Category: Finance

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Finance

Finance For Non-Finance – The Basics That Every Entrepreneur Must Know

लोन
लोन

Not every entrepreneur has to be a Chartered Accountant. But every entrepreneur must understand finance such that they can drive business growth, understand taxes and manage the financial health of their business.

A stronghold on finance for non-finance leads to the following advantages for the business:

  • A strong understanding of assets and liabilities
  • Strategic decision making based on data from P&L, Balance sheet and Cash flow statement
  • It makes your business ready for fund raising
  • Business becomes prepared to manage costs
  • The business is prepared to manage working capital

These Finance for Non-Finance tips can impact your financial decisions and can also affect the performance of your organization in terms of profitability. You will gain a basic understanding of Finance for Non-Finance concepts to drive your organizational growth.

Here are some important tips related to Finance for Non-Finance to understand your financial health:-

1. Know your Balance sheet/Report Card to understand your business

  • A balance sheet is a report card or a scoreboard that shows you the financial health of your business.
  • A balance sheet shows you the bigger picture of your company. It goes beyond the short-term view to gauge your business progress over the time.
  • A balance sheet helps you calculate the value of your company. You may not be thinking about selling your business anytime soon but having an idea of the value can give you an insight about your future plans.
  • A Balance sheet also works as an early warning system. Is your equity shrinking or growing? If your business is not producing growth equity, looking at the assets and liabilities on your balance sheet can help you find out why. For example, if your inventory is a part of your assets, it can turn out to be dangerous because if the inventory doesn’t sell quickly it can become your liability.
  • A balance sheet is a very important financial tool because it gives you an insight on the availability of funds to run your business in the short-term and also allows you to make predictions based on your current financial status.

2. Build a strong Cash Flow management

  • 7 out of 10 start-ups fail because of poor cash flow management. Running out of money is the most critical situation where most of the start-ups fail. You always need to know where the money is coming from and where the money is going.
  • Perform a cash flow analysis at least once a month. This will help you identify the risky situation and will help you move forward. It also records all the relevant activities for the current period.
  • Cash Flow management is the amount of cash collected and used by a company in a set period and checking on how much cash is available to perform other functions. This is one of the most difficult and critical aspects of financially understanding your business.
  • You are going to put your business in a very dangerous position if you don’t stay on top of your cash flow. It doesn’t matter how good your idea is when you run out of the money you always hit a brick wall.

3. Limit your fixed expenses in the beginning

  • In the starting stages of a business, keeping all your expenses low is an important key to longevity.
  • Utilize your major capital to grow your business, this will enable you to fight when the going gets tough in your business.
  • Many business owners focus only on the wrong things; like offering too many perks, fancy offices and forget that generating revenue should be their top priority initially.

4. Calculate your business costs and margins 

  • The cost to produce a good or deliver a service is constantly shifting. Changing economic conditions can also affect the willingness of your customers to pay the price.
  • Keeping a close eye on costs and adjusting prices to ensure strong profit margins as this is one common mistake entrepreneurs make.
  • A lot of times business owners fail because they acted too late to make necessary adjustments to the pricing structures.

5. Capitalization of the business

  • Having funds in hand to pay employees or cover operating expenditures can help you keep the business afloat. That’s why business owners need to ensure that they either retain enough earnings to secure sufficient loans and to manage through challenging times.
  • When it comes to understanding taxation, remember that both businesses and their owners are subject to varying levels of taxes, so a clear understanding of the distinction between personal and professional taxes need to be understood.

The health of your business completely depends on how much understanding you have of the Finance for Non-Finance aspect.  Above are some points on finance for non-finance you must know if you want to enter the world of entrepreneurship and run a business.

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Finance

How GST Can Benefit Your Small Businesses

Benefits of GST in business

The benefit of GST in business has positively affected different areas of the Indian economy. Depending upon the industry you work in, GST has its advantages. We are actually looking at low inventory expenses that can benefit the Indian economy in the long run.

Let’s discuss some advantages of GST in India:-

1. GST eliminates the cascading effect of tax

GST has been designed and implemented to bring indirect taxation under one umbrella. More importantly, it eliminates the cascading effect of taxation. Cascading tax effect can be best expressed as ’Tax on Tax’. To reduce this problem, the input tax credit (ITC) was created under the benefits of GST to businesses.

The concept is simple ’ you purchase the supplies for your business from different vendors and pay GST when required. Then, when you sell your service or products, you charge GST from your customers. Every month, the government authorities expect you to pay that amount in taxes.

