and current markets to change the value of the assets and liabilities. For example, you may have accounts receivable that are assets on your books, but you know you won’t likely collect the total amount. If this is the case, you may want to adjust your assets down to reflect their likely real-world values.

 The adjusted net asset method is at its best when used to value a business that doesn’t have an abundance of earnings—or is even losing money. It is a commonly-used valuation method for holding companies that own parts of other companies or real estate investments. It is also helpful if you’re considering selling your business—this valuation method is quite useful when used to set a reasonable baseline price.

2. The Capitalization of Cash Flow Method

The capitalization of cash flow (CCF) method has the virtue of being simple; after all, it is the simpler of the two primary income-based methods that business owners use when valuing income-generating businesses.

To calculate the business’s value using the capitalization of cash flow method, divide the cash flow from a specific period by a certain capitalization rate. You will want to use one period’s worth of sustainable and recurring cash flow—you may need to make adjustments for recent one-off expenses or revenue outliers that you don’t wish to include in the results for the sake of clarity.

 The capitalization rate—also known as cap rate—refers to a business’s expected rate of return. This is the rate of return a potential buyer could expect to earn if they purchase the company. For small businesses, this figure often hovers around 20% to 25%.

The simplicity of the CCF method makes it less conducive to making business predictions or speculations. However, the CCF method can be a practical valuation method for those valuing a more mature business that is relatively unlikely to experience large or inconsistent swings in cash flow.

3. The Discounted Cash Flow Method

The discounted cash flow (DCF) method refers to yet another income-based method. The DCF method utilizes a business’s projected future cash flow alongside the time value of money to calculate the business’s current value. While the CCF is most optimized for enterprises that already boast steady cash flows, the DCF is optimized for companies with more unpredictable futures that may grow or shrink significantly in the coming years.

The time value of money refers to the notion that money is worth more today than it will be in the future. This may seem confusing at first, so let’s look at an example: if you have ten thousand today, you can invest the money, earn interest, and have more than ten thousand dollars in five years. The discounted cash flow model accounts for this, so it can also be helpful for comparing different investment opportunities.

While calculations can tend to be complicated, you can find online valuation calculators—but you will still need to know which numbers to plug in.

A company’s cash flow statement is an ideal jumping-off point, alongside projected cash flows—if they’ve already been created, of course. In addition, you must know the discount rate—otherwise known as the weighted average cost of capital (WACC)—which may require even more complicated calculations. The WACC is the rate the company needs to pay to finance its working capital alongside its long-term debts. Additionally, you must decide how many years’ worth of cash flows you want to include in your valuation.

4. The Market-Based Valuation Method

Market-based valuation relies less on specific business characteristics than current market conditions. When using the market-based valuation method, the company’s current value is determined by comparing the recent sale prices of similar businesses.

Finding comparable business sale prices may be challenging if you are valuing a smaller business. However, you will still want to look for at least a few similar sales if you plan on buying or selling a business. If you need help, you can hire an appraiser; they may also have exclusive access to large databases of business sale figures.

Even if the comparable sales aren’t located in the region your business is in, an appraiser may be able to identify similarly-sized firms within the same or similar industry before making adjustments to reflect your area. It is possible to utilize these results alongside other valuation methods to better value a business.

5. The Seller’s Discretionary Earnings Method

The previously mentioned valuation methods are great methods to use for businesses of all sizes. However, the seller’s discretionary earnings (SDE) method is utilized for small business valuation exclusively.

The SDE method might be optimal if you’re planning on selling or buying a small business. This is because it helps the buyer ascertain how much income they can expect to earn each year from the company. To calculate the SDE, you will first need to determine the operating costs of the business.

It is best to start with the business’s earnings before interest and taxes—referred to as the acronym EBIT—which you can find on its financial statements. Subsequently, add the owner’s compensation and benefits. Also, total non-essential, non-recurring, and non-related business expenses, including travel, one-off consultancy fees, and more.

Because the SDE is most often used at the time of a small business sale, it’s typical for debates about some of the numbers to ensue — especially regarding the expenses that get added back to determine the value.

Let’s take an example: the seller of a small business might want to classify a marketing project as a one-time expense and subsequently plug that portion back into the earnings in order to increase the valuation. However, the buyer might consider this to be an ongoing project that needs to be revisited and funded annually. For the sale to move forward, they must come to an accord.

Related: Profitable Small Business Ideas

Why should I value my small business?

