Get creative: 10 ways to get your business funded

 US-PDGov

By Ruby P. Warthen

If the bank turned down your application for a small business loan, don’t despair. Banks have developed a reputation for turning down these applications, especially when the businesses have no collateral. A declined application does not mean that you’re out of options for funding for your business. Here are some creative ways to get the money that you need.

Factoring

If you don’t mind losing 15 percent of your accounts receivables, you can use factoring as a means to get money for your business. This process involves passing your receivables to a third party who will give you immediate cash. If your company is showing some growth you can use factoring until you have developed a sustainable cash flow.

Retirement accounts

You can take out a 60 day interest free loan from your IRA or 401(k) account. Pay the money back within that 60 day period and you’ll have the benefit of an interest free loan without fees. Before you dip into that fund, keep in mind that you could be putting your retirement money at risk.

Government grants

Do some research to see what grants are available at the local, state and federal levels. Enlist the help of an advisor if you cannot do the research yourself.

Peer to peer lending (P2P)

Sites like the Lending Club make it possible to get loans from total strangers. The loans are subject to a review of your credit score. Lenders will also take your business idea into consideration. Interest rates for these loans are usually very high.

Crowdfunding

With crowdfunding you appeal to others to invest in your cause, and you’ll repay the investment in some non-monetary contribution. You’ll have to come up with an appealing way to present your idea if you want to get others to invest.

Microfinancing

Microfinancing provides small loans, usually less than $10,000, for your business. Again, the goal is to present an appealing idea, but back it up with your experience, sales projections and demonstrate the viability of the business.

Supplier financing

Look for smaller suppliers who might be eager to earn your business. They might be more than willing to provide the financing you need. Don’t place a personal guarantee on the loan.

Contests

Keep your eyes are ears opened to spot opportunities to win money for your business. These contests sometimes result in substantial sums of money given out to winners.

Friends and family

It is risky business to get money from friends and family to fund your business. A lot of good businesses fail, for a number of reasons. When your friends or family invest in your business idea you need to sensitize them to the fact that the money could pay off, but it could just as easily be lost. There might be benefits from taking the money offered by this group, but you need to be very aware of the disadvantages.

Credit Cards

When all else fails, you can use business credit cards to fund your business. There have been many success stories of entrepreneurs using credit cards to fund a business. This option has some disadvantages as well, so beware. 

About the author: Ruby is a software developer working for an IT outsourcing company. Her current project revolves around creating financial asset management systems that can be used by different institutions. Follow her on Twitter @RubyPWarthen

Invoice factoring: Is it right for your company?

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By Floyd Davis

This article is going to show how a business can basically wash its hands of the messy and costly task of managing accounts receivable. For large businesses, the accounts receivable (AR) department is a large unit of the company employing teams of accountants and clerical workers. They work to keep straight all that has to do with invoicing the clients and keeping track of the payments they make.  They may even run a call center, manage the customer service portion of the company's website, and otherwise provide customer service to vendors who owe money.

This guide will show why this entire AR department can be outsourced, and how this will result in faster cash inflow for the business. If there had to be a one sentence summary of what  invoice factoring is, it would be:

Outsource your accounts receivable to a third party company who will pay you a portion to up front for the invoices for a fee.

Invoice factoring as a way to raise capital for business expansion is not a new business technique, but it's often overlooked. Now, with credit more difficult to obtain, small businesses are investigating invoice factoring as a way to quickly and easily raise cash for working capital requirements.

Approval for bank loans for small businesses is difficult to come by, as loan requirements get stiffer and stiffer in the post- credit crisis world. Bank loans also require application fees, lengthy application procedures, and lots of paperwork and preparation. And don't forget the interest on a bank loan.

Invoice factoring is better than a loan

Invoice factoring compares favorably to a small business loan from a bank in all these aspects, which is why it's a fast-growing segment of the business world.