2. Higher threshold for registration

Earlier, in the structure of VAT, business with a turnover of more than 5 lakh (in most of the states) is liable to pay VAT (Value Added Tax). Also, the tax depends on the nature of business you are operating in, and service tax was exempted for service providers that have a turnover of less than 10 lakh. 

Now, with GST coming in, the service provider organizations with turnover lower than Rs.20 lakh are exempted and take benefits of GST in business. In the case of North-Eastern states, Rs.10 lakh is the threshold. This will help small business owners to avoid lengthy taxation procedures.

3. Composition scheme for small businesses

Under the GST regime, small businesses (with a turnover of Rs 20 to 75 lakh) can benefit and pay only 1% of the tax of their turnover as it provides an option to lower taxes by utilizing the scheme of composition. This has moved down the taxes and compliance burden on many small business owners. The benefit of GST to small businesses in India has also helped at reducing corruption and sales without receipts.

4. The simple and easy online procedure

The entire GST process (registration to filing the returns) is made online with super simple operations. This is beneficial for start-ups, as they do not have to get into different registrations such as VAT, excise, and service tax.

5. The number of compliances is lesser

Earlier, there was service tax and VAT, each of which had their compliances and returns. 

However, under GST there is just one return to be filed. Therefore, the number has come down of returns to be filed. There are approximately 11 returns under GST, in which 4 are basic returns that apply to all taxable individuals. The main GSTR-1 is manually populated and GSTR-2 and GSTR-3 will be auto-populated. Under the benefit of GST to business, the compliances are now lesser.

6. Defined treatment for E-commerce operators

Before the GST regime, supplying goods through e-commerce was not defined. It had variable VAT laws. 

For example, The e-commerce brands were treated as facilitators or mediators by states like Kerala, West Bengal, and Rajasthan which did not require them to register for VAT but if the online brands are delivering to let’s say Uttar Pradesh, they had to file for VAT and mention the registration number of the delivery vehicle otherwise the tax authorities could seize goods if the documents were not produced.

All these confusing compliances have been removed under the benefit of GST in business. It has now clearly mapped out the inter-state movement of goods for the provisions applicable.

7. Improved efficiency of logistics

Earlier, In India, the logistics industry had to maintain many warehouses across states to avoid the inter-state movement and CST which pushed them to operate below their capacity.

However, these restrictions on state movement of goods have been lessened under GST.

As an outcome of benefit of GST to business, Instead of operating from other cities, the logistic aggregators have shown interest in setting up the warehouses at a strategic location which leads to a reduction in unnecessary logistics expenses and increasing profits for businesses.

As the GST in business eliminated the varied state taxes, It opens ups India for business. 

8. Convenient Filing

For a small business, one of the best things about GST is its convenience. In the old system, the owner had to pay and track a variety of taxes, which included service tax, central excise duty, purchase tax, luxury tax, countervailing duty, and many other taxes.

Under GST, the small business owner, only needs to pay a single tax that makes your monthly and annual returns much easy. That means you can stay compliant without spending much money on a tax professional. You can handle each step of the tax process by using the online GST portal, from registering for GST to paying your taxes.

The GST system is relatively easy to master for the small business owner. Once you get the hang of the forms and filing requirements, you can streamline your accounting to save time, energy and money.

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Finance

Common Challenges Faced by a Small Business While Seeking Funds

ऑनलाइन बिजनेस
ऑनलाइन बिजनेस

Running a business comes with a number of hurdles and challenges for a business owner. One of the most important and common issues for business failure is lack of capital to keep the business in operation. Educate yourself and understand the small business challenges in financing to avoid making these mistakes.

1. Lack of Capital

  • This is an important reason why start-ups often fail. The business owner doesn’t have a credit history or a track record that can help the lender evaluate the business and its creditworthiness. Having no track record does not mean that the business has no merit; it just means that the lender does not have anything to evaluate or compare it with. The lender needs to evaluate whether you can use the credit successfully. A study shows that business owners who have a better understanding of their business credit score are 41% more likely to get a business loan. Certain you need to keep in mind while asking for finance for your business:
  • The track record and business credit line will take time to build.
  • Analyze your business credit card and credit score.
  • It is easy to get qualified for a small credit value so maintain it and start building a good business credit profile. Make sure that you have good credit behaviour.
  • Try to get trade credit from your vendors and suppliers; it is one of the great ways to build a solid credit profile. You can show your suppliers and vendor’s credit track report as a good history to your financer.
  • Build a personal and business balance sheet supported by the income tax paid to justify your track record.
  • Create a detailed small business challenge plan that focuses on scalability, market size, product development, competition, and marketing strategy. This road map will help you to drive smoothly for the future. The idea is to anticipate challenges and work towards strategies that can help you cross these hurdles.