There are a plethora of reasons to value your small business. Here’s just a few:

• You are trying to sell your business. If this is the case, acquiring a reasonable valuation will help you get the best possible price—with the least amount of uncertainty.
• You’re trying to attract outside investors. Investors want a clear picture of a business’s current value and projected value so they can determine whether they will likely receive an optimal return or not.
• You’re buying out the owners. Ascertaining a business’s value before buying out the owners is crucial for avoiding future headaches.
• You’re offering your employees equity. Knowing your company’s value is crucial before providing equity. You don’t want to over serve—and your employees may get upset if they feel their equity doesn’t adequately reflect your business’s value.
• You’re applying for a loan or line of credit. Your business’s value will serve as collateral, so it is integral to the loan application process.
• You want to understand your business’s growth better. Valuing a small business using the optimal method can be very insightful when gauging your company’s projected financial health.

Related: Bookkeeping Accounting for Small Businesses

How to Prepare for a Small Business Valuation

If you’re conducting an informal business valuation, you could do this entirely internally. However, suppose you value your company for a sale or another more serious matter. In that case, it is definitely worth hiring a professional appraiser or business valuation expert such as a bank, lender, or accountant. Whether informal or serious, always take these steps to prepare for a valuation:

1. Aggregate Your Financial Documents

Any valuation will be based on managing your small business finances. Even the market-based valuation method synthesizes your business’s financial information to find suitable comparable sales.

You can start by preparing the previous three to five years’ worth of business tax returns, balance sheets, income statements, and cash flow statements. Give each of these statements a thorough look in order to confirm their accuracy.

If you are undertaking a market-based valuation or a DCF, prepare finance-related documents, such as sales reports and industry forecasts.

2. Get Your Other Essential Documents in Order

It depends on the cause for the valuation, but you might want copies of your business licenses, permits, deeds, and certifications available. In addition, prepare documentation for any ongoing contracts with insurers, creditors, vendors, and clients, if applicable.

If you are looking for loans—or selling your business—you will need to share these. You should also prepare your business credit score and reports.

3. Organize Intangible Assets

Your balance sheet should list your tangible assets—cash, property, and equipment. Some intangible assets, such as patents or copyrights, may be listed alongside your tangible assets. However, you must consider your other intangible assets that may contribute to your company’s value, such as client data, SEO rankings, social media presence, and online reputation scores are all examples of intangible assets that may contribute value.

Related: Small Business Tax Preparation

How to Improve Your Small Business’s Valuation

More than anything, Your company’s valuation will reflect how much money it makes. That is why increasing your revenue and cutting your costs are crucial components to improving your business’s valuation. You can also hire a professional appraiser or evaluator to give you the best current valuation and help you identify your company’s strengths and weaknesses. The appraiser or evaluator might even offer insights for valuation improvement based on their experiences working for other businesses.

You can also demonstrate your company’s value to potential buyers in ways that go beyond the numbers. For example, if you can demonstrate that your operations, processes, and systems are in place and running smoothly for years to come, buyers may be more likely to reach an agreement on a higher valuation. Maybe you can demonstrate how happy and productive your employees are—lowered turnover can save the business money, after all, and functional employees can facilitate the transition to new ownership.

And when you do sell, it is essential to accept that you are at the mercy of the market. You may need to compromise on your valuation if the market doesn’t corroborate it. If you need a return on your investment orre you do not have time to be patient while selling, then you cannot be resolute with your valuation.

After all, your company is only worth what the market dictates. If your industry gets devalued for any reason, such as the coronavirus, you may place a higher value on your business than the market does. Business is all about leverage. Timing and the greater need for your business within the marketplace still matter, of course. Business is always about leverage. You don’t often get what you feel you deserve; it’s all about what you negotiate.

The Virtue of Regularly Valuing Your Small Business

Regularly valuing your company can be crucial for small business owners for many reasons. Even if you’re not planning on selling your business or applying for loans, consistently undertaking business valuations can shed insight into your company’s progress over a period of time—and may help you uncover growth opportunities. 

Key Takeaways:

The 5 Main Methods of Business Valuation:

• The Adjusted Net Asset Method: This method is ideal for valuing a business that doesn’t have an abundance of revenue or is losing money. It is commonly used for holding companies that own parts of other companies or real estate investments. It is also helpful if you’re considering selling your business or setting a reasonable baseline price.
•  The Capitalization of Cash Flow Method: This method divides the cash flow from a specific period by a capitalization rate. You will want to use one period’s worth of sustainable and recurring cash flow.
• The Discounted Cash Flow Method: This method utilizes a business’s projected future cash flow alongside the time value of money to calculate the business’s current value. While the CCF is most optimized for enterprises that already boast steady cash flows, the DCF is optimized for companies with more unpredictable futures that may grow or shrink significantly in the coming years.
• The Market-Based Valuation Method: This method relies less on specific business characteristics than current market conditions. When using the market-based valuation method, the company’s current value is determined by comparing the recent sale prices of similar businesses. If the comparable sales aren’t located in the region your business is situated in, an appraiser may be able to identify similarly-sized firms within the same or similar industry before making adjustments.
• The Seller’s Discretionary Earnings Method: This method is optimal if you plan to sell or buy a small business. It helps the buyer ascertain how much income they can expect to earn each year from the company.

