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What Is Credit Utilization Ratio and How Does It Affect Your Business?

What’s your business’s credit utilization ratio? Even if you know your business’s credit score, you might be unfamiliar with its credit utilization ratio. Nonetheless, if your business uses credit, it has a credit utilization ratio. It’s a credit-based financial metric that provides insight into how much credit your business uses. What is credit utilization ratio exactly, and how does it affect your business?

Credit Utilization Ratio Explained

Credit utilization ratio represents the amount of credit your business is using relative to your business’s total available credit. It’s expressed as a percentage. A credit utilization ratio of 25% means your business is using one-quarter of its total available credit. If your business has $100,000 in total available credit — credit cards, lines of credit or other revolving credit accounts — and your business is currently using $25,000 on that available credit, its credit utilization ratio will be 25%.

How Credit Utilization Ratio Affects Your Business

Lenders may consider your business’s credit utilization ratio when determining its candidacy for a loan. A high credit utilization ratio can make it difficult to get approved for a business loan. A low credit utilization ratio, on the other hand, can increase your chances of getting approved for a business loan.

If your business’s credit utilization ratio is too high, you may have trouble paying for expenses. A high credit utilization ratio means less available credit to use. You can always use cash or other payment methods to cover the cost of expenses, but you may not be able to use credit.

Ways to Improve Your Business’s Credit Utilization Ratio

You can improve your business’s credit utilization ratio by using less credit. And when you do use credit to pay for goods or services, be sure to pay it off in a timely manner. Credit utilization ratio is based on revolving credit accounts. By paying down those revolving credit accounts, you’ll free up your business’s total available credit, thereby improving your business’s credit utilization ratio.

Another way to improve your business’s credit utilization ratio is to obtain but not use more credit. As your business’s total available credit increases, so will your business’s credit utilization ratio. Just remember not to use all of this credit. Credit utilization ratio represents the amount of credit your business is using relative to its total available credit. You can improve this metric by increasing your business’s total available credit and decreasing your business’s used credit.

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5 Tips for Smoother Reconciliations

Reconciling your business’s credit card and bank statements is essential to preventing accounting errors. Mistakes can happen when recording financial transactions. You may accidentally record the wrong transaction or the wrong amount in QuickBooks. By reconciling your business’s credit card and bank statements, you can find and fix errors such as this. Reconciliation is an auditing process in which you match the financial transactions recorded in QuickBooks to those listed on your business’s credit card and bank statements. Below are five tips for smoother reconciliations.

#1) Start With Oldest Statements

There’s an order in which you should reconcile your business’s credit card and bank statements. Always start with your business’s oldest statements while working your way to your business’s newest statements. If it’s been three months since you last reconciled your business’s statements, for instance, you should begin with the oldest statements from three months ago. Assuming there are no discrepancies, you can move on to the statements from two months ago, followed by last month’s statements.

#2) Use the ‘Hide Transactions’ Feature

When performing reconciliations in QuickBooks, there’s an option to hide all transactions after the statement’s end date. You can use this feature to focus exclusively on a single statement. You won’t see transactions from other statements in QuickBooks. When selected, this feature will hide all transactions after the opened statement’s end date.

#3) Place a Checkmark Next to Matched Transactions

You should place a checkmark next to matched transactions. Matched transactions are those that appear in Quickbooks and one of your business’s credit card or bank statements. Ideally, all of your transactions should match, meaning there are no discrepancies. Placing a checkmark next to a transaction in the QuickBooks reconciliation window indicates it’s accurate and, thus, matched to a statement.

#4) Include Interest and Fees

A common mistake business owners make when reconciling their transactions is omitting interest fees. If you have any business loans or credit cards, you’ll probably have to pay interest on them. Some lenders may charge fees as well. Payments involving interest and fees are transactions. And like all other transactions, you’ll need to reconcile them. Make sure the interest and fees recorded in QuickBooks are the same as those listed on your business’s credit card and bank statements.

#5) Match QuickBooks Transactions to Statement Transactions

The transactions recorded in your QuickBooks account should match those on your business’s credit card and bank statements. In other words, don’t assume that your QuickBooks transactions are accurate. Statement transactions are always accurate, so you should make sure your QuickBooks transactions match them.