2. Difficulty in demonstrating you have the income to service debt

  • The financer always wants to know about your ability to service debt. They are more focused on whether you can make periodic payments or not? It is unlikely they will approve your loan if you and your business do not meet their income bracket or cash flow requirements.
  • There are many other sources of capital that do not require the same credit details.
  • A microloan can be a good option for you if you have the ability to leverage a small amount to produce a big result.
  • Crowd funding can be another option if you have a solid business idea.
  • Spend time to create a solid pitch and presentation which can motivate the crowd to donate.

3. Understand your financial reports

  • A common small business challenge is that some entrepreneurs don’t understand their financial reports. The financial report shows you the health of your business. Generally, you don’t have to be an accountant to understand it but you should be familiar with the metrics of your business accounts. Your financial report or the cash flow is critical to monitor the health of your business and it clearly indicates whether your business is ready to raise capital or not.
  • If you are not very good with accounts, you can always hire a charted accountant, an expert who can identify the potential gaps to improve your business profits and maintain a healthy cash flow.
  • To address the financial challenges, review, research and revamp your business plan again and again.
  • Dive more into your financial report to understand the numbers and to avoid any financial challenges in the future.

Overspending, a poor capital structure and lack of reserve funds are the common reasons why a small business owner fails. According to the Small Business Association, around 44% of small businesses survive for at least 4 years and then the business owners fail due to the immense financial challenges faced by them. So before seeking finance, try to work on the weak areas of your business. It is not that difficult to eliminate these small business challenges if the business owner exercises little caution and invests his time wisely to focus on the above tips.

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Finance

Don’t Mess Up Your Credit Score

एक्सपोर्ट

Benefits of Maintaining a Good Credit Score

Much before the existence of banks, the trend of lending money with a huge interest to be paid has been practiced in our society since the very beginning. Settling these debts has turned burdensome for many due to the borrowing rate being agreed upon resulting in them losing everything they owned. But today, the whole concept & mindset associated with borrowing and funding has changed drastically. With the emergence of banks, borrowing money turned things in a favorable direction for business owners as banks offered money at a lesser interest rate which motivated people to focus more on their work rather than paying interest. 

For applying loans such a business loan or even a personal loan for that matter, the bank goes through some guidelines that help them to figure out which person is entitled to get a loan or credit. And for this the Credit Score of an individual or a company is very important to determine the eligibility and amount of credit to be given. 

Now the question arises, ’What is a Credit Score’?

Credit Score is an evaluation representing the creditworthiness of a person which is primarily based on digging up a person’s credit file which is linked with one’s bank account. 

To be very honest, we cannot imagine our lives without a credit card these days. Therefore it is very important that we don’t mess with our Credit Score. 

We are fortunate enough to live in a time where one can get loans disbursed to their bank account in a matter of minutes that too with minimum documentation, all thanks to the world of technology. It is important to keep a check on your payment due dates and make all EMI payments on time to maintain a good Credit Score. Failing to do so, your score can drop to a Poor credit score or a Bad credit score category.  

Credit Score can be judged by the range they fall into i.e., 300 to 850, giving a clear reflection where you lie.

  • Good Credit Score ’ More Than 650
  • Average Credit Score ’ 550 to 649
  • Poor credit score ’ 300 to 549

Maintaining a good credit score can be an uphill task for many as there are lots of things one may be doing wrong without even realizing it.

How to overcome a bad credit score which can adversely affect your borrowing capacity in during bad times:-
 

1. Frequently check your Credit Report:
In our busy schedule, we sometimes tend to overlook basic things that have a huge impact. One should be willing to invest some time to check their Credit Report to avoid any crisis or fall in your credit score due to unknown reasons like frauds which can be rectified. By keeping a constant credit check, you can avoid the slippage to a Poor credit score by acting on time.

2. Failing to pay EMI’s:
  Your credit score largely depends on your payment history. The borrowers must keep track of the due dates and act fast by setting a reminder so that it doesn’t slip from your mind. Paying late EMI’s every time can result in a Bad credit score. 