Incurring debt with a small business loan is not always a sound option. There's risk involved with any type of loan. Unfortunately, it's just how business is done if expansion is in the works.  Few small businesses have extra cash on hand for major improvements or expansion. Taking on a loan is common.

Invoice factoring, on the other hand, involves no long term commitment, no chance of defaulting since it's not a loan, and no up front fees commonly associated with a bank loan. The business simply sells its invoices, receives cash for them, and the transaction is finished. The downside is that only a percentage of each total invoice is received. The rest goes to the invoice factoring company, which is the only fee the business pays. Having cash on hand quickly and removing the uncertainty of unpaid accounts receivable are the rewards of working with an invoice factoring company.

Freight bill funding

If you are a transportation company with a cash flow problem then freight bill funding might be of interest. It's jut like invoice factoring but it's for the transportation industry. One big difference is that with freight bill funding, clients can receive their funding in the form of a fuel card.  The fuel cards can then be used by the truckers in the company like ATM cards.

Fuel cards are accepted all over the country at thousands of locations, just like ATM cards. Fuel is a company expense, so having truckers use the fuel cards which are funded by freight bill funding is very convenient for the transportation company that uses the service. Trucking companies need constant cash flow because of their fuel charges, so using the Fuel Cards puts cash in the hands of the people who need it.

Floyd Davis is a blogger for the finance industry and more of his articles can be seen at irsrefund.biz

How floating charges are assessed

Image attribution: FreeDigitalPhotos.net; standard royalty free license

Floating charge loans are secured by assets that have no fixed worth. An example of a floating charge is a corporate debenture which is an asset secured loan. Moreover, the assets that can be used to secure a debenture can include stocks, depreciable equipment and goodwill. No specific asset must be used to secure a floating charge, however the value of business assets should be high enough to pay for the loan if liquidated. 

In order for floating charge business loans to be redeemed by the lender either the loan is paid back by the borrower or in the case of default, the lender can appropriate assets owned by the borrowing company. This right of acquisition allows the secured assets to become what is referred to as 'crystalized' to exchange the debt from the loan according to the North Carolina Banking Institute. In other words, the crystallization of secured assets in a floating charge means the loan becomes a fixed charge loan due to non-payment under the conditions of the floating charge.

The reasons why floating charge loans have a transformative structure is due to the terms of agreement. Moreover, also per the North Carolina Banking Institute, although these types of loans are secured, the asset securities remain in the borrower's possession. The lender only has limited rights to the assets allowing the debtor company the freedom to do as it pleases with the assets so long as the loan is paid in accordance with the floating rate charge. Moreover, upon liquidation of assets, floating charge loans are subordinate to fixed charge and loans where control of assets rests with the lender.

Legal definitions of floating charge loans are shaped in part by judicial rulings; consequently they can have similarities and differences across national jurisdictions. Right to assets is an example of a similarity between legal definition of floating charge loans in both the United States and the United Kingdom. Moreover, under normal business conditions floating charge business loans do not require the borrower to obtain consent of the lender before selling secured assets. 

An area of meaning where a difference between the definition of floating charge loans is in how clearly the underlying assets are defined. For example, according to Freshfields Bruckhaus Deringer LLP, in the United Kingdom floating charge assets have legal precedence requiring them to be tangible via control and possession under Financial Collateral Arrangements Regulations. However, In the United States intangible assets are more likely to be considered as acceptable within a floating charge loan depending on how clearly the definition of an asset with changing value is defined.

Even though floating charge loans are secured and give lenders the right to assets and cash from sale of those assets, they are higher risk than secured loans where assets change hands. Moreover, since the floating charge loan is structured differently, it gives the lender lower priority over assets in the event of a company liquidation per the North Carolina Banking Institute. For this reason, when making floating charge loans, the ability of a borrower to remain solvent is significantly associated with the risk of that loan.

