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Blog Posts (25)
- Economic Profit vs Accounting Profit: The Role of Opportunity Cost in Business Accounting
Understanding the difference between economic profit and accounting profit is essential for businesses when evaluating their performance and making strategic decisions. A key factor in distinguishing these two concepts is the role of opportunity cost. In this article, we will explore the concepts of economic profit, accounting profit, opportunity cost, and how they relate to one another. By the end of this post, you will have a better understanding of these and their implications for your business. Opportunity Cost Opportunity cost refers to the value of the next best alternative that is forgone when a decision is made. In the context of business, opportunity cost represents the benefits a company could have received by using its resources in a different way. It is an essential concept in economics and helps businesses evaluate the efficiency of their resource allocation. Economic Profit Economic profit is a measure of a business's financial performance that takes into account both explicit and implicit costs. Explicit costs are the direct monetary expenses a company incurs, while implicit costs represent the opportunity costs associated with using resources in a specific way. Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. For example, let's consider a business with a total revenue of $200,000, explicit costs of $100,000, and implicit costs (opportunity costs) of $50,000. The economic profit would be $200,000 - $100,000 - $50,000 = $50,000. Accounting Profit Accounting profit, on the other hand, is the difference between a company's total revenue and its explicit costs only. Accounting profits are typically reported on financial statements and are the most common measure of a business's profitability. Accounting profit is calculated by subtracting explicit costs from total revenue. Using the example above, the accounting profit would be $200,000 - $100,000 = $100,000. Economic Profit vs Accounting Profit The main difference between economic profit and accounting profit is the inclusion of opportunity cost (implicit costs) in the calculation of economic profit. While accounting profit only considers explicit costs, economic profit takes into account the opportunity costs associated with resource allocation, giving a more comprehensive view of a business's financial performance. In some cases, a business might have a positive accounting profit but a negative economic profit. This occurs when the opportunity costs (implicit costs) are higher than the accounting profits, indicating that the business is not using its resources as efficiently as it could be. How to Calculate Economic and Accounting Profit To calculate accounting profit, you simply subtract the explicit costs from total revenue: Accounting Profit = Total Revenue - Explicit Costs To calculate economic profit, you need to subtract both explicit and implicit costs (opportunity costs) from total revenue: Economic Profit = Total Revenue - Explicit Costs - Implicit Costs (Opportunity Costs) Understanding the difference between economic profit and accounting profit, and the role of opportunity cost, is crucial for businesses when evaluating their performance and making informed decisions. By considering both types of profit and opportunity cost, businesses can gain a better understanding of their overall financial health and identify areas for improvement. A business should use both economic profit and accounting profit to gain a comprehensive understanding of its financial performance, resource allocation efficiency, and overall profitability. Each of these measures provides unique insights that can inform strategic decision-making and help identify areas for improvement. Here's how and why a business should use economic profit and accounting profit: Evaluating Financial Performance: Accounting profit, derived from a company's financial statements, offers a snapshot of the business's financial health by calculating the difference between total revenue and explicit costs. It helps businesses track their profitability and make comparisons with industry peers. Economic profit, on the other hand, provides a deeper understanding of financial performance by incorporating opportunity costs (implicit costs) in addition to explicit costs. This measure helps businesses assess whether they are maximizing the potential value of their resources. Resource Allocation Efficiency: Economic profit accounts for opportunity costs, reflecting the value of alternative uses of resources. By comparing economic profit with accounting profit, businesses can identify inefficiencies in resource allocation and make informed decisions to optimize their operations. If a company's economic profit is consistently lower than its accounting profit, it may indicate that the business could allocate its resources more efficiently to generate higher returns. Informed Decision-Making: Using both economic and accounting profit enables businesses to make well-informed strategic decisions. While accounting profit provides an accessible measure of financial performance, economic profit offers a more comprehensive view of the business's profitability, considering the opportunity costs associated with resource allocation. By examining both measures, businesses can identify areas for improvement, potential investments, and strategic adjustments that can enhance their overall financial performance. Long-term Growth and Sustainability: Economic profit can help businesses assess their long-term growth prospects and sustainability. A positive economic profit indicates that a company is generating returns above its opportunity costs, suggesting that the business is creating value and has the potential for long-term growth. In contrast, a consistently negative economic profit may signal the need for strategic changes to improve the company's prospects and long-term sustainability. In conclusion, businesses should use both economic profit and accounting profit to gain a holistic understanding of their financial performance and make well-informed strategic decisions. By considering both measures, businesses can optimize their resource allocation, identify growth opportunities, and enhance their long-term profitability and sustainability.