Reasons to Value your Business:

• You are trying to sell your business.
• You’re trying to attract outside investors.
• You’re buying out the owners.
• You’re offering your employees equity.
• You’re applying for a loan or line of credit.
• You want to understand your business’s growth better.

Prepare for a Business Valuation:

• Aggregate Your Financial Documents: Prepare the previous three to five years’ worth of business tax returns, balance sheets, income statements, and cash flow statements. If you are undertaking a market-based valuation or a DCF, prepare finance-related documents.
• Get Your Other Essential Documents in Order: You might want copies of your business licenses, permits, deeds, and certifications available. In addition, prepare documentation for any ongoing contracts with insurers, creditors, vendors, and clients, if applicable.
• Organize Intangible Assets: You must consider your other intangible assets that may contribute to your company’s value, such as client data, SEO rankings, social media presence, and online reputation scores.

The post How to Value a Small Business: The 5 Main Methods appeared first on financepal.

1. El método del activo neto ajustado

Un balance fuerte puede facilitar la valoración basada en los activos. Esto se debe a que la valoración basada en los activos refleja en gran medida lo que aparece en el balance de la empresa. Para utilizar este método, empiece por sumar el valor de los activos de su empresa antes de restar los pasivos. Así obtendrá el valor inicial.

Para obtener una valoración más realista, es posible que tenga que considerar los números de forma diferente. El método del activo neto ajustado requiere un conocimiento del negocio, de su sector y de los mercados actuales para modificar el valor de los activos y pasivos. Por ejemplo, puede tener cuentas por cobrar que son activos en sus libros, pero sabe que probablemente no cobrará el importe total. Si este es el caso, es posible que quiera ajustar sus activos hacia abajo para reflejar sus valores probables en el mundo real.

 El método de los activos netos ajustados es el mejor cuando se utiliza para valorar un negocio que no tiene abundantes ganancias, o que incluso está perdiendo dinero. Es un método de valoración comúnmente utilizado para las sociedades de cartera que poseen partes de otras empresas o inversiones inmobiliarias. También es útil si está pensando en vender su empresa: este método de valoración es bastante útil cuando se utiliza para establecer un precio base razonable.

2. El método de capitalización del flujo de efectivo

El método de capitalización del flujo de efectivo (CCF) tiene la virtud de ser sencillo; después de todo, es el más simple de los dos métodos principales basados en los ingresos que los empresarios utilizan para valorar las empresas que generan ingresos.

Para calcular el valor de la empresa utilizando el método de capitalización del flujo de efectivo, hay que dividir el flujo de efectivo de un período específico por una determinada tasa de capitalización. Deberá utilizar el flujo de efectivo sostenible y recurrente de un período; es posible que tenga que hacer ajustes por gastos puntuales recientes o ingresos atípicos que no desee incluir en los resultados para mayor claridad.

 La tasa de capitalización, también conocida como cap rate, se refiere a la tasa de rendimiento esperada de una empresa. Se trata de la tasa de rendimiento que un posible comprador podría esperar obtener si adquiere la empresa. En el caso de las pequeñas empresas, esta cifra suele rondar entre el 20% y el 25%.

La simplicidad del método CCF lo hace menos propicio para hacer predicciones o especulaciones sobre el negocio. Sin embargo, el método CCF puede ser un método de valoración práctico para aquellos que valoran un negocio más maduro en el que es relativamente improbable que se produzcan grandes o inconsistentes fluctuaciones en el flujo de efectivo.

3. El método del flujo de efectivo descontado

El método del flujo de efectivo descontado (DCF) es otro método basado en los ingresos. El método DCF utiliza el flujo de efectivo futuro proyectado de una empresa junto con el valor temporal del dinero para calcular el valor actual de la empresa. Mientras que el CCF está más optimizado para las empresas que ya cuentan con flujos de efectivo constantes, el DCF está optimizado para las empresas con un futuro más impredecible que puede crecer o reducirse significativamente en los próximos años.