Guest Post: Paper or Plastic? The Pros and Cons of Business Credit Cards

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With constant talk of mounting government debt, student loan debt soaring to higher rates than ever before, and fear of an overall failing economy, credit cards are not necessarily the most desirable thing to boost financial security right now. However, there are a number of advantages business credit cards can offer small business owners in today's economy. Of course, there are several facets to of credit building that business owners and professionals need to consider before switching to plastic. As with all business decisions, professionals should examine all aspects of using credit to facilitate their business needs before opening a business credit card.

Business credit cards can be a useful tool for small business at any stage of their development. As any business owner knows, financial flexibility can be one of the most important things when it comes to running a business successfully. There are times that spending exceeds earning and your budget as a business can vary greatly from one month to another. Business credit cards are a convenient way to quickly access financing for short-term needs, while also increasing your company's spending ability. But, of course, credit use as a small company must be very carefully managed. To decide if a small business credit card might be the right option for you and your business explore these pros and cons.

The Pros

There are many reasons business credit cards may be a great option for small business owners:

1. Convenience: Credit cards offer the business owner immediate access to funds and financing for purchases or cash withdrawal. With the business world being particularly unpredictable, this immediacy and ease can be extremely important. While making hasty decisions concerning spending is not advised, sometimes business owners need to act on their feet and be prepared.

2. Online access: As our world becomes more and more mobile, online accessibility has become ever more essential. Many businesses use online vendors and suppliers to meet their business needs. These online purchases can be made more easily using a business credit card.

3. Bookkeeping assistance: One advantage to using credit that many small business owners rarely consider is the bookkeeping guidance cards can provide. Cardholders not only receive monthly statements detailing their purchases, but many cards provide online tools to help manage accounts and keep track of spending. These tools can be extremely useful with maneuvering taxes, audits, and employee spending.

4. Incentives and rewards: One of the biggest perks that business credit cards can offer are incentives and rewards to their users. Business owners choose cards that provide cash back rewards, airline discounts, accommodation discounts, no fee offers, and much more. These incentives can make a huge different for small businesses that do a lot of spending in order to properly operate and thrive. When choosing a business credit card, consider what type of reward program might be most useful for you and your business. If you do a lot of business travel, consider an airline reward business credit card. These programs can help you save a lot of money in the long run, if you choose them wisely.

The Cons

As with anything, there are two sides to opening a business credit card. Before rushing out and opening the first line of business credit you find, consider these potential downsides:

1. Security issues:

Owning a business credit card (or any credit card) boils down to use it carefully. Business owners should carefully monitor their accounts and regularly check on the security of their finances. Credit cards open individuals and businesses up to some security threats that are worrisome. If cards or card information is compromised, malicious individuals can wreak havoc on your business and finances. With careful monitoring and diligent security measures in place, credit card safety can be found.

2. Finicky interest rates: Interest rates are likely the biggest worry involved with credit card use. Unlike a loan or fixed line of credit, a credit card company can change the interest rate on your card. This fluctuation may be in your favor or not.

3. Sometimes pricey: Because business credit cards offer so much ease and convenience to their users, they can be more expensive than other credit cards. While this is not always the case, many business credit card issuers will charge a higher interest rate than a bank or fixed line of credit. That higher interest rate can become a problem if business owners do not pay back their credit on time or in full each statement.

Eliza Morgan is a full time freelance writer and blogger. She specializes in writing about business credit cardsand other business related topics. If you have any questions email her at elizamorgan856@gmail.com.

Why the price-to-earnings ratio is not an adequate valuation metric

The price to earnings ratio is often used as a measure of corporate performance and overall market performance via the P/E ratios of whole indexes. If the ratio is low in comparison to previous levels then the market is sometimes believed to have room to rise even if it is already inflated. For example, market analysts and observers such as StockCharts.com illustrate this point. Moreover, since 82 percent of companies that reported Q4, 2011 earnings had GAAP vs Operating P/E ratios that were in-between 15 month highs and lows, then those companies are believed to be fairly valued per Stock Charts.