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6 Mistakes to Avoid When Creating a Business Plan

You can’t ignore the importance of a business plan. With this formal document, you’ll know exactly what you need to do to achieve your business’s goals. At the same time, a business plan will help you secure financing, as many lenders require it. There are several otherwise common mistakes, however, you should avoid making when creating a business plan.

#1) Skipping the Executive Summary

Don’t skip the executive summary when creating a business plan. Business plans, of course, consist of multiple sections. The executive summary is typically the first section. As the name suggests, it offers an overview or summary of the contents of the business plan.

#2) Unattainable Goals

There’s nothing wrong with being optimistic, but you should set attainable goals when creating a business plan. You don’t want to set bold, unattainable goals that are beyond your business’s reach. If the goals described in your business plan are unattainable, they’ll set your business on a path to failure.

#3) Overlooking the Competition

Another common mistake to avoid is overlooking the competition. Business plans require a competitor analysis. You’ll need to specify and analyze your business’s competition in your business plan. Without a competitor analysis competition, you won’t be able to convey a unique selling proposition that distinguishes your business from other businesses in the same market.

#4) Making It Too Long

You should be conscious of the length of your business plan. Long business plans aren’t necessarily more effective than short business plans. On the contrary, if your business plan is too long, prospective investors, lenders and other professionals may not read it. How long should a business plan be exactly? Most experts recommend limiting the length of business plans to no more than 20 to 25 pages.

#5) Spelling and Grammar Errors

Don’t forget to proofread your business plan for spelling and grammar errors. Typos are bound to happen. Research shows that the average person has a typing accuracy rate of about 90%, meaning for every 10 words you type, you’ll probably make one typo. Allowing spelling and grammar errors to go unnoticed, though, can harm your business plan.

#6) Not Including Risks

Risks are an important part of a business plan. All businesses have risks. When seeking financing, investors and lenders will probably want to know about your business’s risks. You can convey potential risks in your business plan.

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What Is a Line of Credit and How Does It Work?

When researching alternative financing vehicles for your business, you may come across lines of credit. You can’t expect to grow your business without financing. All businesses require financing in the form of capital. Rather than applying for a loan, though, you may want to consider a line of credit. Both loans and lines of credit are forms of debt-based financing, but the latter vehicle offers a few key advantages. What is a line of credit exactly, and how does it work?

What Is a Line of Credit?

A line of credit is a financing vehicle that involves the use of a revolving credit account. They are offered by banks and alternative lenders. Whether you need capital to purchase new equipment, hire employees, restock inventory or launch advertising campaigns, you may want to use a line of credit. It will provide your business with a revolving credit account from which you can borrow money.

How Does a Line of Credit Work

A line of credit is similar to a credit card. After getting approved for a line of credit, you’ll be able to borrow money from the revolving credit account. You can continue to borrow money from it as long you stay within the lender’s predetermined limit.

All lines of credit have a limit. Some of the smaller lines of credit offered to small businesses may have a limit of $10,000, whereas larger lines of credit may have a limit of over $1 million. With a line of credit, the lender will provide you with a revolving credit account up to this limit. You can make payments to the lender so that your balance lowers and, thus, frees up more available credit.

Should You Choose a Line of Credit?

You might be wondering whether a line of credit is the right financing vehicle for your business. Many business owners prefer lines of credit over loans because it doesn’t have a fixed limit. Lines of credit still have a limit, but they are revolving. You can continue to borrow money from a line of credit as long as you pay down the balance.

As a form of debt-based financing, you’ll typically need good credit to obtain a line of credit. If you have bad credit — or if you don’t have any credit — you may struggle to get approved for a line of credit.

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A Crash Course on Prepaid Expenses: What You Should Know

Expenses are inevitable when running a business. Regardless of what products or services exactly your business sells, it will incur expenses. While all expenses are operational costs, there are different types of expenses, such as prepaid expenses.

Overview of Prepaid Expenses

Prepaid expenses are business-related expenses that are paid for in advance. If you pay for goods or services to use in your business’s operations but don’t receive those goods or services until a later date, you should record them as prepaid expenses. They are “prepaid” in the sense that you pay for them before you receive them.

Common examples of prepaid expenses include the following:

  • Rent or lease payments
  • Insurance
  • Utilities
  • Interest

How to Record Prepaid Expenses

How do you record prepaid expenses? Because they are paid for in advance, you’ll typically need to record them as current assets, followed by expenses. You can record them in a prepaid asset account on your business’s balance sheet. You can then reduce these asset accounts by making entries to expense accounts.