El valor temporal del dinero se refiere a la noción de que el dinero vale más hoy que en el futuro. Esto puede parecer confuso al principio, así que veamos un ejemplo: si usted tiene diez mil dólares hoy, puede invertir el dinero, ganar intereses y tener más de diez mil dólares en cinco años. El modelo de flujo de efectivo descontado toma en cuenta esto, por lo que también puede ser útil para comparar diferentes oportunidades de inversión.

Aunque los cálculos tienden a ser complicados, se pueden encontrar calculadoras de evaluación en línea, pero aún así habrá que saber qué números introducir.

El estado de flujo de efectivo de una empresa es un punto de partida ideal, junto con los flujos de efectivo proyectados, si es que ya se han creado, por supuesto. Además, hay que conocer el tipo de descuento, también conocido como costo promedio de capital considerado (WACC), lo que puede requerir cálculos aún más complicados. El WACC es la tasa que la empresa necesita pagar para financiar su capital circulante junto con sus deudas a largo plazo. Además, debe decidir cuántos años de flujos de efectivo quiere incluir en su valoración.

4. El método de valoración basado en el mercado

La valoración basada en el mercado se basa menos en las características específicas de la empresa que en las condiciones actuales del mercado. Cuando se utiliza el método de valoración basado en el mercado, el valor actual de la empresa se determina comparando los precios de venta recientes de empresas similares.

Encontrar precios de venta de empresas comparables puede ser un reto si está valorando una empresa más pequeña. Sin embargo, es conveniente que busque al menos algunas ventas similares si tiene previsto comprar o vender una empresa. Si necesita ayuda, puede contratar a un tasador; ellos también pueden tener acceso exclusivo a grandes bases de datos de cifras de ventas de empresas.

Incluso si las ventas comparables no están situadas en la región en la que se encuentra su negocio, un tasador puede ser capaz de identificar empresas de tamaño similar dentro del mismo sector o de un sector similar antes de realizar ajustes para reflejar su zona. Es posible utilizar estos resultados junto con otros métodos de valoración para evaluar mejor una empresa.

5. El método de las ganancias discrecionales del vendedor

Los métodos de valoración mencionados anteriormente son excelentes métodos para empresas de todos los tamaños. Sin embargo, el método de las ganancias discrecionales del vendedor (SDE) se utiliza exclusivamente para la valoración de pequeñas empresas.

El método SDE puede ser óptimo si está planeando vender o comprar una pequeña empresa. Esto se debe a que ayuda al comprador a determinar la cantidad de ingresos que puede esperar obtener cada año de la empresa. Para calcular el SDE, primero tendrá que determinar los costos operativos de la empresa.

Lo mejor es empezar con los ingresos de la empresa antes de intereses e impuestos, lo que se conoce como el acrónimo EBIT, que se puede encontrar en sus estados financieros. A continuación, añada la remuneración y los beneficios del propietario. Además, sume los gastos no esenciales, no recurrentes y no relacionados con el negocio, incluidos los viajes, las tarifas de consultoría únicas, y más.

Dado que el SDE se utiliza con mayor frecuencia en el momento de la venta de una pequeña empresa, es habitual que se produzcan debates sobre algunas de las cifras, especialmente en lo que respecta a los gastos que se suman para determinar el valor.

Pongamos un ejemplo: el vendedor de una pequeña empresa puede querer clasificar un proyecto de marketing como un gasto único y posteriormente incluir esa parte en los ingresos para aumentar la valoración. Sin embargo, el comprador podría considerar que se trata de un proyecto continuo que debe revisarse y financiarse anualmente. Para que la venta siga adelante, deben llegar a un acuerdo.

Relacionado: Ideas para pequeñas empresas rentables

¿Por qué debería yo valorar mi pequeña empresa?

Hay una gran cantidad de razones para valorar su pequeña empresa. He aquí unas cuantas:

• Está intentando vender su empresa. De ser así, conseguir una valoración razonable le ayudará a obtener el mejor precio posible, con la menor incertidumbre.
• Está intentando atraer a inversionistas externos. Los inversionistas quieren tener una imagen clara del valor actual y del valor proyectado de una empresa para poder determinar si es probable que reciban un rendimiento óptimo o no.
• Va a comprar la parte de los propietarios. Determinar el valor de una empresa antes de comprar la parte de los propietarios es crucial para evitar futuros dolores de cabeza.
• Está ofreciendo a sus empleados capital social. Conocer el valor de la empresa es crucial antes de ofrecer capital. No querrá ofrecer más de la cuenta, y sus empleados pueden enfadarse si creen que su capital no refleja adecuadamente el valor de su empresa.
• Usted está solicitando un préstamo o una línea de crédito. El valor de su empresa servirá como garantía, por lo que es parte integral del proceso de solicitud de préstamo.
• Quiere comprender mejor el crecimiento de su empresa. Valorar una pequeña empresa utilizando el método óptimo puede ser muy revelador a la hora de calibrar la salud financiera proyectada de su empresa.