Even GAAP or Generally Accepted Accounting Principle Price to Earnings ratios can be misleading however. This is because it measures earnings and not revenue. Earnings are what are left after a company deducts outflows such as expenses, and dividends. So if revenues decline quarter after quarter, but earnings rise relative to price via cost cutting, then it will appear as though the company is becoming cheaper. For example, ABC Corporation earns $100 million on 5,000,000 shares in Q3, 2011 and has a share price of $300 giving it a P/E ratio of 15. Then in Q4, 2011 ABC Corporation increases earnings to $125 million by laying off 625 workers at 40k/yr; the price rises to $325/share and the P/E ratio drops to 13 making it seem undervalued.

Clearly the above corporation is questionable investment if it has to lay more people off to stay profitable. The price to earnings ratio does not measure underlying financial conditions.  But that's not all, if cost cutting has already been tried, and that option is no longer available because it would actually cause earnings to decline, ABC Corporation can also reduce the P/E ratio by purchasing existing shares or issuing new shares if the price per share declines. To illustrate,  if ABC corporation purchases 1,000,000 shares in Q1, 2012 and both earnings and share price remain near their $125 million and $325 levels, the P/E ratio then drops even more to 10.4. All the company did was shrink its own shares outstanding.

What Debentures Are

Debentures are financial instruments used to raise capital that offer borrowers the chance to finance their business without forfeiting control of company ownership. Issuers of debentures are typically either government agencies or businesses, and debentures are also referred to as bonds. However, these types of bonds are' un-collateralized' i.e. not secured by collateral assets, making their success in generating funds largely dependent on the credibility of the issuer, and the return on investment to the lender.

• Purpose

Debentures are an alternate source of capital investment financing. They may however, be used alongside other types of financing to better suit the borrowers goals. For borrowers debentures help finance projects, business expansion and operational objectives that are believed to contribute to their organization's financial success. Lenders partake in debentures because they can receive a stable growth of investment in the case of high-grade debentures, while also hedging risk from other investments such as stocks.

• Terms

The borrower and lender terms of agreement that circumscribe the bondholder's rights are called 'indentures'. These are legal loan contracts that define how the debentures will be paid back, the time by which this will happen, how the debentures will be beneficial to the lender and any other requirements, restrictions, waivers etc. that the involved parties agree to. The process with which debentures are issued and sold is called underwriting; in some cases this process may involve third parties such as investment banks.

• Interest

Interest rates or borrower costs vary considerably with debentures but can be as high as 25% or higher.(3) The indenture, financial solvency of the issuer, and the market in which the debentures are exchanged influence the rate debentures yield. Essentially, the higher risk the company and the more restrictive the indenture is, the greater the interest rate should be to compensate for the accompanying risks to the lender.

• Types

Several types of debentures exist, not all of which are available for consumer investments.(1) Agency debentures are government debentures according to Investopedia, whereas corporate and convertible debentures are issued by companies; the latter of these can be converted to equity i.e. shares. Not all debentures are subject to the same lender obligations, an example being subordinated debentures that do not give priority to the debenture holder in the event of corporate insolvency.(3) Other types of debentures include redeemable and mortgage debentures.(5)

• Benefits

The benefits of debentures may include both a high and relatively low risk return on investment (ROI) for lenders depending on the type of debenture. In other cases, the interest paid by the debenture may be fairly low as is the case with several types of Government debentures. Mutual funds that invest in bonds may offer investors an opportunity to invest in debentures that would otherwise be inaccessible. The benefits for corporations generally assume an Internal Rate of Return (IRR) that is forecasted to be higher than the cost of the debenture(s) in addition to achieving business developmental or operational goals.