Unlike other expenses, prepaid expenses are recorded as current assets — at least initially. This is due to the fact that they are paid for in advance. Prepaid expenses involve business-related goods or services that are paid for in advance. You won’t receive them immediately when you pay for them. It make several days, weeks or even months until you receive them. And because they are paid for in advance, prepaid expenses are recorded as current assets. After the prepaid expenses have been realized, they are later recorded as expenses.

Prepaid vs Accrued Expenses

In addition to prepaid expenses, there are accrued expenses. Both prepaid and accrued expenses are business-related expenses, but don’t let that fool you into thinking they are the same. Prepaid and accrued are two different types of expenses.

Accrued expenses are essentially the opposite of their prepaid counterparts. Prepaid expenses involve paying for goods or services in advance, whereas accrued expenses involve paying for goods or services after you receive them.

In Conclusion

There are many different types of expenses. Prepaid expenses are expenses that are paid for in advance. Most rent and lease payments are considered prepaid expenses. If you rent or lease real property for your business, you’ll have to make those payments in advance. Therefore, they are considered prepaid expenses.

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What Is Multi-User Mode in QuickBooks and When Should You Use It?

Depending on how many licenses you have QuickBooks, you may be able to switch from single-user mode to multi-user mode. This alternative mode lives up to its namesake by supporting multiple users. Not all businesses are run by a single person. If your business has multiple owners, executives or even employees, you may want to take advantage of multi-user mode. You can use it to extend company file access to other people with whom you operate your business.

What Is Multi-User Mode?

Multi-user mode is a feature in QuickBooks that allows multiple users to access the company file simultaneously. The default mode for QuickBooks, of course, is single-user mode. In single-user mode, only a single user can access the company file at any given time. Multi-user mode is an alternative mode that allows multiple users to access the company file simultaneously.

How Multi-User Mode Works

Multi-user mode works by extending company file access to multiple users. All of your business’s financial transactions and accounting information are stored in the company file. If you have multiple licenses, you can switch from single-user mode to multi-user mode. Once in multi-user mode, other users will be able to log in and access the company file at the same time.

According to Intuit, multi-user mode is designed for use on a shared network environment. You’ll need to set up a host computer on a network. The host computer will share the company file with all other users.

To switch to multi-user mode, click the “File” menu in QuickBooks. You should see an option for “Switch to Multi-User Mode.” Selecting this option will convert your account to multi-user mode. You can switch back to single-user mode by repeating the process, in which case you should see an option for “Switch to Single-User Mode” under the “File” menu.

Benefits of Multi-User Mode

With multi-user mode, you can work on the company file at the same time as your accountant or other relevant professionals. You won’t have to wait until your accountant is finished working on the company or vice versa. When set to multi-user mode, multiple users will be able to access and work on the company file.

You can also set different access levels for different users. You may want to assign other users limited access, for instance. Therefore, they won’t be able to perform the same administrative-level tasks as you while working on the company file.

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Why Accounting Is Considered the Language of Business

Accounting is often referred to as the language of business. It’s a label originally given by Warren Buffet. In 2014, the famous investor and philanthropist was doing a news segment with CNBC. During the segment, Buffet advised a caller to study accounting while coining it the language of business. Other people have since jumped on the bandwagon by referring to accounting as the language of business.

All Businesses Need It

Regardless of what they sell, all businesses need accounting. It provides insight into their finances, including their revenue and expenses. Without accounting, businesses will struggle to achieve their financial goals. Whether a business operates in the business-to-consumer (B2C) or business-to-business (B2B) industry, it will need accounting. The universal need for accounting is one of the reasons why it’s considered the language of business.

It Paints a Picture

Accounting paints a picture of a business’s financial health. Statistics show that over half of all new small businesses opened in the United States will fail within their first years. While small businesses can fail for different reasons, poor financial health is often the leading cause. Businesses that aren’t profitable won’t be able to sustain their operations — at least for any extended period. They may be able to borrow money by obtaining loans or other forms of debt financing, but they’ll eventually be forced to close their doors. With accounting, businesses will have a better understanding of their financial health.

It Has Its Own Terms

Another reason accounting is considered the language of business is because it has its own terms.  The term “balance sheet,” for instance, refers to a report that lists a business’s assets, liabilities and shareholder equity. The term “cost of goods sold,” on the other hand, refers to all direct expenses associated with the production of goods or services sold by a business. There are dozens of accounting terms. All languages have their own terms. And accounting has its own terms, so it’s considered the language of business.

