• How to Measure Anything: Finding The Value of Intangibles in Business- Douglas W. Hubbard
• The One Page Business Plan – Jim Horan
• Execution: The Discipline of Getting Things Done – Larry Bossidy
• The Vest- Pocket CPA- Dauber, Siegel, Shim
• Faith – Based Family Finances- Ron Blue & Jeremy L. White, CPA

A business owner can improve the bottom-line on their income statement by improving their capital asset management . That is the depreciation of a capital asset (reducing the value of an asset) instead of expensing it all at once.

Example: you decide to buy new laptops for each of your managers so they can be more productive. You buy 5 new units at $600 each. That’s $3,000 of expense on the income statement. Booking this purchase as an expense reduces your net operating income by $3,000. Thus, lowering your net income ratio.

However, the alternative is to book the transaction as a capital expenditure and record just the depreciation on your income statement. Normally, office equipment is depreciated over 5-7 years. This is called the equipments useful life.

There are a few methods of depreciation. The most common is the straight line method. This is the process of reducing the value of the asset (depreciating it) equally over a set number of years.

So, instead of $3,000 of expense hitting your income statement you will record $300 the first year. Why $300 you say and not $600? Well, normally purchases are not always made on the first business day of a company’s fiscal calendar. So in order to account for this timing the first year of depreciation is split half on the front end and half on the back end. The percentage breakdown for a five year depreciation would look as follows:

10%, 20%, 20%, 20%, 20%, 10%

Or in the example above $300, $600, $600, $600,$600,$300

The respective amount will be expensed to your income statement each year in the form of depreciation instead of a one time hit of $3,000. The first year impact to net income will be a fraction of the amount it would have been if you expensed it all at once.

Also, as an added bonus you will decrease the negative impact on your balance sheet by depreciating vs expensing.

Normally, an expensed item has an impact on both the balance sheet and the income statement. First by reducing cash (an asset) and second by increasing expenses on the income statement.

Again using the laptop example, if they were expensed then your balance sheet would have shown a reduction in cash (asset) by $3,000. This is assuming the purchase was made out right and not financed. The off setting effect to the balance sheet would have been a negative impact to owners equity via the lower net income.

Now a portion of the value moves from one type of asset to another. This is done by depreciating the equipment vs. expensing it. It’s no longer a current asset (cash) but now it’s a fixed asset (equipment).

So, the current asset section is reduced by $3,000, fixed asset is increased by $2,700 and depreciation is increased by $300. This only impacts owner’s equity by $300 vs $3,000 in the first year. Now the business shows a higher net income and less of an impact to owners equity.

All what I have explained is standard accounting practices. In some tax situations it may actually be better to expense some items. Also, not every purchase can be capitalized. It depends on your company threshold and Generally Accepted Accounting Principles (GAAP).

Yet, all to often these types of purchases are not tracked properly by a business owner and could be missed by a bookkeeper. So, consult with your CPA on the best way to track business purchases and stop letting the value leak out of your company.

Don't let your business value go down the drain!

There is an old Sales saying that “Nothing happens in a business until something is sold.” Well, there is also a saying in the Finance and Accounting Outsourcing Sector (FAO) “Nothing happens until something is sold, but not much more happens until the Back Office processes are set up and working well.” A business owner could go along gathering customers and managing their cash out of the left pocket and into the right. Yet, they won’t be in business long or reach the maximum potential until finances are being managed and business cost are understood. Many small business owners can manage their business intuitively, but in order to grow it to a sizeable entity,  the owner must get the Finance and Accounting activities out of their heads and into  a structured process and managed by a focused resource. That is were FAO services come in.  One way a small business can continue to grow and keep their financial concerns  in order is to outsource their FAO service until the business grows large enough to bring the activity in house. But don’t be to quick to outsource without doing the necessary research.

One of the mistakes business owners make is thinking their  bookkeeper can also be a FAO resource. Bookkeepers and finance Managers are not the same thing. This is like saying a Dove and a Falcon are the same kind of bird. Yes, they both have mastered flight, but when you are on a hunt, which “bird” would you prefer to have with you?

When you are hunting for cash flow improvements, investor dollars or small business loans make sure your FAO resource is a Falcon and not a Dove. Finally, make sure your FAO resource understands your industry and business objectives. Raising money and managing money often require different skill sets.

To find out more about FAO resources click one of the links below:

http://www.faotoday.com

Business.com