- A Business Owner's Guide to Certified Public Accountants (CPA's)
How much does a CPA cost? The average cost of a CPA for a small business in the United States can vary depending on a number of factors, including the size and complexity of the business, the services required, and the location of the CPA. According to industry reports, the typical fees for CPA services range from $100 to $400 per hour, with an average cost of tax preparation by a CPA for a small business ranging from $500 to $3,000 per year. CPAs offer a variety of services to small businesses, including tax preparation, financial statement preparation and analysis, bookkeeping and accounting services, payroll processing, and business consulting. In addition, some CPAs may offer specialized services such as business valuation, succession planning, and forensic accounting. It's important to note that while the cost of a CPA may seem high, their expertise and knowledge can provide significant value to your business in terms of tax savings, financial management, and strategic planning. It's also important to shop around and compare the rates of different CPAs and CPA firms in your area to ensure you are getting a fair price for the services you require. Do I Need a CPA? Whether or not you need a CPA for your business depends on a number of factors, including the size and complexity of your business, your financial knowledge and expertise, and your goals for your business. While it is not legally required for small businesses to hire a CPA, there are many benefits to working with a CPA that can help your business thrive. A CPA can provide valuable financial and tax advice, help you navigate complex tax laws and regulations, provide strategic financial planning advice, and help you make informed decisions that can save you money and increase your profits. If you are comfortable handling your own financial and tax matters and have a good understanding of the relevant laws and regulations, you may not need a CPA. However, if you are unsure about your financial situation, are facing complex tax issues, or are looking for strategic financial planning advice, a CPA can provide valuable expertise and guidance to help you achieve your goals. To determine if hiring a CPA is worth it for your business, consider the complexity of your financial situation. Hiring a CPA is recommended if your tax returns are complex, you're making significant financial decisions, you're in trouble with the IRS, or you need assurance services. A CPA can guide you through interactions with the IRS, explain potential financial repercussions, and verify the accuracy of your financial statements. How to Find a Reputable CPA There are several ways to find a reputable CPA for your small business. One option is to search online for "CPA near me," "CPAs near me," or "CPA firms near me" to find local CPA firms that offer services to small businesses. You can also ask for referrals from other business owners, your lawyer, or your banker. Another option is to check with your state's board of accountancy to ensure that the CPA you are considering is licensed to practice in your state. When evaluating potential CPAs, it is important to consider their qualifications, experience, and track record of success working with small businesses. You can ask for references and check reviews online to get a better sense of their reputation and the quality of their work. Additionally, it is important to consider their fees and rates, as well as their availability and level of communication. Overall, finding a good CPA requires research and careful consideration. By taking the time to find the right CPA for your small business, you can ensure that you receive high-quality financial and tax advice that helps your business grow and succeed. How Else Can a CPA Help My Business? CPAs offer various services to their clients to enhance the accuracy, completeness, and reliability of their financial information. These services include audits, reviews, and compilations. Audits are a comprehensive type of service, involving an in-depth examination of a company's financial records, transactions, and internal controls to provide assurance to investors and stakeholders about the accuracy of financial statements. On the other hand, reviews and compilations are less extensive assurance services. Reviews are analytical procedures and inquiries performed to provide limited assurance on financial statements, while compilations involve assembling financial statements based on information provided by the client without providing any assurance on their accuracy or completeness. Apart from these, CPAs also offer agreed-upon procedures engagements, which involve performing procedures that the client and CPA agree upon, and attestation services, which involve providing assurance on various subjects such as compliance with laws and regulations or the effectiveness of internal controls. These services help businesses to enhance their financial reporting and gain credibility with stakeholders. Certified Public Accountants, or CPAs, play an important role in not just helping businesses with financial reporting and compliance, but also in securing financing for their operations. With their expertise in accounting, CPAs can assist in preparing and submitting loan applications, as well as reviewing and analyzing financing offers from lenders like Trust Capital Funding. Through this process, CPAs can provide valuable insights on whether the financing options available make sense for the unique needs and circumstances of your business.