3. Applying for high-value loans:
If you wish to apply for a high-value loan, it would be better to waive of at least 50% of your past EMI’s or Loans that are running as pilling up of credit can result in lowering your Credit Score.

4. Full Payment of Credit Card Dues:
If you have a poor credit score, you can definitely improve it by paying the full amount of your credit card along the way.

5. Credit limit:
One should try not to increase their credit limit if they have an average or a bad credit score as it can act as a burden paying it later on. One should try paying their bills on time to achieve appositive Credit Balance. In this case, the bank itself increases your credit limit if you are found to be a responsible borrower.

By keeping a check and bringing down unwanted expenses that can be undertaken later is the best way to handle your Credit Score. 

So if you want that your credit score remains above average and favourable for borrowing, make sure you adhere to these recommendations given above as you never know when would you need money for business. 

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Finance

Transform Your business Creditors Into Investors

Steps to build and grow a personal brand. | File Image
Steps to build and grow a personal brand. | File Image

How to make your Creditor an Investor in the business?

It is always an unnerving experience when you have to make your business creditors an investor in your company. However, getting an investor on board can help grow your business in many ways- from an increase in inventory to experience in the trade and even talented human resources. But why will someone invest in your company when he can give you that money on loan and earn interest out of that.  Here are some tips on how to transform business creditors into investors:

1. Adaptable Business Plan

  • The business environment is highly dynamic and keeps changing. In this scenario, new opportunities will also arise and with these changes your business will also grow along with a rise in your market share and revenue.
  • But there could be times when there is a slowdown; hence your business plan should be adaptable to the best and worst circumstances.
  • This gives your creditors in business the confidence that the company will be able to survive during harsh times as well and will lure him to invest in it.

2. Financial Performance

  • Financial viability plays a key role for anyone to invest in a business. You need to prove to the investor that the company is financially healthy especially when you are seeking funding from a bank or a venture capitalist.
  • It is the potential high returns that will make them cross the bridge from a business creditor to a business investor.
  • An investor should be guaranteed his money is safe and this can be done by showing proof of the assets and liabilities, revenue streams, acquisition cost etc. 

3. The Role of the Investor

One thing both you and the investor should be clear about is that what is expected from the investor. Is it only money or is there something else lacking in the company. The objective needs to be defined clearly as this can help business creditors turn into investors. 

The objective needs to be defined as to what is the purpose of capital requirement. For e.g.

  • Develop new product line/Business expansion
  • Bring in specialized human resource talent, hence hire additional employees
  • Spend on branding and marketing
  • Or bring in the experience and background of the investor to grow your business

4. Company/Product Uniqueness
 

  • If your business creditors can envision the problem you are trying to solve through your business model or product and how large the market size of that problem is, then surely they will be interested in switching sides.
  • If your business has a competitive advantage and you can also offer something exclusive to the business creditors such as marketing and distribution rights of a region, it will be a bonus incentive for them to join in. 

5. Exit Opportunity
 

  • If you want to transform business creditors into potential investors, they need to see a viable exit opportunity as well in your business.
  • While they are rooting and supporting your business, they are also looking for a return on their investment. Also, be sure of what you want out of the exit as well.

Business creditors can always be potential investors, but you as an entrepreneur need to make sure that there are enough substance and uniqueness in the business for creditors to take the plunge into investment. The idea is that it should be a win-win situation for both you and the creditor. 

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Finance

How to Setup a Petty Cash Book For Your Small Business

The Step by Step Guide to Prepare Your Petty Cash Book

Do you require cash for unexpected expenses almost on a daily basis?

Whether it’s money for some office supplies, lunch for clients or employees, cab fares or money to pay the postman when he brings a letter or a COD package, businesses need to keep some cash in hand for such unexpected expenses. In business terminology, we call it petty cash.

What is Petty cash?

Petty cash is a small amount of money kept aside for the day-to-day expenses in your business.

Small businesses mainly setup a petty cash book for convenience, as sometimes you need a quick alternative to use in place of your company’s regular payment process.

So what are some examples of petty cash expenses in a business?

  • Petty cash expenses include office supplies, catered lunches, postage, cab fares or even a simple cup of tea/coffee.

Why is it important for you to maintain a petty cash book?

If these petty expenses aren’t documented in your books, a lot of money can go unclaimed. These little expenses can be of a significant amount in the long-run once they keep accumulating.

For example
: If a cup of tea/coffee costs Rs.10 per cup, it will be Rs.10,000 if your business has 10 employees for just 100 days in a year.

