Category: General Business News

When it comes to any business, but especially for a start-up, it’s essential to determine how long a company can survive before it must declare bankruptcy and/or close its doors. The biggest metric, especially for a start-up, is to determine how much money a company has to keep its lights on.

The term “burn rate” is defined as how much money a company spends monthly to maintain its operations. It is essential for a company to know how long it can operate before it begins to generate income and hopefully becomes cash flow positive.

It is important to look at two differences between the two sub-meanings of this term: the first is “gross burn” and the other is “net burn.” When it comes to “gross burn,” we are talking about how much a business uses in monthly operating costs. The following formula shows a business how long they have in months to operate.

For example, if a business has $2.5 million available for overhead and it spends $200,000 in monthly overhead costs, it would last 12.5 months. Expressed as a formula:

Available financial resources ($2,500,000)/monthly overhead($200,000) = 12.5 (months)

This assumes the company makes no revenue, which will be accounted for in the next example. However, this is where “net burn” comes into consideration. Net burn looks at how much money a business loses every month, but the difference with this calculation is that it looks at if it can be lowered by any incoming revenue.

If a company spends $10,000 on rent/office space, $20,000 on IT expenses, and $25,000 on employee wages, the gross burn rate would be: $55,000. However, if the company is generating sales at $17,500 per month, for example, and the cost of goods sold (COGS) is $5,000, the following calculation would determine its “net burn rate:”

Net Burn Rate = [Monthly Revenue – Cost of Goods Sold (COGS)] – Gross Burn Rate

Net Burn Rate = ($17,500 – $5,000) – $55,000

Net Burn Rate = (12,500) – 55,000 = -$42,500 Gross Burn Rate

The difference between the net burn rate and the gross burn rate may seem obvious or intuitive, but depending on how much money the start-up has available, and factoring in how much the revenue brings in and offsets the COGS, it can make a stark difference for the business’ prospects.

Once a business has determined what its “gross burn rate” and/or “net burn rate” is, the next step is to look at how to reduce costs and/or increase revenue to keep working toward positive cash flow. 

Two considerations for the company include what the business can do and what it must do to make more revenue and increase profit margins. For example, companies could look at the cost-benefit analysis of incorporating AI to see if it would have an overall positive impact on labor costs. They also could look at how to create effective marketing campaigns that cost less (using backlinks instead of paid search engine marketing, for example).

Another consideration is that if the company has enough time and is able to re-strategize its model, this can have a material impact on the business receiving a cash injection from outside investors.  

Determining these timeframes and figures are one way a company can reduce costs and/or pivot to more profitable products and/or services. These two calculations can provide avenues to re-invigorate a business in hopes of providing a path to profitability.

We all have those days when we dream of striking it rich with a winning lottery ticket. Never having to work again while living a life of luxury. While your chance of finding a four-leaf clover is higher than winning the lottery, we can still dream, right? And while we are dreaming, let’s talk about the best ways to deal with landing such a large sum of cash. And since lottery winners have a limited time to claim their prize, it’s important to take prudent steps when managing the money.

How Much Do Winners Actually Take Home?

Let’s take a look at actual prize amounts from recent winnings. The October 2023 Powerball jackpot of $1.2 billion translated to a cash value of $551.7 million. Depending on what the winner decides – either taking the lump sum or opting for a multi-decade annuity – they have a serious decision to make.

It’s important to consider inflation factors if choosing the multi-decade annuity option. For example, when it comes to 30 payments taken over 29 years, the first consideration is to determine if there’s a 5 percent increase in the amount for each subsequent year. However, it’s important to keep inflation and the value of money going forward in mind.

For example, between March 2021 and March 2023, the average monthly inflation rate was 5 percent or higher, according to Statista Research Department. It peaked during June 2022 at 9.1 percent on a monthly basis. If the lump sum was taken before inflation increased during the post-COVID-19 reopening, or the annuity was increased by 5 percent, lottery winners without a plan to preserve and increase their earnings would have seen their money’s purchasing power decline.

Another thing to consider is how to legally navigate the tax code. For example, when it comes to federal taxes, 24 percent is automatically withheld. According to the 2024 Federal Tax Code, large winnings will put the winner in the 37 percent tax bracket. If the winner is single or married, the 37 percent bracket kicks in at $578,125 and $693,750, respectively. Additionally, winners also are required to determine compliance with state, county, city, etc. taxes. State taxes can vary greatly; looking at you: Pennsylvania at 3.07 percent, and New York at 10.9 percent.