Relacionado: Manejo de libros y contabilidad para pequeñas empresas

Cómo prepararse para la valoración de una pequeña empresa

Si está llevando a cabo una valoración empresarial informal, podría hacerlo de forma totalmente interna. Sin embargo, supongamos que valora su empresa para una venta u otro asunto más serio. En ese caso, sin duda merece la pena contratar a un tasador profesional o a un experto en valoración de empresas, como un banco, un prestamista o un contador. Tanto si es informal como si es serio, siga siempre estos pasos para preparar una valoración:

1. Agregue sus documentos financieros

Cualquier valoración se basará en la gestión de las finanzas de su pequeña empresa. Incluso el método de valoración basado en el mercado sintetiza la información financiera de su empresa para encontrar ventas comparables adecuadas.

Puede empezar por preparar las declaraciones de impuestos, los
balances, las cuentas de resultados y los estados de flujo de efectivo de los tres a cinco años anteriores. Examine a fondo cada uno de estos estados para confirmar su exactitud.

Si se trata de una valoración basada en el mercado o en un DCF, prepare documentos relacionados con las finanzas, como informes de ventas y previsiones del sector.

2. Ponga en orden sus otros documentos esenciales

Depende de la causa de la valoración, pero es posible que quiera disponer de copias de sus licencias comerciales, permisos, escrituras y certificaciones. Además, prepare la documentación de cualquier contrato en curso con aseguradoras, acreedores, proveedores y clientes, si procede.

Si está buscando préstamos, o vendiendo su negocio, tendrá que compartirlos. También debe preparar la puntuación de crédito de su negocio y los informes.

3. Organizar los activos intangibles

Su balance debe listar sus activos tangibles: efectivo, propiedades y equipos. Algunos activos intangibles, como las patentes o los derechos de autor, pueden figurar junto a sus activos tangibles. Sin embargo, debe tener en cuenta otros activos intangibles que pueden contribuir al valor de su empresa, como los datos de los clientes, los rankings de SEO, la presencia en las redes sociales y las puntuaciones de la reputación online son ejemplos de activos intangibles que pueden contribuir al valor.

Relacionado: Preparación de impuestos para pequeñas empresas

Cómo mejorar la valoración de su pequeña empresa

Más que nada, la valoración de su empresa reflejará cuánto dinero gana. Por eso, aumentar sus ingresos y reducir sus costos son componentes cruciales para mejorar la valoración de su empresa. También puede contratar a un tasador o evaluador profesional para que le dé la mejor valoración actual y le ayude a identificar los puntos fuertes y débiles de su empresa. El tasador o evaluador puede incluso ofrecer ideas para mejorar la valoración basándose en sus experiencias de trabajo con otras empresas.

También puede demostrar el valor de su empresa a los posibles compradores de formas que van más allá de las cifras. Por ejemplo, si puede demostrar que sus operaciones, procesos y sistemas están en marcha y funcionan sin problemas en los próximos años, es más probable que los compradores lleguen a un acuerdo sobre una valoración más alta. Tal vez pueda demostrar lo felices y productivos que son sus empleados: después de todo, una menor rotación puede ahorrar dinero a la empresa, y unos empleados funcionales pueden facilitar la transición a la nueva propiedad.

Y cuando usted venda, es esencial que acepte que está a merced del mercado. Puede que tenga que ceder en su valoración si el mercado no la corrobora. Si necesita rentabilizar su inversión o no tiene tiempo para ser paciente al vender, entonces no puede ser firme con su valoración.

Al fin y al cabo, su empresa sólo vale lo que dicta el mercado. Si su sector se devalúa por alguna razón, como el coronavirus, puede que usted le dé un valor más alto a su empresa que el que le da el mercado. Los negocios son una cuestión de ventaja. El momento y la mayor necesidad de su empresa en el mercado siguen siendo importantes, por supuesto. Los negocios son siempre una cuestión de ventaja. No se suele obtener lo que se cree que se merece; todo depende de lo que se negocie.