Sources:

1. http://bit.ly/9Vdpsy (Treasury Direct)
2. http://bit.ly/8Zy8YH (Investopedia)
3. http://bit.ly/d7lTAl (Mojo Law)
4. http://bit.ly/ax7dYP (Small Business Administration)
5. http://scr.bi/bdqA1z (Scribd)

Accounting terms: The General Ledger

In accounting, the general ledger is an important aspect of bookkeeping that verifies and documents where and how money is utilized within a business. General ledgers are important for assessing business cash flow, and in preparation of other financial documents that are distributed to corporate owners, managers and government regulatory authorities for financial disclosure and decision-making. General ledgers can be maintained using accounting software or via spreadsheets, and are ideally done so on a consistent basis. The following subtitled sections breakdown the general ledger into its component parts and principles.

• Credit and Debit accounts

Not all types of accounts in the general ledger work the same way. Some accounts are debit accounts and others are credit accounts. This means that value is subtracted from either the debit or credit side postings. If a general ledger T-Account is a debt account, it is increased by posting on the debit side and decreased on the credit side. The reverse is true for credit accounts. Debit accounts include assets and expenses whereas credit accounts include liabilities, owners equity and revenue. For an illustration of how posting in the general ledger is different for debit and credit accounts, consulting a guide to debit and credit on general ledger accounts can be helpful.

• General ledger accuracy

Posting numbers in the general ledger is important in accounting. There is essentially no room for error when posting numbers in a general ledger because accounting is either right or wrong when it comes to implementing Generally Accepted Accounting Principles (GAAP) and standard methods of recording financial activity. An inaccurate general ledger can lead to fault financial decision-making, bad financial reporting and poor financial records. If posting in the general ledger includes more than one account, the value of the credit posts must equal that of the debit. The accuracy of a general ledger may be discovered in a failure to reconcile or through an accounting audit.

•Posting in the general ledger

Several different people may post in a general ledger depending on the size and type of organization. Larger organizations may have a networked general ledger with which many people can record flow of money within and without a business at the same time. Efficiently and quickly posting in the general ledger helps in the resolution of questions regarding business finances and in the reconciliation of accounts. All debit and credit accounts should balance i.e. equal each other in value. This process is called reconciling the general ledger. An example of a general ledger posting is as follows: An asset is paid for in cash and credit; in the initial posting total debit will be split between the asset and expense accounts, and the total credit will be divided between cash and accounts payable.

• T-Accounts

Since the general ledger consists of multiple accounts, an accountant or bookkeeper can specifically allocate cash flows by documenting the movement of money on a T-Account. The T-Account consists of columns and rows used for recording date, and account type in addition to whether money is debited or credited on that account. T-accounts are named such because the debit or credit columns are formed on either side of the T, and the top of the T is the line where the account name is placed. Some general ledger accounts may also be assigned numbers in addition to names. For example, in the following linked to California State Administrative Manual, general ledger asset accounts are numbered between 1100-1999.

• General ledger software

There are many standardized, cost effective and useful types of accounting software that include general ledgers. If a company has specific intranet network needs, an accounting software may need to be customized to work most efficiently for that company network. Other times a software such as Intuit Quickbooks may be sufficient, cost effective and time efficient for recording and management of general ledger data. Cloud computing software may also enable outsourced Information Technology management and expanded options for use of general ledgers. For example, recording of general ledger information from mobile hardware and outsourced maintenance of accounting software.

Sources:

1. http://bit.ly/cJ26Ow (University of Houston-Victoria)
2. http://bit.ly/dvWCbc (California Department of General Services)
3. http://bit.ly/F0uNY (DWM Beancounter)
4. http://bit.ly/9mV94A (QuickMBA)
5. http://bit.ly/c1haCb (Watch Captain)

Comparing Expense and Capitalization In Accounting

Accounting principles allow the purchase of large business items to be recorded on assets without cost other than depreciation expense on the income statement. In other words, the immediate cost of expensive business expenditures can be incurred over time via straight line or accelerated depreciation. This process is called capitalization of expenses and should not be confused with "capitalization" which is equity investment within a company.

Expensing is different from capitalizing of expenses because items i.e. assets or services are not depreciated in this method. Instead, with this accounting technique, when items are expensed immediately the costs are realized as a reduction to revenue rather than an increase to the liabilities of a company. If the expense is to be paid over a few months, all or part of it may become a short-term liability but will usually quickly become expensed as the debt is paid.

