Tag Archives | money

Tax Brackets

See Also:
Marginal Tax Rate
Prepaid Income Tax
Ad Valorem Tax
Deferred Income Tax
Cash Flow After Tax

Tax Brackets

What are tax brackets? Tax brackets are levels of taxation determined by income. Individuals with income falling within a certain tax bracket pay taxes according to the stated rate for that bracket. Typically, lower income is taxed at a lower rate and higher income is taxed at a higher rate. The idea is that people making more money can afford to pay more taxes and still live comfortably while people making less money have less income available to pay towards taxes. Tax brackets are a component of progressive tax rate systems.

Tax Bracket Example on 2008’s Tax Rates

Here is a tax bracket example based on 2008’s tax rates. Let’s look at three individuals with three different incomes. The first person earns annual taxable income of $20,000 dollars. The second earns annual taxable income of $50,000 dollars. The third person earns annual taxable income of $150,000 dollars.

The tax brackets for this hypothetical example are as follows. Individuals making less than $25,000 dollars of annual taxable income must pay taxes at the rate of 15%. Individuals earning income between $25,001 and $50,000 dollars must pay taxes at a rate of 20%. And individuals making more than $50,001 dollars of annual taxable income must pay 25% taxes.

In this example, the first individual, the person with a salary of $20,000 who pays taxes according to the first tax bracket tax rate, pays taxes of 15%. This amounts to $3,000 dollars of taxes due for that individual. The second individual, the person earning $50,000 dollars who is taxed at 20% ends up paying taxes of $10,000. While the third individual, the one making $150,000 dollars and paying taxes at a rate of 25% ends up paying $37,500 dollars. Of course, these are not the real tax brackets in the U.S. or elsewhere, they are merely hypothetical examples for illustrative purposes.

US Tax Brackets 2008

Tax Rate      Single                    Married Filing Jointly 
10%           $0 - $8,025               $0 - $16,050 
15%           $8,026 - $32,550          $16,051 - $65,100 
25%           $32,551 - $78,850         $65,101 - $131,450 
28%           $78,851 - $164,550        $131,451 - $200,300 
33%           $164,551 - $357,700       $200,301 - $357,700 
35%           Over $357,701             Over $357,701

Tax Bracket Example on 2018’s Tax Rates

Let’s look at another tax bracket example based on 2018’s tax rates. There are three different people that earn different incomes. The first person earns annual taxable income of $50,000 dollars. The second earns annual taxable income of $100,000 dollars. The third person earns annual taxable income of $250,000 dollars. By using the US Tax Brackets 2018 chart below, the first person is in the 22% tax bracket; the second person in the 24% tax bracket; the third person in the 35% tax bracket.

The first individual makes $50,000. Using the 22% bracket, this individual owes $11,000.

The second individual makes $100,000. Using the 24% bracket, this individual owes $24,000.

The third individual makes $250,000. Using the 35% bracket, this individual owes $87,500.

US Tax Brackets 2018

Tax Rate      Single                    Married Filing Jointly 
10%           $0 - $9,524               $0 - $19,049 
12%           $9,525 - $38,699          $19,050 - $77,399 
22%           $38,700 - $82,499         $77,400 - $164,999 
24%           $82,500 - $157,499        $165,000 - $314,999 
32%           $157,500 - $199,999       $315,000 - $399,999 
35%           $200,000 - $499,999       $400,000 - $599,999
37%           $500,000 +                $600,000 +

IRS Tax Bracket Information

For IRS tax bracket information, IRS tax bracket tables, and IRS tax brackets for 2018, go to the following website: irs.gov.

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tax brackets

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tax brackets

Originally posted by Jim Wilkinson on July 24, 2013. 

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What is Cash Flow?

See also:
Free Cash Flow Definition
How Growth Affects Cash Flow
Why Use a 13-Week Cash Flow Report as a Management Tool?
Why You Need to Have a 13-Week Cash Flow Report

What is Cash Flow?

Cash flow is a term describing the money into and out of a business. This includes all transactions that transfer cash. Furthermore, the business’s sources of cash are separated into three areas in the company’s cash flow statements. Some of the different categories for money spent or earned to fit into the following:

Cash flow in vital to your business. It is the blood or oxygen for your company. Without it, there is no company.

What is Net Income?

Net income is a measure of revenue after subtracting all expenses. This means you take the total revenue for a period and subtract cost of goods/services as well as overhead. This gives a rough idea of whether a business made ‘money’ during the period. However, net income is not a good way to determine the cash usage in a business.