Other examples include:

  • To pay for small purchases which require cash, such as food for your employees or coffee supplies or a parking ticket
  • To reimburse employees for goods/items they have bought for your business.

By accounting these expenses in the petty cash book, it becomes easier for you to track tax-deductible expenses, making journal entries and also helps in separating personal expenses from business expenses.

4 Easy Steps: Setting up a Petty Cash Book

Step 1
: Add a petty cash book account to your books of accounts, if you do not already have one. Also, start a petty cash fund by drawing a cheque on your company to ’Petty Cash’ and cash the cheque.

Note
: If you are a small business with fewer people you may only need Rs.5000 in your petty cash fund. But if you’re a larger SME, you may need a larger fund. So based on the size of your business and your judgment as a business owner keep the contingency.

Step 2
: Place the petty cash from the cheque you cashed at a safe & designated location within your workplace (Example: a lockable drawer or a safe).

Give access to the petty cash fund to only a few people and assign the responsibility for refilling & recording the transactions of the petty cash fund to a specific person out of them.

Step 3
: Make a list of the expenses made out of the petty cash fund and keep the receipts of all the expenditures made attached to that list.

Step 4
: Refill the petty cash fund back to the decided and approved amount, as needed.

Format of Petty Cash Book for your business:

Petty Cash Book Format

Amount Received Date

Particulars Voucher No. Ledger Folio Expense (Amt. Paid)


Example:

The following transactions occurred in the books of GUPTA JI LTD in the month of May 2019.

May 2 – Cheque received for Rs.700 to open the petty cash book

May 3 – Postage paid    Rs.50

May 6 – Paid taxi hire of traveling employee (xxx to location Y)    Rs.100

May 8 – Paid cleaning lady   Rs.125

May 13 – Telegram sent to Delhi    Rs.40

May 17 – Cart hire paid on goods bought for business    Rs.60

May 19 –
Stationary purchased    Rs.120

May 25 –
Customer’s tiffin charges    Rs.60

May 31 – Settled the pending balance due to Smith    Rs.85

Amount Received Date Particulars Voucher No. Ledger Folio Expense (Amt. Paid)
Rs. 2019 Rs.
700 May 2 To Bank
May 3 By Postage 50
May 6 By Taxi Hire 100
May 8  By Wages 125
May 13 By Telegram  40
May 17 By Car Hire 60
May 19 By Stationary 120
May 25 By Tiffin Charges 

60
May 31 By Smith 85
May 31 By Balacane C/D
700 700
Rs.60 Mar 1 By Balacane C/D

Taking these easy but systematic steps when setting up your petty cash book will help you protect your daily expense cash flow, ensuring it is used appropriately and recorded systematically.

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Finance

Advantages of Tally in a Small Business

स्टार्टअप

Automate Accounting with Tally!

If your business still uses manual systems for accounting and data entry, you may end up spending a lot of time keeping a track of paper documents, finding useful information and keeping your details secure. 

To survive in today’s competition, it is essential that your business adapts to the current technological trends by using tools that give you deeper insights about your business & strategy.

Small businesses usually hesitate to switch to an ERP even though they have the financial capacity to do so. Below are some of the advantages of tally that can do wonders for your business:

1. Multipurpose Use
 

Small and medium enterprises (SMEs) need ERP software to manage 3 essential functions of the business:

Tally for small business
is a one-stop solution and can be used in all these areas with its easy-to-use interface that manages complex activities of the software in the background, without any chances of errors.

2. Facilitating decision making

Since Tally seamlessly allows to manage accounting, inventory and compliance of business within a single software, its becomes easier & convenient for a small business owner to assess the financial impact of various functions on their business and take day to day decisions based on data. 

Tally for small business acts as the backbone of your company by providing estimates, detailed analysis, and overview of your business at your fingertips, which can further help in the decision making process that can boost the growth of your business.

3. Instant access to records

Small and medium enterprises need to monitor the cash flow and revenues of their business before making decisions, as they are typically hard-pressed for finances.

For Example
Decisions like whether to take a loan from a bank or other sources.

One of the advantages of Tally is that these critical business decisions can be taken, just by looking at the financial reports of the business available at the click of a button.

4. Inventory management

Small and medium enterprises need to keep track of their inventory data i.e. the current inventory in hand, to ensure that the business is not investing heavily in maintaining inventory by paying huge interest costs.

