Olivia T Cavy on thu 22 oct 98
Amy,
Actually to stay in business you need to look at net income (profits),
sales (cash coming in) AND cash flow (cash after paying expenses). All 3
are important and interrelated. Your points about ALL of the expenses of
being in business are so accurate.
Even for the financially challenged there are numerical ways to estimate
your hourly earnings (other than looking into an empty refrigerator or
looking in your piggy bank and finding that you really do have money to
pay that invoice). You could do this over a typical work cycle, or even
at the end of a year when you do your taxes (although it will be more
meaningful if it's not too long after the year ends).
This example assumes that you have no employees, to keep it simple. You
need to keep track of how much time you spend working in the business.
Include ALL your time, including planning, order filling, packing,
loading, unloading, traveling, plus the directly clay related tasks. If
you are working from a tax return, look at your taxable income and add
back any "non-cash" expenses (where the expense deducted isn't paid
directly in real money) such as depreciation or amortization, if any.
This will increase your bottom line. Subtract the portion of any large
equipment purchases that you feel applies to this year. Use the amount
that is "right" for you. (See next paragraph for an explanation.)
What is right? If you bought any equipment that you are depreciating,
decide in your own mind (not what the tax code says, which is hopefully
what you did on your tax return) how many years you want to recover the
cost. By this I mean how long you are willing to take to pay back the
cost. If I purchase a slab roller for $1,600 I probably expect it to last
forever, or at least 12 years, but in the US I could write it all off in
the year of purchase under tax code section 179, or I could depreciate it
as equipment over 7 years (or alternatively over 10 years). Regardless of
how I've handled this purchase on my tax return, I can decide for cost
accounting purposes how long a life I want. Maybe I think 4 years is the
right life for me to use for my slab roller. So I'll subtract $400 from
my net income. (Maybe I'll adjust it by the number of months in the year
I owned it.)
As a CPA when I am working with my tax clients about record keeping for
their business, we discuss things they do, that they might do anyway
(usually things they enjoy) but which COULD become deductions with the
proper documentation. Some examples: entertainment, places they go (both
local and further away), things they read. So in the generic cost
accounting system discussed here, you could possibly make adjustments for
those "fun" things, by adding some fraction back to your bottom line.
But since you are computing your earnings per hour for your own
information, carefully consider whether or not to make these adjustments.
You can't have your cake and eat it too. It doesn't make sense that
you're willing to spend time and money to go to dinner with so-and-so who
is a potential customer to discuss ceramics, document and save the
receipt, and deduct the expense on your tax return and then decide when
you're doing your cost accounting that you would have gone anyway even if
it hadn't been a business expense and you are therefore going to add back
that expense to increase your net income. Either it is an "ordinary and
necessary business expense" or it isn't.
Another adjustment you might make (if you're self-employed) in which case
your income and self-employment tax are not included as a business
expense on your tax return, is whether or not to subtract taxes that
result from the business. You do have the option of deriving your pre-tax
earnings per hour by NOT subtracting your personal taxes. Both are
correct. Both have different meanings. You can't spend all of your
pre-tax earnings, but if you are comparing pre-tax earnings to minimum
wage, or desired earnings per hour, pre-tax earnings may be a better
benchmark for you. What you have to spend are after tax earnings.
So having finally come up with as accurate a list of your business sales
and your business expenses as you can, you will take your adjusted net
income and divide it by the total number of hours you worked and you'll
come up with a good approximation of your earnings per hour. Hopefully
you are satisfied with this number.
The whole point of the exercise is to come up with an approximation for a
one person operation. Jonathan Kaplan works with a MUCH more
sophisticated model. His needs require him to have MUCH more detailed
information and he has paid someone a nice fee to develop his model. I'm
not in any way suggesting that my simplistic method could be a substitute
for him. It won't work for bidding jobs, for running a business with
employees (although it would tell you as a self-employed person not
taking a salary out of the business what you are earning per hour), or
whether you should continue to make teapots or sell at a certain street
fair. It will only give you your average earnings per hour.
However if I found that I earned minimum wage from my ceramics business
last year (or less) and I didn't like it, I'd be spending a lot of time
this year trying to figure out what I could do to increase my profit. I'd
probably stop making those teapots that take me hours to make (from start
to finish) OR I'd decide only to make them if I could quadruple my
selling price. It's not rocket science. A lot of it is common sense. BUT
I have to understand my business. I will have to do more detailed
analysis and/or figure out how to increase my revenue (increase prices,
increase volume), lower my costs and expenses if possible (use fewer
cobalt glazes??? only kidding), decrease my unsaleable (lost) pots, spend
my time more productively, etc etc. Or I could say that last year I was
still learning the business and developing my skills (and education is
rarely cheap!) and this year I expect to do better.
I can do a similar analysis over a shorter period of time than a year. I
can take an average work cycle or perhaps a month. I will keep track of
ALL my time, ALL of my expenses (estimating some and being sure I
include ALL expenses including production materials, utilities and a
share of my equipment costs), and what I can realistically sell the work
for. I need to factor in selling time, travel time and expenses if I
usually sell at fairs. There's a lot of more estimation here. However you
can get to roughly the same place as the annual analysis.
