Author: Service2Client

How to Calculate Operating Return on Assets

3 min read

How to Calculate Operating Return on AssetsDuring Q3 of 2023, businesses in the United States made approximately $3.3 trillion, according to Statista. This is right behind the third quarter of 2022, when corporations in America made even more money. These figures are the net income of the respective periods, according to the National Income and Product Accounts (NIPA).

With profits reaching all-time highs since Q3 of 2012, understanding how businesses can analyze their profitability ratios through the Operating Return on Assets (OROA) ratio is another helpful tool for number crunchers.

Defining OROA

This calculation helps business owners and analysts determine how well a business is run. It shows the percentage, per dollar, that a business makes in operating income relative to assets involved in day-to-day operations. Unlike the regular return-on-assets (ROA) calculation, the Operating Return on Assets ratio takes a more selective consideration of assets. The primary consideration for the assets in OROA’s calculation is to only consider assets employed in a business’ traditional operations.

The calculation is as follows: 

OROA = Earnings Before Interest and Taxes (EBIT) / Average Total Assets

Another way to look at EBIT for the calculation is to look at the Income Statement’s Operating Income. For the average total assets, it’s taking a look at the business’ Balance Sheet and determining the two most recent yearly Total Assets for the company, that are used in its normal business activities.

Putting the OROA into practice, it’s calculated as follows:

OROA = $85,000 (Operating Income) / ($425,000 + $450,000) (Total Assets) / 2 =

  = $85,000 / 437,500

   = 0.1942 or 19.42 percent

This means that for every dollar of operating assets, the company has produced $0.1942 in operating income.

There are two important distinctions between OROA and the traditional ROA assets calculation. When it comes to income, OROA uses EBIT or Operating Income, but ROA uses net income as the numerator. With assets considered, OROA uses assets used for regular business operations, while ROA accounts for total assets in the calculation.

Interpreting Operating Return on Assets

One important way to use the result includes looking at a company’s OROA on a trended basis to determine if a business is declining, stagnating, or increasing its profitability.

Especially for investors, it’s important to contrast the OROA of the company at hand against rival businesses within the company’s same industry. When it comes to comparisons, the higher the OROA is, the better the result.

Another important consideration for investors is that OROA provides an accurate assessment of a business’ core operations. Since assets analyzed are for a business’ core profits or services, if a business reports profits from selling a division or it reports a one-time profit surge from investments, its core profitability is less likely to be skewed during investment analysis.

When used in conjunction with other accounting and financial metrics, businesses can continually measure and adjust their operations to increase efficiencies to increase their return on operating assets.

6 Ways to Use Your Tax Refund

4 min read

6 Ways to Use Your Tax RefundGosh, it feels great to get that tax refund. Dreams of a much-needed vacation or a splurge on something you’ve been craving might be running through your mind. However, as unexciting as this sounds, you might want to spend this chunk of change on things that really matter. Here’s a list of smart uses for your tax refund that you’ll be glad you acted upon.

Build an Emergency Fund

Let’s face it. We depend on our machines to make life easier. However, these metal contraptions can (and will) break down. When this happens and you have money socked away, you won’t have to shell out a big part of your household budget to get them fixed or replaced. You’ll be prepared. Plus, saving money for something like this could also be a way to avoid stress. According to the American Psychological Association, 77 percent of Americans aged 35-44 say that money (or the lack of) is their main source of stress. The best way to save for the unexpected is to have a part of every paycheck auto drafted into a savings account – tuck those dollars away while you relax.

Pay Off Debt

Yes, at first blush, this doesn’t seem like a lot of fun. That said, carrying around debt and paying high interest rates can be a heavy burden to bear. Imagine how relieved you’ll be when you either pay off all your debt or a good portion of it. No longer will you be a slave to those monthly payments. And here’s a plus: Paying off your debt will improve your credit score. You ready?

Make a Down Payment on a New Car

Or, if you want to buy a good used one, buy it! But back to the new vehicles. When you get a new car, you not only get a new warranty and reliability, but also new technology and safety features. And word on the street is it that dealerships are starting to offer lower interest rates and great pricing incentives. Put your pedal to the metal on this one.

Pay Down Student Loans

Whether you’re a parent or child, this is a great use for a tax refund. Alleviating debt, no matter the source, is always a good thing. Now, you might hesitate given that President Biden recently canceled debt for a lot of students. However, this doesn’t apply to everyone, as some students have private loans and others don’t qualify. Another part of the upside of whittling away student debt is that there’s no penalty for paying more often and/or making extra payments. The sooner you get rid of this obligation, the more freedom you’ll experience.

Make Home Repairs

If you’ve been putting off getting a new water heater or replacing doors, now’s the time. Why? You may be eligible for tax credits for upgrading your home with “green” improvements. While not all renovations qualify, the ones that do include energy-efficient HVAC systems, windows, additional insulation, and modifying doorways for wheelchairs and walkers. That’s planning ahead!

Invest Your Money

If you’re not risk averse, the stock market is a good short-term option. However, if you’re more conservative, IRAs, CDs, and Treasury Bills are your best bet. The yield on the two aforementioned, T-bills and CDs, are higher than they’ve been in years, with many at 5 percent. Making money on your money is always a good idea.

What you decide to do with your tax refund is personal, depending on where you are in your life. There’s nothing wrong with splurging. However, in these uncertain times, putting it to good use could come in handy in the long run.

Sources

https://www.kiplinger.com/taxes/taxes/ways-to-spend-your-tax-refund

 

Defining Burn Rate, Gross Burn and Net Burn

3 min read

What is Burn Rate, Defining Burn Rate, Gross Burn and Net BurnWhen 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.