  • Tally for small business provides Stock Ageing report which helps manage inventory in the business.
  • Small business owners can take decisions such as giving new purchase orders to suppliers, based on stock clearance status by simply looking at the report.

5. GST ready

GST filing has become a monthly affair for small and medium enterprise business owners, since its introduction.

  • To file GST return without any hassle, small and medium enterprise business owners need a software for recording business data in GST compliant formats.
  • Tally ERP software is GST ready, giving business owners an advantage over their competitors by enabling them to become GST compliant.

6. Remote access to data

Tally enables a business to give remote access to the employees of the organization.

For example, An inventory manager who works from a warehouse location and not the office location could get access to appropriate information so that he can generate delivery challans using Tally at the warehouse itself.

Employees can get access to all the data by simply logging in using a unique ID and Password.

7. Acts as an Audit tool

Tally acts as an audit tool for compliance as it helps out in conducting regular audits of different companies.

Tally for small business does a thorough compliance check at the beginning of the financial year and ensures all monetary transactions are smoothly being carried out in the business.

  • With the help of Tally, Tax consultants can remotely perform audit without the hassle of transferring data.
  • For better coordination, auditors can leave their comments on the vouchers and business owners could take further action as required.

8. Multi-user

Tally enables business owners to manage multiple functions with multiple user logins. Owners can assign different access rights to their employees based on the data used to run the business.

Tally for small businesses enables its users to work remotely with accounts of multiple companies simultaneously and update the information in real-time as soon as the voucher entries are made.

Tally software has helped many small and medium enterprises to manage their tasks cost-effectively by saving time & increasing efficiency

There are multiple advantages of using tally, facilitating the digitization of bills and signatures, making business transactions a task of seconds.

With the aid of Tally, even a small shop owner can manage bills, customers, inventory, and daily financial transactions more effectively.

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Finance

5 Essential Accounting Terms for Small Business Owners

Everything You Need To Know About Small Business Accounting

How often do you end a call with your accountant feeling more confused than you were before?

If you response is ’almost every time’ have no fear!

We’ve compiled a list of 5 most crucial accounting terms for small business, along with the technique to understand them with regards to your business  

1. Cash Flow

Cash Flow = Money Flowing In & Out Of Your Business

Most of the small businesses fail not because of the lack of sales or profit, but because of lack of cash in their business.

Cash is not the same thing as revenue. Sales occur when a business sells a product or renders a service, but the cash comes in the business when the company collects payment from the customer.

Being cash flow positive
 i.e. having excess cash in the business means:

  • Business is better equipped to keep up with the debt
  • Business can cover unforeseen expenses
  • Business can invest in growth opportunities

The activities that affect the cash flow of business are:

  • How quickly customers payback the company
     ’ the faster they pay, the faster cash comes in the business
  • How slowly the company pays back to its vendors
     ’ the slowly these bills are paid, the more cash is retained in the business. But you have the credibility to build too, hence this should be done within a 45-60 day cycle depending on your terms with the vendor
  • The inventory size and how many times it rotates in a year
     ’ the larger the inventory, the more cash needs to be invested in the inventory.

2. Variable & Fixed Expenses

Variable & fixed expenses are very simple but extremely important accounting terms for small businesses.

Variable expenses can increase or decrease depending upon the company’s production output in a month i.e. they rise as production increases and reduces as production decreases.

Fixed expenses remain the same regardless of the production output in a month (e.g. office rent, employee salary, etc.)

  • Small businesses should try to keep more expenses as variable and only a few expenses as fixed, to make higher profits.
  • Unused resources like employees not being able to produce at their maximum potential because the pace of the business alternates, hence such resources can become a real drag on the bottom line.
  • Businesses should try to keep such expenses as a variable by using seasonal workers, freelancers or other third-party resources, only paying them when they work.

3. Depreciation

Many business owners feel that depreciation is a complicated accounting term, which is a completely wrong perception.

Depreciation is the decrease in the value of an asset over time due to its wear and tear, new technology or market conditions.

  • Common assets that a company can calculate depreciation for includes tangible assets like machinery, vehicles, furniture, buildings etc. and intangible assets like patents, copyrights, computer software, etc.
  • For example: If a company purchases a vehicle costing Rs.500,000 and the expected usage of the vehicle is 10 years, the business might calculate depreciation on the asset at Rs.50,000 each year for a period of 10 years. 

Depreciation is an income tax deduction. By decreasing the value of the asset, your overall taxable income lowers, and hence, your tax liability decreases.