One caveat. You need to write things down. (And don't try to crowd all
your records on one piece of paper. Use lots of paper with everything
well labeled so you can check your work.) Label all your numbers. An
accounting program such as Quickbooks, Quicken, One Write, MYOB, Money,
etc is great for tracking sales and expenses. If you know how to use and
have access to a computer spreadsheet, that is great to set up a model
of expenses being estimated, and in the long run, time spent. One nice
thing about spreadsheets is that you don't have to add up long columns of
numbers. Another nice thing about spreadsheets is that if you later
decide to change things, or add things, you don't have to do a lot of
work recalculating your results.
Another note is that a business that is growing may experience temporary
cash flow (income minus expenses) problems because often there is a
longer lag time in collecting revenue than the time available to pay
bills. So an accrual basis income statement will show a profit, but the
business may go belly up because of insufficient cash to meet its current
needs. By definition a new business is an expanding business- one whose
sales are growing compared to the past.
Bonnie
Bonnie D. Hellman, CPA in PA & CO
Pittsburgh, PA
work email: bdh@firstcaptl.com or oliviatcavy@juno.com
home email: mou10man@sgi.net
On Tue, 20 Oct 1998 13:09:51 EDT amy parker
writes:
>----------------------------Original
>message----------------------------
>Jonathan Kaplan wrote:
>
>We are so involved with other issues in ceramics
>that the one of "what does it cost you to make it" seems to go
>un-noticed,
>until tax time and you may realize that you worked at a loss all year
>because you just didn't care to figure it out. ANd IMHO there is a
>thread
>that runs thoughout potter's lives that" figuring this out is too
>complicated," or "I'm financially challenged," whatever.
>
>I''m willing to posit that most potters are clueless about what their
>costs are to produce a mug. In fact, I'd like to encourage those on
>the
>list to post to the list what it costs them to make a mug. And I'll do
>the
>same to start it off when I get to the shop this afternoon or
>tomorrow.
>-----------------------------------------
>
>I'd like to mention that my husband & I were just discussing
>a large local corporation that made the mistake of looking at "cash
>flow" and
>not "profits". We are talking millions of dollars a year. Yeah, they
>"made
>money". Millions & millions. Every month. BUT - they did not
>consider their
>expenses, and their little hidden costs - and suprise to them & their
>stockholders!!! - bankruptcy. So, if major corporations, with highly
>compensated accountants & CFO's can screw this up, it should certainly
>be
>easy for those of us not so well trained!
>
>I am not making mugs at this time, but bowls instead. I just figured
>out
>that cost of clay, glaze, firing bisque & glaze for one of my
>"average"
>bowls is about $3.40. If I sell said average bowl for $25, and I can
>make,
>say 25 bowls, in a part-time week, including cleanup time, of about 25
>hours, in theory I am "making" $21.60/hr. Sounds great, huh? In
>reality,
>there is the cost of the kiln, wheel, bats, tools, mileage, and a
>horrible
>array of other initial expenses (just got serious about trying to make
>a
>living in the past year, so there was a lot of stuff to acquire). All
>of
>this other overhead has to be
>included in the cost of goods sold, somehow. At this point, I am so
>far
>in the hole, I look like a charitable cause!
>
>I've been self-employed as a programmer for 12+ years, so I am
>familiar with
>most of the forms & procedures IRS wants. BUT - all this material
>cost,
>and averaging out over each item made, is so complicated that I think
>that
>Jonathan is definitely right in his observations! I have been
>considering
>some of the Job Cost software that I have worked with as being
>necessary now
>for my new endeavor!
>
>So - Jonathan you are right! Until tax time, when I attempt to add
>all of
>this up, I am "clueless" as to what I am making - I just know that
>this
>year it is a negative figure!
>amy parker Lithonia, GA
>amyp@sd-software.com
>
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Kathi LeSueur on mon 26 oct 98
In a message dated 10/22/98 10:41:48 AM, you wrote:
>You
>need to keep track of how much time you spend working in the business.
>Include ALL your time, including planning, order filling, packing,
>loading, unloading, traveling, plus the directly clay related tasks.
Bonnie's model is an excellent one for tracking your hourly expenses for tax
purposes. But to come to the actual hourly expenses (not related in any way to
taxes) I would suggest some things to consider.
First, what things do your spouse or your kids or your friends do for you to
help out? How much time does it take? If you didn't have them, how many more
hours would you be spending on your work? Too often we have people who "help
out" but aren't paid. But if we had to pay for that help, how much would it
cost?
Second, how many things related to making pots do you do while watching tv? Do
you wire lamps, price, pack? Do you count that as work time? It is.
I think most of us have a lot of time spent in some way on our business that
for some reason or another we think doesn't count. But it does and it will
give a truer picture of the cost of doing business if it's included.
Kathi LeSueur
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