When it comes to being generous through philanthropy, winners can work with their legal and financial professionals to determine how to offset taxes. This can take the form of direct donations, creating a donor advisor fund (DAF) to get the tax benefit immediately, especially if the lump sum is taken, but also if an annuity is taken. With 2023’s standard deduction threshold of $13,850 (single) and $27,700 (married couples), winners might consider how to make charitable donations part of a tax reduction plan.

Another question to ask is whether establishing a trust would be helpful when sorting out one’s distribution of assets. If a winner dies intestate (without a will), the state of that person’s residence will determine who gets your money – regardless of who you may have wanted to receive it.

Similarly, setting up a trust may be beneficial for both claiming the lottery winning anonymously, and it can help determine how to give money to family members. A trust can be set up for a family member or a pet’s care and can be conditional on releasing the funds when the individual reaches a certain age.

While these steps are not comprehensive, and each winner will have unique circumstances, there are many legal and financial considerations to think about immediately upon winning and before claiming a jackpot.

Sources

https://www.irs.gov/credits-and-deductions-for-individuals

https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/

Variance analysis is found by determining the difference between what was budgeted and what actually occurred. Additionally, when variances are added together, we get a better picture of how well a company is measuring its performance against expected metrics. It’s also important to be mindful that each metric is measured to determine what the actual cost is versus the industry’s standard cost.

Whether it’s materials, labor, electricity, or another metric, if the actual cost is lower than the standard cost for the same quantity of materials, it would be a favorable price variance. However, if the number of materials was more than the standard quantity, it would be considered an unfavorable variance. Examining variance allows us to analyze the price and quantity of the variable being analyzed. Always keep in mind that unusual or significant variances should be investigated to see why such anomalies exist.

It’s important to distinguish between variances and the types of inputs. When it comes to materials, labor, and similar variable overhead, variances to be analyzed are for price and quantity/efficiency. When it comes to fixed overhead, analysis looks at variances in budget and volume.

One way to conduct variance analysis is through the Column Method. The following example illustrates this:

A business produces widgets. The following assumptions are made:

• 6,000 widgets are produced in a month
• Direct labor hours are used as the basis to allocate overhead costs to products
• Denominator level of activity is 8,060 hours, resulting in $48,360 in fixed overhead expenses budgeted.

Other cost assumptions include:

Direct Costs

Labor: 2.6 hours/widget @ $14 per hour

Materials: 10 pieces/widget @ $1/widget

Overhead

Variable: 2.6 hours/widget @ $8/hour

Fixed: 1.3 hours /widget @ $12/hour

However, the business saw the following costs for the month’s production:

Variable overhead manufacturing costs: $34,000

Fixed overhead manufacturing costs: $50,000

Both of the following are Direct Costs:

Material: 50,000 items bought @ $0.96/widget

Labor: 8,000 hours totaling $128,000

Materials Variance

Real Quantity x Real Price = 50,000 pieces x $0.96 per widget = $48,000

Real Quantity x Industry Price = 50,000 pieces x $1 per widget = $50,000

Standard Quantity x Industry Price = 36,000 pieces x $1 per widget = $36,000

Price Variance = $50,000 – $48,000 = $2,000

Quantity Variance = $50,000 – $36,000 = $14,000

When we find the difference between these two amounts, there’s an unfavorable variance of $12,000. Additionally, it’s worth looking at why there were 50,000 pieces used versus the standardized 36,000 pieces. It could be due to defective materials, problematic machinery, etc.

Labor Variance

Real Hours x Real Rate = 8,000 hours x $16 per hour = $128,000

Real Hours x Industry Rate = 8,000 x $14 per hour = $112,000

Standard Hours x Industry Rate = 7,800 x $14 hour = $109,200

Rate Variance = $112,000 – $128,000 = -$16,000

Efficiency Variance = $109,200 – $112,000 = -$2,800

Based on this calculation, there’s a total unfavorable variance of -$18,800. Management should look at why labor costs are higher than the standard and why production took more supplies than the industry standard.

While this is not all-encompassing, it does show the importance of understanding the nuances of calculating variances and how it’s essential to understanding a business’ (in)efficiency.

Fiduciary accounting, which is also referred to as court accounting, is a way to document and report financial activity during a discrete period of time for legal entities, such as a conservatorship, estate, trust or guardianship.

It’s meant to give adequate notice to all relevant parties when it comes to every consequential financial activity impacting the administration that occurred over the accounting time frame. It shows every disbursement and receipt that is managed by the legal entity’s fiduciary. It accounts for transactions beginning with the initial funding or principal and the resulting future transactions, including income.

