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How Much Money Do I need to Operate?

Posted on April 28th, 2019

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

Your young start-up business is now taking off.  Sales for the current fiscal year are expected to increase from $110,000 to $500,000. Until now, you’ve been able to operate out of your home, purchase inventory as needed, and sell it immediately to customers who have either prepaid, or pay cash on delivery (C.O.D.).  So what does this new growth spurt imply in terms of the funds required to operate your business?

Assume your business is a wholesale distributor of some kind, and the following changes in the way you currently operate will occur:

  • You now need to stock at least a 30 day supply of inventory, and your suppliers offer 30 day payment terms.
  • In order to stock inventory, you need to lease warehouse space, hire warehouse staff, and purchase a delivery truck.
  • New customers will insist on 30 day payment terms.

Now further assume that, for whatever reason, you overstocked on inventory so that you are running at a 60-day supply of inventory on hand; and, the reality is that your customers are paying you on average in 45 days.  This is what your projected Profit & Loss and Cash Flow now looks like:

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Note in particular the amounts highlighted in yellow.  Even though your business is projected to be profitable at the higher level of sales (see Income Statement), your cash balance declines by $34,000 (rounded), plus you are required to either borrow another $11,000 from a bank or other outside source, or personally invest from your own funds, for a total of $45,000 (see Balance Sheet and Cash Flow Statement).  And what if you had not anticipated this funding requirement, what would you do?

The financial concept I am alluding to is called “Permanent Working Capital,”  defined in this article (click on link) as “the minimum level of current assets required by a firm to carry-on its business operations.”  In other words, it represents a “permanent” funding need.  In contrast, a “seasonal” working capital requirement, wherein increases in inventory and accounts receivable, and the funds required to support these increases, would be of a temporary or “short-term” nature.

The distinction between “short-term” and “permanent” working capital is critical for planning your company’s cash requirements. The difference it makes determines not only how much money your company needs to operate, but also when and where it must come from.  Banks typically do not lend money for permanent working capital unless they have some tangible collateral to secure the loan with, such as your house.  So that leaves: commercial finance companies that lend on receivables and inventory at a much higher rate of interest; an SBA (Small Business Administration) loan; a private investor such as your rich relative; or, your own personal savings account.

For more information, see also below articles.

Related Articles:

The Effect of Sales Growth on Cash Flow

The Relationship Between Turnover Ratios and Cash Flow

Strategic Financial Planning vs. Crisis Management 

Securing a Small Business Loan Revisited



Scam Alert: Fake Calls from Taxpayer Advocate Service

Posted on April 7th, 2019

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

Like clockwork, every year, there’s a new twist on old scams. This year, it is the IRS impersonation phone scam whereby criminals fake calls from the Taxpayer Advocate Service. The TAS is an independent organization within the IRS that help protect your taxpayer rights. TAS can help if you need assistance resolving an IRS problem, if your problem is causing financial difficulty, or if you believe an IRS system or procedure isn’t working as it should. Typically, a taxpayer would contact TAS for help first, and only then would TAS reach out to the taxpayer. TAS does not initiate calls to taxpayers out of the blue.

How the scam works

Like many other IRS impersonation scams, thieves make unsolicited phone calls to their intended victims fraudulently claiming to be from the IRS. In this most recent scam variation, callers “spoof” the telephone number of the IRS Taxpayer Advocate Service office in Houston or Brooklyn. Calls may be ‘robo-calls’ that request a call back. Once the taxpayer returns the call, the con artist requests personal information, including Social Security number or individual taxpayer identification number (ITIN).

In other variations of the IRS impersonation phone scam, fraudsters demand immediate payment of taxes by a prepaid debit card or wire transfer. The callers are often hostile and abusive. Alternately, scammers may tell would-be victims that they are entitled to a large refund but must first provide personal information. Other characteristics of these scams include:

  • Scammers use fake names and IRS badge numbers to identify themselves.
  • Scammers may know the last four digits of the taxpayer’s Social Security number.
  • Scammers spoof caller ID to make the phone number appear as if the IRS or another local law enforcement agency is calling.
  • Scammers may send bogus IRS emails to victims to support their bogus calls.
  • Victims hear background noise of other calls to mimic a call site.
  • After threatening victims with jail time or with, driver’s license or other professional license revocation, scammers hang up. Others soon call back pretending to be from local law enforcement agencies or the Department of Motor Vehicles, and caller ID again supports their claim.

Telltale signs of a scam call

While the IRS or the TAS will never do any of the following, scammers will often:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.
  • Call about an unexpected tax refund.

Tax scams can happen any time of year, not just at tax time and its important to stay alert to scams that use the IRS or other legitimate companies and agencies as a lure. If you have any concerns, please call the office.

Related Articles:

Employers Beware: Identity Theft and W-2 Scam Alert

Duke Energy Telephone Scam

Identity Theft: What to Watch out for and What to do