April is Financial Literacy Month: How Much Do You Know?

4 min read

Financial LiteracyWhat started as Youth Financial Literacy Day some years ago is now a monthlong event: Financial Literacy Month. It all started in 2003 when some U.S. legislators got together and decided that we needed more days dedicated to this topic. So, what does that mean for us? Plenty. It’s one month out of the entire year you can dedicate to getting your financial ducks in a row by engaging in fiscally savvy activities, absorbing all the knowledge, and then sharing your learnings with family, friends, and the world.

Prepare the Kids

Unless you went to a school (K-12) that included business/money classes, chances are you didn’t learn basic finance until you were older.That’s why starting kids early in their understanding of how to make deposits, withdrawals and balance their checkbooks is key. Here’s a resource for downloadable PDFs that you can use to help kids understand the basics of banking. You can even read a children’s book on personal finance to your grands or nieces and nephews, something like The Berenstain Bears’ Trouble with Money.

Both of these resources give kiddos a strong foundation for digesting more complex financial products, like Non-Fungible Tokens (NFT) and cryptocurrency. (You can save those for when they’re older.) When children master everyday money tasks, they’re better equipped to navigate life when they leave the nest.

Subscribe to a Blog or Podcast

You can choose personal finances, investing, or whatever you like. Educating yourself about how to make the best use of your money will pay off – and we’re not talking about just cash. You’ll also discover a variety of strategic directions about how to handle future financial issues. A few blogs to check out are Think Save Retire and The Penny Hoarder. Here are a few more. In terms of podcasts, check out Millennial Investing and Ditch the Suits. After you’ve digested some helpful nuggets, share them with your family and friends.

Learn More with Jumpstart Coalition

Jumpstart Coalition is a non-profit organization out of Washington, D.C., that houses a world of info about all things money – a curated database of financial education resources. From tax tips to credit unions, it’s a one-stop shop. Just spend a little time looking around, and you’ll finish smarter than when you started.

Attend Your State’s Financial Literacy Events

While this varies from state to state, be on the lookout in April for an announcement signed by your governor or your state representative. Typically, these are held in your capitol and are free. For example, the Idaho Financial Literacy Coalition holds a piggy bank beauty contest for elementary kids. All you have to do is search (Google, Bing, your choice!) “[State] April literacy month events,” and a list will come up. After you’ve attended, you might even think of creating a seminar of your own.

Go Over Your Monthly Budget

So, after you’ve filled your noggin with all your new money knowledge, you might want to review your finances for the month to see where you can tweak. Money is a fluid situation, as you well know, and applying new tricks and tips can help exponentially.

At the end of the day, and of course, the month, taking time to dive into improving your financial literacy – and spreading the news­ – is well worth it. When you’re fiscally fit, everything else in life seems to fall into place.

Financial Literacy Month 2024: Financial Literacy Activities to Start With | EVERFI

April is National Financial Literacy Month (moneyfit.org)

Taking a Closer Look at Trial Balances

3 min read

What are Trial Balances? What is a Trial Balance?A trial balance is an accounting tool that helps businesses determine if the double entry accounting system has any mathematical errors. Once the trial balance is worked through, and the total debits and total credits equal each other, we know there are no mathematical errors – but that doesn’t mean it is error free. It is important to determine how it is constructed and the considerations for each step in the process.

Raw Trial Balance

The first is the unadjusted trial balance. This looks at all the double entry bookkeeping journal entries, which records the business’ day-to-day transactions. When beginning to prepare for the adjusted trial balance, the eventual adjusted trial balance will have three column headers: 1. Account 2. Debit 3. Credit.

It should list all sub-ledger account balance totals, the account description and number, along with the final debit/credit balance. It also should document the accounting period, including the starting and final dates.

The next step is to address balancing for each sub-ledger. Sub-ledgers, such as Cash, Accounts Payable and Accounts Receivable, are balanced from the sub-ledgers’ “T” account; the resulting credit or debit balance must be noted. Depending on the resulting credit or debit balance, it must be put in the right “Debit” or “Credit” column. If there is a mathematical error, it means the previous steps in the accounting cycle might have errors in them.

Adjusted Trial Balance

Along with the trial balance having the credits and debits entered from each respective sub-ledger, the first thing to check is if the credit and debit balances line up. Then, the next step is to determine if other mistakes may exist. Examples of non-mathematical mistakes include:

  • Original entry errors or double entry transactions that contain mistakes on both ends.
  • Omission errors or errors that result from not being put into the accounting ledger.
  • An error of reversal is an error with double-entry transactions that has the correct numbers but transposes credits and debits.
  • A principal error is a transaction that correctly records the transaction, the figures, the right side (debit v. credit), but attributes it to the incorrect account.

Along with these potential mistakes, a business can identify and take corrective action when reviewing its transactions on specific accounts and when aggregating sub-ledgers into their trial balance. Examples of corrective action include tax adjustments, such as ensuring any tax deductions that were missed are then added.

If business transactions were made on a personal credit card, they need to be adjusted accordingly. When it comes to accrual considerations, if a payment is owed but not made during an accounting period, it must be adjusted to reflect the correct accounting period. Another consideration is for payments received, which is often referred to as a deferral. Past due payments that are applied to a later accounting period but were for a previous accounting period must be adjusted accordingly.

Conclusion

The last step is to prepare the post-closing trial balance. Once the closing entries have been finished, it can help a company use it as a starting point when they need to do it again for the next accounting cycle.

While trial balances are only a part of the bookkeeping and accounting process, taking steps to reduce errors can make the accounting process a more insightful business function.