How to expense and capitalize costs 

To expense an item assets are debited if it is a product or prepaid service and liabilities are credited if the expense will payable in the future. If the expense is payable immediately, revenue is debited and cash is credited since revenue expenses are credit accounts and assets are debit accounts.

To capitalize and expense, assets are debited i.e. usually a long term or fixed asset and liabilities are credited. Then, as expenses are realized through depreciation, liabilities are debited and revenue is credited as an expense. Thus, instead of immediately lowering revenue and therefore profit calculations, capitalized expenses increase assets and liabilities for a balanced increase in both.

Advantages of expensing 

The advantages of expensing are not the same as those of capitalizing, however since capitalizing of expenses is only realized for larger expenditures the benefits of capitalizing expenses cannot be realized when expensing and vice versa. Below are a few of the advantages that may be realized with the expensing method:

• Increases to liabilities are short lived if accrual and do not occur if paid immediately
• Taxable income may decline more than a capitalized expense depending on the exact amounts
• Interest payments, if any, will likely be short lived
• May not involve as much bookkeeping requirements as large capitalized expense

Advantages of capitalization 

Capitalizing expenses is a little more complicated than expensing but can have advantages that aren't realized with expensing. These advantages may have a greater impact on a company because the monetary amounts of capitalized expenses are larger. A few of the potential benefits of capitalized expenses are listed as follows:

• Does not have as a dramatic effect on the income and income statement as when fully expensed.
• May encourage equity investments
• Interest and/or value changes of debt over time may end up costing less
• Has potential tax benefits that can add additional value and/or savings to the expenditure

Since many businesses don't operate with zero debt, looking into different ways of expensing purchases may be wise to an overall business strategy. Two such methods of expensing are short term expensing and capitalization expensing. The former is usually used with more current and/or revolving expenses such as pre-paid services whereas the latter usually applies to larger, more long-term expenditures such as buildings, and expensive equipment or machinery. Each method has unique advantages, bookkeeping requirements, and effects on financial statements and income numbers.

Sources:

1. http://www.answers.com/topic/capitalize?cat=biz-fin
2. http://www.admin.mtu.edu/admin/procman/ch2/ch2p9.htm
3. http://www.dwmbeancounter.com/tutorial/MouseQuizzes/Test4-1.html

How small-business owners can effectively manage cash flow

Managing business cash flow affects business functionality and profitability because cash flow is the use of and movement of cash in and out of a business. Too much cash in one aspect of a business can adversely affect another aspect of a business and the inverse relation holds true as well i.e. too little cash in operations can lead to costly debt and lower net gains after return on investment.

Cash flow management can be tackled by dealing with several parts of the business by optimizing the cash flow for profitability in each of those parts. For example, business loans refinanced at lower rates optimize outflow by reducing interest costs. The goal of cash flow analysis is ideally to allow adequate availability of cash for business activities, in addition to helping maximize profit margin and/or net income after costs, taxes, depreciation, expenses and dividends if any.

The three major areas on the cash flow statement include operating, investing and financing activities. Small business cash flow always has operating cash flow and may have some form of investing and financing activities, but the amount of the latter two depend on the size the business.

• Operating cash flow

Operating cash flow should generally be positive due to steady or increasing accounts receivables, net income, and depreciation expensing of property. Cash flow notes may also increase the final operating cash flow number however an increase in operating cash flow because of liabilities may not always be a good thing.

• Cash flow from investing

A second area of cash flow is investing. This aspect of cash flow should generally be negative as cash not invested via capital expenditure in fixed assets or investments in equity ownership is cash that is potentially not growing as much as it could. Investing cash flow may also vary depending on the economic, and business cycles, in which case the cash flow may be strategically lower.

