Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
Managing costs and pricing effectively is one of the biggest challenges facing manufacturers today. In this video, CK principals, Deanna Salo and Brian Kot draw on decades of experience working with manufacturing clients in the Chicago area to discuss the common pricing pitfalls from an incomplete bill of materials to outdated costing models. These can erode profitability. They also explore how frequently businesses should be reviewing and updating their costs in today’s market, how to align your sales force with profitability goals and how strategic focus on core competencies can drive long-term success. Whether you’re a seasoned manufacturer or growing your operations, this conversation offers practical insights to help improve your margins.
Transcript:
Deanna: I’m Deanna Salo, and I’m the managing principal of Cray Kaiser Limited CPAs. And today I’m here with one of our other principals, Brian Kot. And we’re going to be talking about our manufacturing clients. Cray Kaiser performs a number of services and has for our tenured period of time over 53 years with our manufacturing clients here in the Chicago area. And we want to talk about today some of the key indicators, the key challenges. Some of the key observations we have when we’re performing our auditing advisory review tax planning procedures with our clients. So inventory, right, huge item on a client’s financial statements, really the brick and mortar of their profitability. We really want to focus in on you know how clients are modeling their pricing to ensure they’re capturing all of their costs when they’re going out to bid in their pricing. You know the pricing models that we’ve seen some of our clients, I guess what are some of the shortfalls that they have in terms of their pricing models.
Brian: I think the shortfalls having the pricing models is they don’t include all the costs it truly takes to manufacture the product. And they might pick up labor and I know I pay a guy X dollars an hour but they forget about the other employment costs, the taxes that go along with that. And another big thing I see missed is also sometimes the rent costs and the building maintenance some of those other overhead costs that go into your facility to run your plant and your operations, those often get missed.
Deanna: Right. So really what I call making sure your bill of materials, your BOM is fully loaded. You’ve got to make sure that those costs are in your pricing model so that when you’re telling your sales force to go out there and sell your goods that you really know what your gross profit margin might be on those fully loaded costs. Again, the sales force, sometimes the sales force, their drivers are to go out and sell. Go out and sell. And their financial acumen might not be at the calibration that they really know what the gross profit margin is for a certain company. So really educating your sales force to really understanding the financial pieces, the labor costs, the rent costs, the burden costs with respect to how to model the pricing. We’ve also seen some clients shift their commissions, right, and payments to their sales force, not on, you know, sales volume, but also on gross profit margin, right? And making sure that they’re yielding the right profitability consistently. You know, they might have some volume discounts. They might have some other perks for some of their specific customers. But really making sure that they’re honing in on all of their related bill of material costs is a really important part of that, too. What’s some of the other things that they should be doing in terms of making sure that the costing is there?
Brian: One thing I see often is they set a price. They look at their costing once a year. Maybe they did it last year. In today’s economy, the prices are changing so often, you know, depending on what type of raw material that you’re buying. I mean, there could be weekly swings, monthly swings in there. So I do recommend at a minimum, at a minimum, you’re reviewing your costing at least twice a year and you are updating those numbers. And that’s actually very generous when I say twice a year.
Deanna: Yeah. We have a client that does use standard pricing, standard costing. And, you know, they were only updating their prices once a year. So we got them to look at it at least four times a year, and depending upon what the variance might be, to do it even more frequently than just the once a year, right? It was something that it’s an audit client, and we do look at their processes and procedures in terms of their standard costing. And while they were uploading and getting all the pricing there, they weren’t really doing the full roll-up other than once a year. They actually now do it twice a year. But we’ve even leaned in a little bit more on them to say maybe even a little bit more often because the raw material costs is steel imports from China and the tariffs and so forth that, you know, we’ll be going out there this year to audit them. So we’ll be really interested to hear, you know, how frequently they’ve even updated it for the current year. Another thing on inventory is, you know, even on the sales side, you know, some clients are really trying to diversify right through a whole bunch of different types of sales lanes. You know, they want to expand, broaden what they’re selling, how they’re selling to stay competitive in the marketplace. You’ve got a client example that kind of didn’t do that and just stuck true to what they do.
Brian: Yeah. I had a client they were looking to expand into different lanes and kind of take over their supply chain for themselves and they thought maybe we could start manufacturing these items that we’re buying and they decided not to. And the model was we wanted to use the finances and invest in what we do well and do it better. And with that, they have had tremendous success by not expanding out and properly utilizing their capital funds.
Deanna: Yeah. So using their capital funds, reinvesting in the things that they did well, and staying honed in on their costing and profitability, and they’ve been super successful. So there’s a little bit of ying and yang, growing for the sake of growth, which a lot of people could get into that whole wheelhouse of let’s grow to grow, but also stay profitable. And even beyond that is really being able to have the leverage that they had to get the costing at a place in their existing profitability that didn’t compromise their growth. They stayed super profitable.