La virtud de valorar regularmente su pequeña empresa

La valoración periódica de su empresa puede ser crucial para los propietarios de pequeñas empresas por muchas razones. Incluso si no está planeando vender su negocio o solicitar un préstamo, la realización de valoraciones de empresas de forma sistemática puede aportar información sobre el progreso de su empresa durante un período de tiempo, y puede ayudarle a descubrir oportunidades de crecimiento.

Puntos clave:

Los 5 principales métodos de valoración de empresas:

• El método del activo neto ajustado: Este método es ideal para valorar un negocio que no tiene abundantes ingresos o que está perdiendo dinero. Se suele utilizar para sociedades de cartera que poseen partes de otras empresas o inversiones inmobiliarias. También es útil si está considerando vender su negocio o establecer un precio de referencia razonable.
• El método de capitalización del flujo de efectivo:  Este método divide el flujo de efectivo de un período específico por una tasa de capitalización. Es conveniente utilizar el flujo de efectivo sostenible y recurrente de un período.
• El método del flujo de efectivo descontado: Este método utiliza el flujo de efectivo futuro proyectado de una empresa junto con el valor temporal del dinero para calcular el valor actual de la empresa. Mientras que el CCF está más optimizado para empresas que ya cuentan con flujos de efectivo constantes, el DCF está optimizado para empresas con un futuro más impredecible que pueden crecer o reducirse significativamente en los próximos años.
• El método de valoración basado en el mercado: Este método se basa menos en las características específicas del negocio que en las condiciones actuales del mercado. Cuando se utiliza el método de valoración basado en el mercado, el valor actual de la empresa se determina comparando los precios de venta recientes de empresas similares. Si las ventas comparables no están situadas en la región en la que se encuentra su empresa, un tasador puede identificar empresas de tamaño similar dentro del mismo sector o similar antes de realizar los ajustes.
• El método de las ganancias discrecionales del vendedor: Este método es óptimo si tiene previsto vender o comprar una pequeña empresa. Ayuda al comprador a determinar la cantidad de ingresos que puede esperar obtener cada año de la empresa.

Razones para valorar su negocio:

• Usted está tratando de vender su negocio.
• Usted está tratando de atraer inversionistas externos.
• Usted está comprando la parte de los propietarios.
• Usted está ofreciéndole a sus empleados capital.
• Usted está solicitando un préstamo o una línea de crédito.
• Quiere entender mejor el crecimiento de su empresa.

Prepárese para una valoración de la empresa::

• Agregue sus documentos financieros: Prepare las declaraciones fiscales, los balances, las cuentas de resultados y los estados de flujo de efectivo de los tres a cinco años anteriores. Si va a realizar una valoración basada en el mercado o un DCF, prepare los documentos relacionados con las finanzas.
• Ponga en orden sus otros documentos esenciales: Es posible que quiera disponer de copias de sus licencias comerciales, permisos, escrituras y certificaciones. Además, prepare la documentación de cualquier contrato en curso con aseguradoras, acreedores, proveedores y clientes, si procede.
• Organice los activos intangibles: Usted debe considerar sus otros activos intangibles que pueden contribuir al valor de su empresa, como los datos de los clientes, los rankings de SEO, la presencia en los medios sociales, y las puntuaciones de la reputación en línea.

The post Cómo valorar una pequeña empresa: Los 5 métodos principales appeared first on financepal.

• What Is the Role of Accounts Payable?
• What Is the Accounts Payable Process?
• What Is Included in Accounts Payable?
• Outsourcing Your Accounts Payable Department

What Is the Role of Accounts Payable?

Accounts payable departments aren’t just responsible for paying bills and invoices; they typically undertake at least three essential functions in addition to paying bills.

1. Business Travel Expenses

In any company that requires staff to travel, the accounts payable department will manage their travel expenses. This may include placing reservations for airlines, car rentals, and hotels. Depending on the business’s responsibility structure, the accounts payable department may process requests and disburse funds to cover travel expenses. After instances of business travel transpire, the accounts payable department typically settles the difference between funds distributed and actual spend.

2. Internal Payments

Accounts payable is responsible for distributing internal payments, administering minor cash flow matters, and distributing sales tax exemption certificates. To corroborate reimbursement requests, a business’s employees must turn in either a manual log report or receipts—or both. Trivial expenses such as out-of-pocket office supplies, postage, or a small client lunch are considered minor cash flow matters and handled by Accounts Payable. On top of this, Accounts payable is in charge of sales tax exemption certificates—special certificates issued to managers to ensure qualifying business purchases don’t include sales tax in the total.