• Financing cash flow

If a company makes use of equity and/or cash flow loans, cash flow can be negative or positive depending on whether shares have been sold or debt paid off. Generally, the business development plans will determine if a business needs to pay off or expand its financing in a given fiscal quarter or year. For example, for companies seeking to expand and develop new projects the cash flow may be positive through debt or equity financing. However, if a new project has been completed and is now returning a profit, it may be a good time to pay off some or all of the financing for it.

• Tips for improving cash flow

Asset management can aid in lowering interest payments, accounting for maximum tax benefits and obtaining cheap or affordable financing. Lowering credit costs, reliance on lines of credit, and write offs benefits cash flow. Inversely, increasing accounts receivable terms and penalties may serve a similar affect. Risk management incorporates cash flow need forecasts in business down times, seasonal and economic cycles helping the business run smoothly. Keeping an eye on costs, business credibility, liquidity and profitability ratios can assist in the cash flow analysis process.

Cash flow management is an continuing process that is either subject to the scrutiny of private, public or individual ownership. Regardless of who owns a company, the goal of business functionality and profitability is facilitated by effective cash flow management. Through an optimization of the operating, financing and investing activities in addition to keen asset, and risk management, the cash flow of a business can not only assist with annual goals but may also aid in demonstrating management expertise to any potential investors, vendors, venture capitalists or banks.

What is cost accounting?

Cost accounting identifies, documents, implements and resolves business costs for both managerial decision making and financial reporting. Without cost accounting, businesses may have out of control expenses, inefficient business practices, excessive liabilities and no effective cost management systems and solutions. Just as financial accounting is regulated by General Accepted Accounting Principles (GAAP), cost accounting is also regulated by Cost Accounting Standards Cost Accounting Standards (CAS)

Cost accounting that encompasses a process of utilizing cost accounting information for improved business functioning is a helpful if not essential aspect of running a business competitively and efficiently. This article will discuss cost accounting in terms of 1. types of business costs, 2. cost accounting records, 3. cost management systems and 4. solutions for cost management.

1. Types of business costs

Business costs in cost accounting vary from industry to industry and the ideal business has no expenses, which is rare. The different types of costs incurred by a business reflect the management's decision making, the business products and services, and aspects of how a business is operated. Properly identifying business costs is helpful and necessary in preparing and analyzing corporate fundamentals. Some of the business costs handled by cost accounting are listed below:

• Manufacturing costs ex: Nuts and bolts
• Overhead costs ex: Lighting
• Variable and fixed costs ex: Nuts and bolts and salaries
• Direct and indirect costs ex: Paper used for invoices
• Sunk and opportunity costs ex: Investment in equipment

2: Cost statements and documents

What cost accounting also helps with is the recording and documenting of business costs. This process helps track costs every step of the way from origination, through completion of a product manufacturing, sale and service. Cost accounting statements and documents also provide regulators, investors and auditors with necessary financial information with which to analyze the profitability, accounting methods, accuracy and effectiveness of cost accounting systems. A few of the documents, reports and statements used in cost accounting are:

• Schedule of cost of goods manufactured ex: cost of completed product
• Schedule of cost of goods sold ex: costs of sold inventory
• Income statement ex: COG raw materials
• Job cost record ex: costs of work in progress
• Balance sheet ex: product and period costs

3. Different cost management systems:

Cost accounting also uses what is referred to as 'cost management systems'. Cost management systems 1. define how costs are identified, 2. organize the method by which costs are recorded and 3. assist in reviewing and improving business costs. These cost management systems are used in various aspects of business operations to properly account for, record and identify business costs. Some of these cost management systems are cataloged hereafter:

• Actual and normal costing: ex. Average and exact water used cleaning lettuce
• Activity based costing: ex: cost of electricity used shredding
• Product costing systems ex: average cost of boys and girls bicycles
• Job order costing: ex: manufacturing cost for custom furniture
• Cost allocation and cost classification: Cost per apple vs apple picker cost

4. Solutions for management:

Without solutions for cost management, cost accounting hasn't completely fulfilled its task. In other words, identifying, methodologically assessing costs and recording costs do not necessarily help a business improve.  Rather, solutions to cost management problems may be needed frequently or occasionally depending on how much a market and business environment change. With changes in prices, equipment capacity, training, know how and product manufacturing, also come possible changes to the cost accounting that studies these things.