When it comes to the format of fiduciary accounting, along with the United States having its own unique modifications, the Uniform Principal and Income Act requires checking the governing instruments, in addition to state laws, to ensure fiduciary accounting compliance is met. However, looking at the National Standard Format, the following components in a filing are accepted by most courts:

• Documentation of incoming and outgoing monetary sums of the legal entity’s starting principal and income produced
• Documentation of the entity’s liabilities and assets
• Documentation of any payment the fiduciary received
• Legally authorized individuals hired by the fiduciary, what pay they received, and their association with the fiduciary

The primary consideration is that being part of being a fiduciary is having a legal duty to the beneficiary of the legal entity, including “the duty to account” to the beneficiary. This duty to account is oftentimes required by the governing document, the state statute, a court order, linked to court proceedings or a beneficiary requesting an accounting. If this duty is breached, the fiduciary may be liable.

The accounting should ensure a reporting of every asset in the legal entity. During the first year, the beginning balance will list the assets that fund the account. For successive accountings, the starting balance and the ending asset values on the preceding accounting should be the same. Along with the assets in the custody of the legal entity being documented, any asset that has been withdrawn, paid out, or moved must also be documented. Income received from the entity’s investments is to be measured against the principal and income investment schedules to ensure that all income, dividends, and interest have been received and reported correctly.  

Reasons Why an Accounting is Done

Some of the more straightforward reasons a fiduciary accounting is done is to ensure the fiduciary is compliant. There’s also greater efficiency when doing this annually versus more infrequent intervals since mistakes can be identified and corrected sooner. The same accounting results can also be used for the entity’s tax filings.

Other reasons concern the fiduciary and beneficiaries. The beneficiary can review and challenge the accounting if there’s impropriety suspected. When the fiduciary has completed their responsibilities for the beneficiaries and entity, liability for the fiduciary may cease to exist, even if the beneficiaries decline to execute a receipt, release, and refunding agreement (or similar document). If an approved accounting is necessary to be submitted with a court, the above four documents may be considered an acceptable substitution in place of an accounting.

Regardless of the type of legal entity that requires this type of fiduciary accounting, a fiduciary that is diligent and works with an accounting and legal professional can reduce the chances of exposing themself and their supervising entities from unnecessary exposure.

According to the United States Department of Labor’s Consumer Credit Protection Act (CCPA), wage garnishments are a complex legal process for employers to account for when it comes to employment matters. This article specifically refers to Title III of the Consumer Credit Protection Act. 

Usually authorized through a court order, a wage garnishment directs an employer to withhold or garnish an employee’s wages for a certain amount or percentage to satisfy an outstanding debt. Wage garnishments also can be implemented for delinquent tax obligations and other debts owed to federal agencies of the U.S. federal government, as well as for state-level tax collectors. 

Another consideration for Title III is that for a single debt, employees may not be fired; but if an employee’s earnings are garnished for two or more distinct debts, an employer has the discretion to involuntarily separate an employee from its business. This law also permits varying amounts and percentages of an employee’s “disposable earnings” that may be withheld.

The first step is determining how earnings are defined in the course of deciding the final wage garnishment calculation. Examples include but are not limited to retirement and pension payments to the employee, hourly wages, yearly salaries, commissions, bonuses, along with profit sharing, etc.

When it comes to lump-sum payments, the CCPA requires counting earnings that are for personal services but not including non-personal service-related lump-sum payment compensation as the first step when calculating the final wage garnishment. 

Defining Disposable Earnings

The final amount able to be garnished is determined by the employee’s disposable earnings. This is defined as the earnings remaining once legally mandated deductions are factored into an employee’s earnings. Example deductions include local, federal, and state taxes, along with withholdings for unemployment, Medicare, and Social Security taxes. Voluntary deductions, such as health premiums, voluntary retirement plan contributions, etc., are not factored into the disposable earnings calculation.

When it comes to regular garnishment guidelines, which include non-support, bankruptcy, or tax-based requests, for both state and federal taxes, the maximum weekly amount is the smaller amount of either one-fourth of the worker’s disposable earnings or how much the worker’s disposable earnings exceed 30 times the U.S. minimum wage of $7.25 per hour x 30 hours = $217.50 (as of June 2023).

Looking at a weekly view, if disposable earnings are $217.50 or less, no garnishment can occur. If disposable earnings between $217.50 and up to $290 are considered, only $72.50 may be garnished, depending on how much the outstanding debt is in total. If the worker’s disposable earnings exceed $290 for a weekly pay period, up to one-fourth of the pay period’s disposable earnings can be considered to be garnished. It’s important to note that some bankruptcy court orders, state/federal tax debts, and court orders for child support and/or alimony are not necessarily subject to the garnishment ceilings discussed above.

While this information is not comprehensive for employers, it’s important to understand all the federal, state and local regulations to ensure compliance is achieved to reduce the chances for adherence complications.