3. Vendor Payments

The Accounts payable department is responsible for organizing and maintaining vendor information, payment terms, and IRS W-9 information. Accounts payable either handles pre-approved purchase orders or accounts payable verifies purchases after the point of sale depending on a business’s responsibility structure. The Accounts payable department also manages end-of-month aging analysis reports. These reports provide upper-level management with a clear picture of business credit.

Miscellaneous Functions

In addition to the three functions mentioned above, the accounts payable department reduces costs by recognizing credit patterns and developing strategies to save money in the credit department. For example, some invoices contain inherent discount periods. Accounts payable will settle credit liabilities within the defined timeframe to receive the discount. In addition, accounts payable comprises a direct line of contact between a business and its vendor’s representatives. Maintaining robust and positive business relationships between the company and its vendors may lead to certain benefits, such as relaxed credit terms.

Related: Profitable Small Business Ideas

What Is the Accounts Payable Process?

The accounts payable department must follow what is known as the accounts payable process. The accounts payable process is a set of procedures undertaken while making payment to a vendor. Due to the sheer volume of transactions that many accounts payable departments handle, these guidelines are essential to maintaining consistent, accurate reporting.

The accounts payable process is as follows:

1. Receiving the bill: When a business purchases goods, they receive a bill. Bills are important because they quantify what is received.
2. Review bill details: The accounts payable department must ensure that the bill includes vendor name, authorization, date, and verified and matching requirements to the purchase order.
3. Update records: Once the bill is received, ledger accounts need to be updated. An expense entry is typically made. This step may or may not require managerial approval.
4. Make the payment: All payments should be processed before or at the due date specified on a bill as agreed upon between a vendor and a purchasing company. Required documents need to be prepared and verified. Check details, vendor bank account details, payment vouchers, the original bill, and the purchase order need to be considered. Like the previous step, making the payment may or may not require managerial approval.

To ensure the safety of the company’s cash and assets, the accounts payable process must have internal controls to prevent paying a fraudulent or inaccurate invoice—or accidentally paying a vendor invoice twice.

Related: Accounting Tips for Small Businesses

What Is Included in Accounts Payable?

Accounts payable is listed on a company’s balance sheet as a current liability. Accounts payable consists of a collection of short-term credits extended by a business’s vendors and creditors. An accounts payable department also manages internal payments for business expenses, travel, and minor cash flow matters. Compare balance sheet vs. income statement.

Outsourcing Your Accounts Payable Department

Due to tighter margins, many smaller businesses do not retain dedicated accounts payable departments because financial professionals can be costly. However, at FinancePal, we seek to change the narrative that small businesses cannot afford dedicated financial professionals. Outsourcing your accounting and bookkeeping matters, such as accounts payable, to professionals is the most efficient and most cost-effective way to save your business money come tax time. Accounting for startups provided by FinancePal has helped thousands of small businesses with their financials and taxes on a convenient subscription basis.

The post Accounts Payable Process and Cycle appeared first on financepal.

• ¿Cuál es el papel de las cuentas por pagar?
• ¿Qué es el proceso de cuentas por pagar?
• ¿Qué se incluye en las cuentas a pagar?
• Externalización del departamento de cuentas por pagar

¿Cuál es el papel de las cuentas por pagar?

Los departamentos de cuentas por pagar no sólo se encargan de pagar las facturas, sino que suelen llevar a cabo al menos tres funciones esenciales, además de pagar las facturas..

1. Gastos de viajes de negocios

En cualquier empresa que requiera que su personal viaje, el departamento de cuentas por pagar gestionará sus gastos de viaje. Esto puede incluir la realización de reservas para aerolíneas, alquiler de automóviles y hoteles. Dependiendo de la estructura de responsabilidad de la empresa, el departamento de cuentas por pagar puede procesar las solicitudes y desembolsar los fondos para cubrir los gastos de viaje. Después de que se produzcan los viajes de negocios, el departamento de cuentas por pagar suele liquidar la diferencia entre los fondos distribuidos y el gasto real.

2. Pagos internos

Las cuentas por pagar se encargan de distribuir los pagos internos, administrar asuntos menores de flujo de efectivo y distribuir los certificados de exención del impuesto sobre las ventas. Para corroborar las solicitudes de reembolso, los empleados de una empresa deben entregar un informe de registro manual o recibos, o ambos. Los gastos triviales, como el material de oficina, el franqueo o un pequeño almuerzo con un cliente, se consideran asuntos menores de flujo de efectivo y son gestionados por Cuentas por Pagar. Además, Cuentas por Pagar se encarga de los certificados de exención del impuesto sobre las ventas, que son certificados especiales emitidos a los gerentes para garantizar que las compras de la empresa que cumplen los requisitos no incluyen el impuesto sobre las ventas en el total.