4. Cost of Goods Sold (COGS)

COGS or Cost of goods sold refers to the expenses that are directly related to the creation of the product or service of the business.

In simple language, the accounting term COGS refers to the direct costs of producing the goods sold by a company. 

COGS includes cost of the material & labour directly used to create the goods or services, and excludes indirect expenses such as distribution costs and sales force costs.

How COGS affects Business Income:

Accounting term Cost of goods sold is a business expense, just as cost of doing business. As COGS increases, the company’s profit decreases, resulting in reduction in the tax liability. 

But a business owner should keep in mind that increasing COGS means that the business doesn’t make much money overall, hence COGS should be managed efficiently to increase profits.

5. Gross Profit Vs Net Profit

Profit is the amount of money your business makes. The difference between gross and net profit is that expenses when subtracted form gross profit gives us the net profit earned. 

  • Gross profit is what remains after deducting cost of goods sold from your business’s revenue. Gross profit is your business’s profit before subtracting business expenses.
  • Net profit is what remains after subtracting all operating, interest, and tax expenses, in addition to deducting your COGS from revenue. 

To calculate net profit, you must know gross profit of your business. Small business owners should always try to increase their gross profit by reducing their cost of goods sold.

Accounting terms, Gross & net profit are both key indicators for measuring performance of a business as an industry benchmark or its competitors.

If you understand these 5 key accounting terms for small businesses, it can help you manage your accounting in a more efficient manner helping you build your enterprise.

Taking the time out to understand these accounting terms for small businesses is well worth your while and can set you up for future success.

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Finance

How to Calculate Depreciation in Your Business

इनकम टैक्स
इनकम टैक्स

The Step-by-Step Guide on How to Calculate Depreciation

When you’re running a small business, each and every penny saved is a penny earned.

Many business owners feels that depreciation is too complicated or that they’ll have to pay a lot to the accountant to calculate depreciation. Well that’s a mistake which could cost you far more than any savings from your accounting procedures.

What is Depreciation?

When you use an asset over a period of time, it often loses its value.

Depreciation is the decrease in the value of an asset over time due to its wear and tear, new technology or market conditions. 

What can a small business depreciate?

Common assets that a company can depreciate include tangible assets like machinery, vehicles, furniture, buildings, etc. and intangible assets like patents, copyrights, and computer software.

For example: If a company purchases a vehicle costing Rs.100,000 and the expected usage of the vehicle is 5 years, the business might calculate depreciation on the asset at Rs.20,000 each year for a period of 5 years. 

Depreciation is an income tax deduction. By decreasing the value of the asset, your overall taxable income lowers, and hence, your tax liability decreases.

How to calculate depreciation in Small Business?

There is no single method to calculate depreciation. In fact, there are several methods of calculating depreciation.

3 most common methods to calculate depreciation are as follows:

  • Straight Line method
  • Unit of production method
  • Accelerated depreciation method

Estimate Initial cost, Useful life and Residual value

Step 1

Calculate the initial cost of the asset purchased. The initial cost includes the cost of acquiring the asset plus additional expenses for making it operational, such as installation cost, shipping or taxes.

Initial cost = Cost of asset + additional expenses (installation, shipping or taxes)

Step 2

Estimate the useful life of the asset i.e. the period of time over which the asset is expected to be used, after which it needs to be replaced. 

Step 3

Estimate the residual or salvage value of the asset i.e. the amount that you expect to be received from the disposal of the asset after its useful life.

1. Straight-line method
 

This is the simplest method of all. In the straight-line method, you choose to depreciate your asset at an equal amount for each year over its useful lifespan.

Depreciation expense = (Asset cost ’ Residual value) / Useful life of the asset

For Example: 

Suppose Aggarwal Sweets purchases a machinery for Rs.200,000 having a useful life of 10 years and the residual value of the machinery is Rs.20,000.

Annual Depreciation expense = (Rs.200,000 ’ Rs.20,000) / 10

Annual Depreciation expense = Rs.18000

Thus, Aggarwal Sweets can take Rs.8000 as depreciation expense every year over the next 10 years.

2. Unit of production method

This method is very useful in assembly for production lines. This is a 2-step process.

Under this method of depreciation calculation, equal expense rates are assigned to each unit produced. 

Hence, depreciation calculation is based on the output capability of the asset rather than the number of years.