Key Differences Between Cash Flow & Net Income

Some of the key differences between cash flow and net income include the following:

  1. A business can be profitable and go out of business from lack of cash.
  2. A business can have cash flow but remain unprofitable.
  3. Cash flow is reflected on the cash flow statement and not the income statement or balance sheet.
  4. Analyzing cash flow is a way of planning for future cash needs.
  5. Investors can tell where the cash comes from and where it goes from statement of cash flows.
  6. Loans show up as cash on an income statement; Loans are shown as positive financing activities in the statement of cash flows.
  7. Watching cash flow helps notify a business of cash shortages and shows when to borrow money to keep operations going.

Click here to read more about Cash Flow vs Net Income.

What is Cash Flow?

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What is Cash Flow?

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Make Money Grow on Trees

Make money grow on trees

Let’s go back to when you were a child. You looked up at a tree and thought… If money is made from paper and paper comes from tress, surely, I can make money grow from trees! Or maybe, you asked your parents for something extraordinarily expensive and they responded with “money doesn’t grow on trees”. We have always been told that we cannot make money grow on trees… Until now. There are a couple steps we can take in our businesses to grow dollar bills as easily as trees grow leaves.

Money Does Grow on Trees

You might be wondering at this point if we are really talking about how to make money grow on trees. Unless your company has access and uses natural capital, you probably cannot physically make money grow from trees. But we are still going to show you how to grow using what every company has. First, let’s look at a company that makes money grow on trees.

Clean Water Services is a water utility company in Oregon that faced an opportunity to make real change. Their only water source, coined the “sluggish” river, became the first river in the state to fail to meet the Clean Water Act. This Act mandated that the Clean Water Services make a change or face severe consequences. Needing to dramatically cool the discharged water from their waste management facilities, Clean Water Services faced two options. These options included either investing $102-255 million to cool the water or using nature’s own capital to cool the water at a mere $12 million.

In this case, the choice was obvious. Over the next 5 years, they would invest in planting trees to cover the river and won various EPA awards because of their successful use of natural capital. Because of their decision to go with the latter option, Clean Water Services increased their bottom line by planting trees – essentially making money grow on trees. The great thing is that if you are creative enough, you have the ability to capitalize on what is already provided. If you want to read more about this case study, click here to access it on Harvard Business Review.

If you are looking to learn how to make money grow on trees, it’s important that you have to tools to accomplish that task. Click here to download our 3 Best Tools!

How to Make Money Grow on Trees

What are some necessities required to grow a healthy tree? You need a seed, healthy soil, water, and sunshine. It’s simple! So, if it’s so simple, why do we not see that the same methodology working in our own businesses? Whether it be a business model or a person, you need an idea. You need a team surrounding you to bring the idea to fruition. Money is required to make it happen. You must continually invest in knowledge and advancing your product or service or risk getting left behind by competition. Let’s start taking your business to the next level!

Plant a Seed

First, figure out what type of tree you want to plant. This can include an idea, a person, or a business model. Apple’s seed was Steve Jobs. He had the idea and passion to revolutionize technology. Amazon converted to a subscription model and partnered with UPS to do logistics. Google took their algorithm and provided a free product for consumers while providing an advertising platform for companies.

Once you have identified what you want to do and where you want to do it, it’s important to commit to it. Remember though, it is okay to adapt as you learn what works and does not work. But, be aware that many young companies decide to pivot too quickly to prevent making a mistake and lose out on a great reward. You are missing out on an opportunity to make money grow on trees if you continue to change the type of product or service and how to deliver it every six months. Commit to your seed.

Toil Your Soil

The next step is to plan it in fertile soil. A seed is useless if it isn’t planted in nutrient-rich soil. By setting yourself up with a great foundation, you will be more likely to reap great rewards. What does this mean for you as the financial leader of your company? Have the resources, the right team, and the place that this seed would thrive. You wouldn’t plant a palm tree in Siberia.

Then, have a hyper-focused goal to reach X customers, $Y million in revenue, or enter Z more states/countries. Whatever that goal is, paint it on the walls and breathe it every second of the work day. A great leader will continue to remind and encourage the team of those goals.

You will still run into a few roadblocks while you try to toil your soil. As a financial leader, it can sometimes be frustrating when your entrepreneur chases multiple “squirrels”, losing their focus repeatedly. But thankfully, you can help guide them back onto a focused path towards success. Instead of getting annoyed, encourage them that if they focus on this one product or model, they can chase after that squirrel later. Keep in mind, your attitude toward your entrepreneur and the company’s goals will determine the level of success they achieve.

If you want to learn more about how you can be more effective in your role (and get two extra tools), click here to download the 7 Habits of Highly Effective CFOs.

make money grow on trees

Water Your Plant

You have identified your seed, planted it, but to make it grow, you need something critical in business. Cash! Cash is the blood of your company, the water to grow your company, the life-giving resource. But it is important that you measure the amount of water you are pouring on your seed before it is too late. Whether it is a sprinkle, a consistent stream, or a flash flood of cash coming into the business, the risk of pouring too much or too little can result in disaster – the death of your company. If you have ever kept and grown a plant, you know how important this balance of water is. Thankfully, there are ways to improve cash flow to help buffer a potential mistake.