3. Pagos a proveedores

El departamento de cuentas por pagar es responsable de organizar y mantener la información de los proveedores, las condiciones de pago y la información del IRS W-9. El departamento de cuentas por pagar gestiona las órdenes de compra preaprobadas o verifica las compras después del punto de venta, dependiendo de la estructura de responsabilidad de la empresa. El departamento de cuentas por pagar también gestiona los informes de análisis de la antigüedad de fin de mes. Estos informes proporcionan a la dirección una imagen clara del crédito de la empresa.

Funciones misceláneas

Además de las tres funciones mencionadas anteriormente, el departamento de cuentas por pagar reduce costos reconociendo los patrones de crédito y desarrollando estrategias para ahorrar dinero en el departamento de crédito. Por ejemplo, algunas facturas contienen períodos de descuento implícitos. Las cuentas por pagar liquidarán las obligaciones de crédito dentro del plazo definido para recibir el descuento. Además, las cuentas por pagar constituyen una línea directa de contacto entre una empresa y los representantes de sus proveedores. Mantener relaciones comerciales sólidas y positivas entre la empresa y sus proveedores puede suponer ciertas ventajas, como la flexibilización de las condiciones de crédito.

Relacionado: Ideas para pequeñas empresas rentables

¿Qué es el proceso de cuentas por pagar?

El departamento de cuentas por pagar debe seguir lo que se conoce como proceso de cuentas por pagar. El proceso de cuentas por pagar es un conjunto de procedimientos que se llevan a cabo al realizar el pago a un proveedor. Debido al enorme volumen de transacciones que manejan muchos departamentos de cuentas por pagar, estas pautas son esenciales para mantener una información coherente y precisa.

El proceso de cuentas por pagar es el siguiente:

1. Recibir la factura: Cuando una empresa compra bienes, recibe una factura. Las facturas son importantes porque cuantifican lo que se recibe.
2. Revisar los detalles de la factura: El departamento de cuentas por pagar debe asegurarse de que la factura incluya el nombre del proveedor, la autorización, la fecha y los requisitos de verificación y concordancia con la orden de compra.
3. Actualizar los registros: Una vez recibida la factura, hay que actualizar las cuentas del libro mayor. Normalmente se realiza una entrada de gastos. Este paso puede requerir o no la aprobación de la dirección.
4. Realizar el pago: Todos los pagos deben procesarse antes o en la fecha de vencimiento especificada en la factura, según lo acordado entre el proveedor y la empresa compradora. Hay que preparar y verificar los documentos necesarios. Hay que tener en cuenta los detalles del cheque, los datos de la cuenta bancaria del proveedor, los comprobantes de pago, la factura original y la orden de compra. Al igual que en el paso anterior, la realización del pago puede requerir o no la aprobación de la dirección.

Para garantizar la seguridad del efectivo y los activos de la empresa, el proceso de cuentas por pagar debe contar con controles internos para evitar el pago de una factura fraudulenta o inexacta, o el pago accidental de una factura de proveedor dos veces.

Relacionado: Consejos de contabilidad para pequeñas empresas

¿Qué se incluye en cuentas a pagar?

Estas cuentas por pagar figuran en el balance de una empresa como un pasivo corriente. Las cuentas por pagar consisten en un conjunto de créditos a corto plazo concedidos por los proveedores y acreedores de una empresa. Un departamento de cuentas por pagar también gestiona los pagos internos de los gastos de la empresa, los viajes y asuntos menores de flujo de efectivo. Comparar el balance vs. la cuenta de resultados.

Externalización del departamento de cuentas por pagar

Debido a los márgenes reducidos, muchas empresas pequeñas no mantienen departamentos de cuentas por pagar dedicados porque los profesionales financieros pueden ser costosos. Sin embargo, en FinancePal tratamos de cambiar la idea de que las pequeñas empresas no pueden permitirse profesionales financieros dedicados. La externalización de sus asuntos de contabilidad y manejo de libros, como estas cuentas por pagar, en manos de profesionales es la forma más eficiente y rentable de ahorrarle dinero a su empresa cuando llegue el momento de los impuestos. La contabilidad para startups proporcionada por FinancePal ha ayudado a miles de pequeñas empresas con sus finanzas e impuestos mediante una cómoda suscripción.

The post Proceso y ciclo de las cuentas por pagar appeared first on financepal.