Brian: And if you have any questions, please contact us.
Deanna: And you can contact Deanna Salo or Brian Kot at Cray Kaiser at www.craykaiser.com. And we’re here to help. Thanks so much for listening in.
Managing your finances effectively begins with the right partnerships and processes. In this audio blog, Karen Hoban, a Senior in CK’s CAAS department, share practical tips to help clients get the most out of their relationship with a CAAS team. From organizing financial records to streamlining communication, Karen offers strategies designed to save you time, reduce friction and help your CAAS team deliver the service you deserve.
Transcript:
My name is Karen Hoban. I’m a senior in Cray Kaiser’s CAAS department. I’ve been with Cray Kaiser about five and a half years. Our goal is to provide excellent service to all of our clients here at Cray Kaiser. And my hope for this blog is to touch on a few ideas I have that might help our current and future CAAS clients help us to help you.
In order for us to deliver to you valuable services, I have a few thoughts on some areas to consider. The first one is documents and financial records management. These would include strategies for maintaining organized financial records, including receipts, invoices, and statements that we require in order to do your accounting or prepare any kind of tax returns. One area that we recommend is to provide us view-only access to your bank and loan statements through the bank. This doesn’t allow for any transactional access, but we can access the bank in our time in order to obtain statements timely. This also frees you up from tedious tasks that you may like us to do instead.
Another thought is to consider upgrading or switching to a cloud-based software similar to QBO or Bill.com. Using a cloud-based software streamlines efforts and allows for document storage within the program. It also offers real-time sharing. We can log in at our convenience to notice any changes that have been made or make any changes to your file.
Another area to consider is to use our portal for document management. This is a secure way to send us files, retrieve files, and we can reduce emails and back and forth of document sharing. It offers access at convenient times for both of us to view what you’ve provided to us.
Another area I’d like to touch on is technology. Again, the usage of QBO, Bill.com, or any other apps for payroll or sales that can be integrated into your accounting software helps us to help you better. Use of AI-enabled software helps in your AR and AP functions, reducing, again, the need for your time for tedious tasks. These softwares also allow us to have real-time collaboration with you and your staff members and gives us extra access to data. Changes and updates can also be made remotely.
The third area that I have to talk about is communication. I find it valuable to have an upfront investment in time to discuss your business and operations. Creating checklists with staff to refer to for documents and information needed on a regular basis, whether it be monthly, quarterly, or at year end. It helps us to be on the same page in what we require and what you know you need to provide. In addition, regular check-ins, whether it be monthly, quarterly, or even at year end, help us to stay up to date with any changes or updates in personnel or management. It allows us to ask the right questions and stay informed of any new purchases or relevant changes in the business.
Lastly, ask questions. It helps us to provide better service if we’re aware of issues, problems, or any questions that you may have.
Hopefully a few of these ideas will resonate with you. A few small or big changes in the areas of document management, technology, and communication can result in a more efficient and successful relationship. Please feel free to reach out via email or phone. We’d be happy to have a conversation on how we can better serve you.
CPA, CVA | Manager
As a manufacturer, your inventory isn’t just sitting on shelves, it’s the lifeblood of your company. Every material you buy, every product you’re building and every finished good waiting to ship represents cash your business has already spent. How well you track and value that inventory has a direct impact on profitability and assists in your ability to make informed decisions.
The foundation of effective inventory tracking is knowing what you have, where it is and what it costs you, in real-time. That means recording inventory movements when they happen, from when raw materials arrive, to production, and ultimately, when they ship. Outdated or rough cost estimates lead to poor decisions about what products to focus on, where to invest, and how to price competitively.
It is also important to regularly review your bills of materials (BOMs), by using systems that capture inventory movements at the point of activity. Like anything, your inventory inputs are impacted by macro and microeconomic factors that can change your cost to produce and therefore, BOMs should be reviewed regularly to ensure that these changes are being reflected. Other factors include changing a supplier, swapping out a material or improving a process; these are all examples of changes that need to be reflected in your records right away, not months later. Stale data can turn into material variances or financial misstatements.
Knowing your accurate costing is equally as important as knowing your inventory because it directly influences pricing, margin analysis, and strategic decision-making. However, you choose to calculate what it costs to make something, including standard, actual, or activity-based costing, the method must reflect what’s actually happening on your shop floor. Inaccurate or outdated costs can lead to underpricing, shrinking margins, misinformed product decisions and misleading financial results. Clear policies about what you expected to spend versus what you already spent help you to catch inefficiencies early, before they become bigger problems.