To improve your cash flow as you water your plant, learn how to squeeze extra cash out of every area in your business (and get two bonus tools) by downloading the 25 Ways to Improve Cash Flow whitepaper.

Let the Sun Shine

Lastly, you need to let the sun shine and watch it grow to know when to reap the fruit. As the financial leader of your company, guide your CEO and senior management team to know when and what move to make. A great place to start is to look at the pricing of your product or service. If you want to analyze your pricing, click here to download the Pricing for Profit Inspection Guide.

make money grow on treesOther Tidbits

We have put together some tips to help your better manage the growth of your company.

  1. Develop a budget that you can consistently adhere to.
  2. Have an emergency fund to bail you out if something goes south unexpectedly. One of the biggest mistakes is exhausting all cash and depleting the reserves.
  3. Pay down any debt in the company quickly and strategically. Too much debt will strangle your ability to grow.
  4. Get referrals to build your business. In our consulting practice, we give referrals to banks and other businesses who we were not able to help ourselves. In return, they refer us clients.

Now’s the time to really think like a CFO. Download our three best tools to start speaking the CFO language and start growing your company. Make some money grow on trees!

How to Make Money Grow on Trees

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Make Money Grow on Trees

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Managing the Banking Relationship in a Growing Market

extending lineBusiness is rarely easy.  Even in a growth market, there are still challenges.  They are just different challenges than in a recession.

Managing the Banking Relationship in a Growing Market

In Houston, we are seeing companies who are continuing to grow and generate cash. As they seek to expand their operations and invest in infrastructure, they are running up against the debt limits set by their bank. Right now, banks want to lend money!  That is how they earn a profit.  Unfortunately, a lot of companies are not making it easy on them.

Pursuing an aggressive tax-minimization strategy may generate cash to a point, but makes it difficult for banks to lend the company money once the tax savings aren’t enough to fuel growth.

Companies who violate the concept of sustainable growth, by borrowing more than the company’s internal growth rate can sustain, tie their banker’s hands and often make it necessary to seek sources of funding outside their bank.

Another obstacle for the bank loaning more money is the regulators.  Since the financial meltdown, bank regulation has increase dramatically and the banks have to keep the regulators happy.  We’re finding that in order to get more leverage, companies often just need to address the bank’s issues in a manner that makes sense.

Bankers hate surprises. Consequently, the key to a successful banking relationship is communication. Openly communicating your plans with your banker not only gives them confidence that you know where you are going, but gives them the opportunity to help you get there.

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managing the banking relationship

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Track Money In and Out of a Company

See Also:
How to Develop a Daily Cash Report
Cash Flow Projections
Discounted Cash Flow Analysis
Cash Flow Statement
Free Cash Flow Analysis

Track Money In and Out of a Company

We have all heard CASH IS KING and HE WHO HAS THE GOLD RULES. I was talking with a business owner of a growing company. He was complaining about the lag between the time he had to pay his suppliers and employees and the time it took him to collect from his customers. He told me that is his biggest problem. Then he asked me how to resolve it. The trick is to track money in and out of a company.

Cash Flow Management

I said the solution is cash flow management. He looked at me and asked “what do you mean cash flow management?” I told him the most basic definition of cash flow management is delaying outlays of cash as long as possible, while encouraging anyone who owes you money to pay it as rapidly as possible.

He looked and me and said if he could do that, then he would not be talking to me. In reality he said his suppliers will not give him the credit he needs and his customers will not pay him when their receivables were due. I told him that his situation was normal and not unusual. He then asked what I would suggest for him to have good cash flow management.

Prepare Cash Flow Projections

I told him first of all, you can not manage anything if you can not measure it. So, you should consider preparing cash flow projections for next year, next quarter and, if you’re on shaky ground, next week. The objective and results of an accurate cash flow projection is they will alert you to negative cash flow situations well before the money is not there.

However, you must understand that cash flow plans are not glimpses into the future. Cash flow plans are only estimates that will take into account such items as your customerspayment histories, your upcoming purchases, and your vendors’ patience.

Additionally, to make an accurate projection you need detailed understanding of amounts and dates of upcoming cash outlays. This means you need to account for every dollar that will be spent, as well as what it will be spent on.


Download The 25 Ways to Improve Cash Flow


Manage Operating Cycle

Secondly, you must manage and work your operating cycle. You know if you were paid for sales the instant you made them, you would never have a cash flow problem. Unfortunately, that doesn’t happen in business to business transactions. You can still improve your cash flow by managing your operating cycle. The basic idea is to speed your operating cycle, which is the time it takes to turn materials and supplies into products, inventory into receivables, and receivables into cash. Some techniques for doing this include, offer discounts to customers who pay their bills rapidly, ask customers to make deposit payments at the time of ordering, issue invoices promptly, and follow up immediately if payments are slow in coming.