• Restructuring of capital management
• Identification of redundant costs
• Redesign of cost systems
• Improved day to day operations techniques
• Enhanced sourcing and implementation of cost items

Sources: 

1. Hilton, Ronald 'Managerial Accounting: Creating value in a dynamic business environment' 5th ed,  McGraw-Hill, 2002 Chapters 1-6.
2. http://www.fasab.gov/ (Federal Accounting Standards Advisory Board)
3. http://fast.faa.gov/archive/v1198/pguide/98-30C14.htm (Federal Aviation Administration)

Pros and Cons of Stock Buybacks

Stock buybacks occur when a corporation uses available cash to repurchase shares of itself either from shareholders or from the market in which available shares circulate. There are a number of advantages when corporations buy back stocks, however there are also a few disadvantages. Knowing and recognizing when a stock buyback is genuinely good for a company can help distinguish between the pros and cons of stock buybacks. 

Pros of stock buybacks:

• Reduces dilution of shares

Unless a company is about to reissue a different class of shares or resell shares at a future point the medium to long-term affect of share repurchases is a reduction of outstanding available shares. Investors tend to favor stock repurchases because the affect is usually a dilution of available shares which can increase both price and demand.
• Can increase Earnings Per Share (EPS)

When a share repurchase takes place, Earnings Per Share (EPS) can increase. This means a higher percentage of a company's retained income is proportional to the outstanding shares of that company. For example, Company A reduces its shares from 1 million to 500 thousand, and its income is $10 million in the fiscal quarter before and after the share repurchase. Before the share repurchase EPS is $10 per share; after the repurchase, EPS is $20 per share.

• Lessens risk of corporate raiders

If a company is both profitable and undervalued the threat of an aggressive acquisition of that firm may increase via purchase of a controlling amount of the company's shares by another company or investor(s). To avoid this, the company may realize its shares are deal and buy them back to both obtain a future profit on the shares and to avoid an aggressive takeover by a third party.

Cons of stock buybacks:

• Increased opportunity cost

Share repurchases aren't always good according to Investopedia, a Forbes Corporation. This is because the money used to buyback shares may have a more optimal use that could create a Higher Return on Assets (ROA) and EPS. For example, if a company's earnings remain the same with a share repurchase, EPS rises, but if the company's earnings rise yielding an EPS higher than EPS after the stock buyback, then the share repurchase is less advantageous. 

• Higher debt ratio

Even though share repurchases can have a positive affect on some financial metrics, it can have a negative affect on others. For example, a reduction in shares by 500,000 from 1 million in a company that has $1 million in total debt will lead to an increase in the company's debt ratio. This means the company becomes more of a credit risk when it seeks to borrow capital due to less assets from buying the shares.

• Shrinking company

If  a company's earnings experience a simultaneously and proportionate drop in relation to the share repurchase, the affect of the share repurchase will be nullified in terms of Earnings Per Share. In such case the share repurchase is indicative of a shrinking company because not only have the number of shares been reduced, so have the amount of available assets and income. So with lowered earnings EPS stays the same or lowers, ROA decreases, and the debt ratio increases.

Understanding corporate motives for share repurchases is important in knowing if the stock buyback will be a pro, rather than con, for the company. To do so involves studying the industry sector, market conditions, revenue and earnings trends in addition to price movements of the share price among other things. If the financial indicators point to the share repurchase being a pro, then it is more likely to benefit stockholders.

Sources:

1. http://bit.ly/boNRw8 (Businessweek)
2. http://bit.ly/a7EWJY (Investopedia)
3. http://bit.ly/aI416j (Rightline)
4. http://bit.ly/9xAqHI (Langsdorf)