It’s Structured

Accounting is structured. It consists of specific rules that businesses must follow when tracking and recording their financial transactions. Many businesses use the Generally Accepted Accounting principles (GAAP). Originally adopted by the U.S. Securities and Exchange Commission (SEC), it’s become synonymous with accounting. The GAAP consists of rules that, when used by businesses, provide structure.

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Does Asset Depreciation Affect Cash Flow? Here’s What You Should Know

Depreciation is inevitable when running a business. While some of your business’s assets may increase in value, others may decrease in value. The latter is known as depreciation. Whether it’s a machine, vehicle, real property or any other asset purchased by your business, its value may decrease.

In accounting, depreciation is recorded as an expense. You can write off the depreciation of an asset so that it lowers your business’s tax liabilities. Doing so essentially allows you to allocate the asset’s original cost over time. Once the asset is no longer useful for your business, its value will be zero. You can use depreciation to slowly achieve this zero value. You might be wondering, however, if depreciation will affect your business’s cash flow.

Cash Flow Explained

Cash flow is a business’s net cash for a given period. All businesses make money, and all businesses spend money. The difference between this incoming and outgoing money is cash flow. Cash flow is a financial metric for incoming and outgoing money.

If your business makes more money than what it spends, your business will have a positive cash flow. If your business spends more money than that it makes, on the other hand, your business will have a negative cash flow.

Depreciation Doesn’t Directly Affect Cash Flow

Depreciation may affect your business’s taxes, but it won’t affect your business’s cash flow. Cash flow is a measurement of how much cash flows into and out of your business. Depreciation is the loss of value involving a fixed asset. When a fixed asset becomes less valuable, it will depreciate.

In accounting, depreciation is classified as a non-cash expense. There are cash expenses, and there are non-cash expenses. Cash expenses include goods and services that your business paid for. Non-cash expenses include things like depreciation and amortization.

Depreciation Still Affects Taxes

While it doesn’t directly affect cash flow, depreciation still affects taxes. Like other expenses, it’s tax-deductible. You can write off depreciation to lower your business’s tax liabilities.

The greater the loss of value with a given asset, the more money your business will save on its tax liabilities. Depreciation won’t affect the money coming into your business, nor will affect the money leaving or going out of your business. But it can still affect your business’s tax liabilities.

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S Corp vs C Corp: What’s the Difference?

The U.S. Internal Revenue Service (IRS) recognizes several types of business entities. In addition to sole proprietorships and limited liability companies (LLCs), there are S corps and C corps. You can structure your business as either an S corp or C corp. While they are both corporation-based entities, though, they aren’t the same. What is an S corp and C corp exactly, and how do these entities differ?

What Is an S Corp?

An S corp is a corporation-based entity that passes its income to its shareholders. All corporation-based entities have shareholders. Whether you want to start an S corp or C corp, you’ll have to jump through the hoops of issuing stock and holding shareholder meetings. You don’t have to necessarily list your business on the stock market. Rather, you just need to have shareholders — even if your business is privately traded. S corps are pass-through entities, meaning shareholders are responsible for paying taxes on their business’s gains or losses.

What Is a C Corp?

A C corp is a corporation-based entity that doesn’t pass its income to its shareholders. C corps still have shareholders, and they must perform many of the same stock-related tasks as their S corp counterparts. But C corps themselves must pay taxes. C corps aren’t pass-through entities. Their shareholders must pay taxes on dividends, and the C corps themselves must pay taxes on their income.

Differences Between S Corps and C Corps

The main difference between S corps and C corps is that the former is a pass-through entity, whereas the latter is not. S corps are classified as pass-through entities because their taxes are passed down to their shareholders. C corps use a different form of taxation known as double taxation. With double taxation, both the shareholders and the C corps themselves pay taxes.

Another difference between S corps and C corps involves stock. S corps only have a single class of stock. C corps, in comparison, support multiple types of stock. If you operate a C corp, you can create different classes of stock with different levels of voting rights for shareholders.

S corps are more common than C corps among small businesses. Only businesses with more than 100 shareholders are eligible for the C corp status. S corps, in comparison, are limited to 100 shareholders. Since small businesses typically have fewer shareholders, most of them operate as an S corp, instead.

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