Understand Sales Growth

Another area to help your cash flow is to understand that sales growth will conceal problems. Don’t be lulled into complacency by simply expanding sales. You need to watch expenses carefully. Any time and any place you see expenses growing faster than sales, examine costs carefully to find places to cut or control them. You must use your cash wisely. Some ways to achieve this is to take full advantage of creditor payment terms. If a payment is due in 30 days, don’t pay them early, consider using electronic funds transfer or credit cards to make payments on the last day they are due. And, don’t always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.

With this information, he told me he is now prepared work on his cash flow management.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

Track Money In and Out of a Company, Cash Flow Management
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Track Money In and Out of a Company, Cash Flow Management

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Other People’s Money

Other People’s Money (OPM)

In finance, other people’s money, or OPM, is a slang term that refers to financial leverage. Other people’s money refers to borrowed capital that is used to increase the potential returns as well as the risks of an investment. OPM can be used by individuals or by corporations.

Using other people’s money is considered a double-edged sword – it cuts both ways. If an investment that is levered with other people’s money turns out to be profitable, then the profits are magnified by the effects of the leverage. However, if the levered investment goes sour, then the investor that utilized other people’s money can incur steeper losses.

Capital structure refers to a company’s mix of debt and equity financing. Many factors must be considered when determining the optimal mix of debt and equity financing. Increasing leverage, or the use of other people’s money, up to a certain degree can benefit a company by increasing its tax shield. On the other hand, more leverage can increase the risk of default and the incurrence of bankruptcy or financial distress costs.

Other People’s Money Example

Here is an example that demonstrates the risk-return trade-off of using financial leverage, or other people’s money. Let’s say an investor has $100 and plans to invest it in a security that either gains 20% or losses 20% over the course of the year.

If the investment gains 20%, then the investor ends the year with $120, or a profit of $20. However, if the investment losses 20%, then the investor ends the year with $80, or a loss of $20. In either case, the gains and losses represent a reasonable amount in comparison to the original invested capital.

Now, let’s examine the same investment, but with the investor using other people’s money as financial leverage. Let’s say the investor borrows $400 and, along with his original $100, invests a total of $500 in the same investment. The investment will end the year either up 20% or down 20%.

If the investment gains 20%, then the investor ends the year with $600, or a profit of $100. This represents a 100% increase in the original invested capital. On the other hand, if the investment losses 20%, then the investor ends the year with $400, or a loss of $100. This represents a loss of 100% of the original invested capital.

As you can see, the use of other people’s money, or financial leverage, dramatically increased both the upside gains and the downside losses of the investment.

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Other People's Money
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Other People's Money

See Also:
Angel Investor
Venture Capital
Line of Credit (Bank Line)
What are the 7 Cs of banking
Working Capital

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Interest Rate Definition

See Also:
Effective Rate of Interest Calculation
Interest Expense
What are the 7 Cs of banking
Time Value of Money (TVM)
Interest Rate Risk
LIBOR vs Prime Rate
Federal Funds Rate Definition
Treasury Inflation Protected Securities

Interest Rate Definition

An interest rate signifies a borrowing cost. The interest rate definition is the rate the lender charges the borrower for the use of money. Quote interest rates as annual rates, which represent a percentage of the borrowed principal. Interest rates are used in all types of business and consumer loans, including auto loans, mortgages, credit cards, and any other contract that involves a borrower and a lender. A borrower with good credit – and therefore less risk of default – can borrow money at a lower rate than a borrower with poor credit.

Benchmark Interest Rates

Business and consumer loans, as well as interest rate derivatives (see below), often rely on benchmark interest rates, such as the fed funds rate, the prime rate, Libor, or U.S. Treasury rates. For example, a company may borrow money from a commercial bank at a rate equal to the prime rate plus a specified quoted margin. The quoted margin, or spread between the benchmark rate and the interest rate used in the loan, would depend on the credit standing of the borrower.

Interest Rate Derivatives

Furthermore, interest rates are also frequently used in financial derivatives, such as interest rate futures and interest rate swaps. With financial derivatives, the value of the derivative instrument depends on fluctuations in the underlying interest rate.

Calculate Interest on Loan

Use the following equations to calculate interest on a loan:

Simple Interest = Principal x Interest Rate x Time Periods

Compound Interest = Principal x (((1 + Interest Rate)^Time Periods) – 1)

Interest Payment = Principal x Interest Rate

Principal = Interest Payment / Interest Rate

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Interest rate definition

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Interest rate definition

 

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