- How to Qualify for Better Business Loan Programs Over Time
Business financing can be a smart strategy to expand your business without tapping into your personal savings or waiting for your company to generate enough funds. Fortunately, there are a variety of options available for businesses seeking financing, including term loans, lines of credit, and unsecured working capital (also known as cash advances). This article will provide guidance on determining which program you qualify for if this is your first business loan, and offer tips to help you secure the best programs with the lowest rates. The most preferred financing option is a term loan, offering the lowest rates among the three programs with monthly payment options and 1-10 year terms. However, it is also the most challenging program to get approved for, as an average minimum credit score of 720 is required. Approval chances are higher if your business has been operating for at least two years and consistently generating profits. Besides the usual documents, such as a copy of your driver's license, voided check for the business, and an application, you must provide many other documents, including the last 12 months of business bank statements, a copy of your last two years' tax return, and possibly a P&L report for the company. The underwriting process is lengthy and intricate, considering multiple factors about the business and owners. Additionally, this option requires a personal guarantee, impacting your credit score. Our next option for financing your business is a line of credit, which works like a credit card. You get approved for a certain amount and can borrow up to that limit, only paying interest on the money you use. While rates are slightly higher than for term loans, they are still competitive. A line of credit is best used for a rainy day fund or if you plan to use financing regularly. The average minimum credit score for this program is 680, making it slightly easier to qualify for than a term loan. This program has monthly/weekly payment options depending on your credit history. The term ranges from 6 months to a true revolving credit line that does not expire. To apply, you will need to provide your last six months of business bank statements, a copy of your driver's license, a voided check for the business, and an application. The underwriting process is not as rigorous as for the term loan option, but your credit history is still a factor. The last financing option is unsecured working capital or a cash advance. This option does not require any collateral or personal guarantee, hence the name "unsecured". However, it has the highest rates among the three options and is not meant for long-term financing needs. The payment structure for this option is usually daily (Monday-Friday, no holidays) or weekly, with a micro-payment structure to facilitate payments. Although daily payments may seem inconvenient, they are smaller and easier to manage, especially for businesses that generate revenue regularly. The approval process for this option primarily considers your business's revenue, with an average minimum requirement of $10,000 per month. The approval amount can range from 50% to 80% of your average monthly revenue, depending on other factors such as your average daily balance and number of deposits. The terms for this option range from 1 month to 2 years. This is also the only option that offers an early payback discount, which allows you to save money if you pay off the advance before the end of the term. Now that we have gone over the programs lets recap, you can fall into three main categories. A Profitable Business for over 2 years and credit over 720 A Profitable Business for over 1 year and credit over 680 A Profitable Business In addition to the financing options we've discussed, there are several other types of business financing available. These include equipment loans, SBA programs, factoring programs, commercial real estate loans, and franchise funding, to name just a few. If you're interested in learning more about these programs and how they can help your business, be sure to visit our Programs page. Your loan options are determined by the category you fall into. However, just because you only qualify for a cash advance, it doesn't mean you'll never be eligible for a line of credit or term loan. If you have low personal credit, you can work on building your business credit. By paying off a cash advance or revenue-based financing on time and without missing any payments, you can become a better candidate for other programs, even if your credit score is not that high. Although your credit score reflects how likely you are to keep up with payments, when working with a private lender like Trust Capital Funding, you can build your credit directly with the lender. As a direct lender, Trust Capital Funding has built long-lasting relationships with clients over the years. By maintaining a good payment history, we can offer you better programs and lower rates in the future. Remember, loan brokers cannot change any terms or make the final decision in your funding process. When applying for a business loan, always make sure you are working with a direct lender like Trust Capital Funding to avoid any potential issues. If you're looking for a business loan but do not qualify for the programs you want right now, take a small loan to build a relationship with a direct lender like Trust Capital. Private equity firms and direct lenders have the final say on what programs you qualify for when working with them directly. When you first apply for business financing the only thing a lender can look at is your credit history. We know that your credit history is not always the best representation of you or your business, and that is why we urge you to build a relationship with us, so we can better understand your specific situation. If you are only being offered cash advances you may be working with a loan broker. Be careful when getting a business loan, make sure you are always working with a direct lender like Trust Capital Funding and not a loan broker. Direct lenders use their own money to lend to businesses and a broker is sending your file out to multiple different lenders to try and get you a loan. A broker can not change any terms or make a final decision in your funding process so you gain non benefit working with them. Direct lenders also have connections with other lenders and will sometime syndicate or pool their money to fund a deal. So just because the deal is funding with a different lender another direct lender can make changes that a broker would not be able to do. Brokers also make more money on programs like a cash advance than a line of credit or term loan, making the chances of getting the other options less likely. Hopefully you learned a lot about what business loan options are available and how to qualify for better business programs if you are stuck getting cash advances. If you are interested in getting a free pre-approval fill out an application now and see what you qualify for.