2 steps are:

Step 1: Calculate per unit depreciation:

Per unit depreciation = (Cost of asset ’ Residual Value) / useful life in terms of units of production

Step 2: Calculate the depreciation of actual units produced: 

Total Depreciation = Per Unit Depreciation x Units Produced

For example:

Gupta Ji Ltd. purchases a printing press to print flyers for Rs.40,000 with a useful life of 1,80,000 units and a residual value of Rs.4000. It prints 4000 flyers.

Step 1: Per unit Depreciation = (Rs.40,000 – Rs.4000) / 180,000 = Rs.0.2

Step 2: Total Depreciation = Rs.0.2 x 4000 flyers = Rs.800

Hence, the total depreciation expense, which is accounted, is Rs.800.

3. Written down value method:

Under this method, depreciation is calculated at a fixed percentage each year on the decreasing book value, known as Written Down Value of the asset (book value less depreciation).

For example:

Sharma & Sons purchased a machine for Rs.500,000 having a useful life of 10 years and its estimated residual value is Rs.40,000. 

Rate of depreciation = 10%

Amount of depreciation = (Book Value ’ Rate of Depreciation) / 100

1st year: Depreciation = Rs.500,000 x 10/100  = Rs.50,000

2nd Year: Depreciation = Rs.450,000 x 10/100 = Rs.45,000

3rd Year: Depreciation = Rs.4,05,000 x 10/100 = Rs.40,500

4Th Year: Depreciation =   Rs.3,64,500 x 10/100 = Rs.36,450

Depreciation is an important part of bookkeeping and accounting which helps companies maintain their income statement and balance sheet properly with the right profits recorded. 

Categories
Finance

How Does Your Business Structure Affect Your Taxes?

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What is the Best Business Structure to pay the Least Taxes?

Different Business Structures have different tax liabilities, so it is very important to choose your structure sensibly. An entrepreneur should know the tax implications of the business structure being finalized. Here is your guide to know how a legal structure can affect your taxes:

1. Sole Proprietorship

As the name suggests, this business entity is owned by a single individual and not recognized as a separate legal entity. It has an informal structure and therefore, the tax model is the same as an individual.

Tax Rate

A Sole proprietorship firm is taxed as same as an individual. Therefore, the rebate is the same as the individual i.e. if the income is not more than INR 5, 00, 000/-, there is 100% tax rebate.

Surcharge

The surcharge is as follows:

Income less than INR 50 lakhs: No surcharge

Income between INR 50 lakhs and INR 1 Core: 10%

Income more than INR 1 Crore: 15%

Cess

Health and education cess are calculated at 4% of the income tax and surcharge

2. LLP or Partnership firm

Both kinds of partnerships; LLP or a simple partnership firm are taxed as separate entities. This tax implication for this business structure is:

Tax Rate

The income is taxed at 30% 

Surcharge

If the income is less than INR 1 Crore: No surcharge

If the income is more than INR 1 Crore: 12% surcharge

Cess

Cess is calculatd at 4% of income tax and surcharge

3. Private Limited Company

It is one of the most popular business structures in India. A company is a separate legal entity from its director and members from the start. The tax model is divided into two types: Foreign and Domestic

Tax Rate

For the domestic companies, the tax rates
are as follows

If the annual turnover is not more than INR 250 Crore: 25%.

If the annual turnover is over INR 250 Crore: 30%

For foreign companies
, the tax rates are as follows

If the government is the client: 50%.

If there are other sources of income: INR 40%

Surcharge

Domestic companies:

Income not more than INR 1 Crore: No surcharge

Income more than INR 1 Crore, but less than INR 10 Crore: 7%

Income more than INR 1 Crore: 12%

Foreign companies

Income not more than INR 1 Crore: No surcharge

Income more than INR 1 Crore, but less than INR 10 Crore: 2%

Income more than INR 1 Crore: 5%

Cess

Health and education cess are calculated at 4% of the income tax and surcharge

4. Co-operative Society

The objective of the co-operative society is mutual help and welfare. It is a service-oriented business structure.

Tax Rate

Up to Rs 10,000: 10%

Between 10,000- Rs 20,000: 20%

And, above Rs. 30000: 30%

Surcharge

Income Less than Rs. 1 crore- No Surcharge

Income more Rs. 1 crore- 12% Surcharge

Cess

Health and education cess is computed as 4% on income tax and surcharge

The following are tax structures for different business structures in our country usually opted by SMEs. Apart from other considerations such as Market conditions, Research, Customer profile, Tax implication too plays a dominant role in deciding what business structure you want to opt for.