Other Pages (8)
- Trust Capital | Flexible Funding Soultions
- Programs | Trust Capital
FUNDING PROGRAMS We offer flexible custom financing to fit your specific needs. REVENUE BASED FINANCING Trust Capital offers funding solutions based on your company's revenues - not your personal credit. Trust Capital can fund you up to 150% or more of your monthly volume. It is cash in the business owner's pocket. The money can be wired as fast as 24 hours after all required documents are received. An agreed upon percentage is taken from your sales in order to repay the funded amount. Note: there are other innovative repayment structures designed to alleviate the stress of a fixed monthly payment. The purpose of structuring the financing this way is to ease the pressures of a bank looking over your shoulder demanding a check each month, no matter how well you do. With Trust Capital, you repay based off your returns. When sales are high, you pay back a little more, if business is slow, you pay back a little less. APPLY NOW MERCHANT PROCESSING Trust Capital Funding is the premiere company for all of your processing needs. We work with many credit card processing companies. This allows us to place our clients with a company that will best fit their needs. Trust Capital only affiliates itself with the top ten processors in the country. Using multiple companies allows us to provide your business with the best rates and necessary functionality for bankcard processing, electronic check services, multiple POS systems, as well as business management solutions. Trust Capital Advantages Guaranteed ability to beat all pricing Next day funding (most of our competitors use 48-72 hours) Real time access to your transaction history Multilingual Customer Services Representatives Ability to finance credit card receivables Flawless credit card processing for internet based, e-commerce sites and high ticket priced industries Versatile enough to be used with Global Payment Systems, First Data and many other back-end processors APPLY NOW Taxes EMPLOYEE RETENTION CREDIT (E.R.C. TAX CREDIT) FREEDOM FLEX FINANCING Freedom flex funding is Trust Capital's version of a business line of credit. With these funds we allow our qualified clients to come back for additional funding before the existing balance is paid off. Today's market allows for a unique opportunity for our clients to have more money available so they can prosper within their industry. The only interest owed is on money borrowed. The purpose of this is to make sure we are not over leveraging our clients with a burden of the maximum amount of money available. APPLY NOW FRANCHISE FUNDING Today's average start up cost of a Franchise can range from $40,000.00 to several million. Trust Capital Funding has worked with many franchises in the past and understands the difficulty of securing money quickly. With our flexible terms and vast experience we are generally able to sync our terms with whichever franchise agreement you are pursuing. Taking on another location? We can help! In today's economy, why used your money when you can use someone else's? Trust Capital and its' affiliates are extremely innovative when it comes to acquiring additional locations. You can have your current location revenues pay for additional locations. Each Franchise agreement is different. We would like to hear from you to discuss in more detail the specifics of what our clients are looking for. Please give us a call at 1-800-LENDER-1. Some Franchises Funded: APPLY NOW TRADITIONAL BANKING PRODUCTS These banking products are based on your total gross revenues. Funds are not secured through personal assets but on the corporation itself. It is a fixed payment structure. Note: TCF is not a tax attorney or legal firm. Hence, customers should check with their legal counsel for tax deduction information. CONTACT US COMMERCIAL REAL ESTATE Multi-Family: Refinance Multi-Family: Acquisition Multi-Family: New Construction New Construction/Sub Rehab Mobile Home Parks New Construction/Sub Rehab Nursing and ALFs: Acquisition Nursing and ALFs New Construction/Sub Rehab NON Profit 202 Refinance This major policy change allows Section 202 communities to refinance debt at today's low rates and use the savings to improve facilities and enhance the living experience for residents. TRUST MORTGAGE is a national HUD lender and is an industry leader of the 202 refinance process. 90% Loan-to-value, no cash out 35 Year amortization 35 Year Term (no balloon) No maximum loan amount Low, fixed interest rate, based on market spreads over the Ten-Year Treasury Yield Negotiable pre-payment terms* 1:18 Minimum Debt Service Coverage Third-party expenses and loan costs are financeable Net Operating Income and valuation may utilize Section 8 Contract rents. Rates and Terms determined by LTV, property type and other conditions. This is limited information and meant for general reference purposes. For detailed information or a specific quote on a project, contact Trust Capital Funding at 617-795-2100. CONTACT US The Employee Retention Credit is a refundable tax credit issued by the government to encourage employers to keep their employees on payroll. Most businesses qualify if they employed five or more W-2 employees during the covid-19 pandemic. APPLY NOW
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