Regular and timely review of costing assumptions matters more than most people realize. If you don’t know what it truly costs to make a product, you risk pricing too low and losing money on every sale. It is important that your costs reflect current material prices, labor rates, and overhead structures. Outdated estimates lead to poor decisions about which products to focus on, where to invest and how to price competitively.
When inventory tracking, BOM management, and costing are kept accurate and up-to-date, the payoff is significant. You’ll gain a clearer picture of what products are actually making you money, have better control over cash flow, and more confidence in management decisions especially during times of inflation, supply chain disruptions, or rapid growth. In short, strong inventory practices aren’t just an accounting exercise. They’re one of the most practical tools you have for running a healthier, more resilient business.
Understanding what your business is truly worth is a critical step in planning for the future. In this audio blog, Jason Hofferica, Assurance Manager at CK, breaks down the purpose of a business valuation, when you might need one and how the process works, from high-level industry insights to detailed financial analysis.
Transcript
My name is Jason Hofferica. I’m an Assurance Manager here at Cray Kaiser, and I’m a Certified Public Accountant and a Certified Valuation Analyst.
A business valuation, in short, is a process of setting the value of a business for several reasons. You can be looking to acquire a business. You could be looking to exit a business, sell a business, maybe for estate tax planning, purposes, gifting. So there’s all sorts of different reasons to want to go ahead and get a valuation for your business or for one that you’re interested in.
They could always ask to obtain their, if there has been one, they can go ahead and request one. Or if they’re more comfortable, they can hire their own personal valuation analyst to go ahead and run the numbers as well to see if the asking price is reasonable.
A business valuation is necessary because things just happen in general. You can have a disability or a shareholder death, gifting purposes. Perhaps you want to start transferring some shares to your children or to other family members. So for these considerations, a valuation sometimes is or often is necessary to come up with these values for transfer.
So a business valuation, the process typically starts from a very high level. And in order to properly value a business, you first have to understand many aspects of not only the macro environment, but the micro environment, the market, the industry. And so typically we start from a high level. We then discuss with the client, get company history. We read industry publications to come up with different things that might impact that specific industry. And from there we start honing in on these different things that might be considerations when valuing.
We then typically look at the financial statements and five years is typical. We do do analysis of financial ratios. We compare it to those in the industry. We try to get as closely to the size and complexity of the business that we’re valuing as possible. We will then go through a process of what is called normalizing the financial statements. Often when you have these closely held companies, officers are paid a certain amount. Rent sometimes is paid to a related party. Is that market value? So all of these different financial information gets adjusted to come up with a true revenue stream of expectations.
Typically the ownership is who will go ahead and get a valuation done for either estate tax purposes, gift purposes, maybe they’re looking to go ahead and sell or from buyers. Buyers will want to know if they’re interested in a business whether or not something is appropriately valued and we will be contacted from that aspect as well.
But really, anybody with these mergers, acquisitions, valuation can be used in all aspects of these. I would say to get a valuation done when there is an event or an occurrence, that would warrant a valuation to be done of your stock.
We do go ahead and we kind of give a good assessment of what the industry and all of those variables for that company to come up with an estimate as far as hours and theme. The final report is actually quite lengthy because of the amount of research and analysis that gets put into it.
Like I mentioned before we start, very high level and kind of work our way down to not only the macroeconomics, but microeconomics regional. We’d go into the industries and it even does include all the different methods that were considered as well as why they were considered or why they weren’t considered. So that the person reading the valuation report should have a clear understanding of the why and as to why a business was valued, where it was valued.
Accounting & Advisory (CAAS) Supervisor
In today’s competitive business environment, staying on top of your company’s financial health is essential for sustaining growth, maintaining profitability, and making informed decisions. Business owners need clear and accurate insight into their financial position in order to make informed decisions, manage risks, identify opportunities for improvement and plan for the future. One of the most effective ways to gain this insight is through consistent financial reporting. Reviewing a few key financial reports each month can help you understand how your business is performing, where improvements can be made and whether you are on track to meet your financial goals.
Below are five financial reports every business owner should review monthly. These reports will provide you with a comprehensive understanding of your company’s financial health.
The Profit and Loss (P&L) statement, also called the income statement, is one of the most important financial reports for any business. This report summarizes your company’s revenue, costs, and expenses over a specific period of time, typically monthly, and shows whether your business generated a profit or a loss. Key metrics to review in this report include gross profit, operating expenses and net income (or loss).
Why this Report Matters:
2. Balance Sheet
A balance sheet provides a snapshot of your company’s financial position at a specific point in time. It outlines what your business owns (assets), what it owes (liabilities), and the value remaining for the owner or shareholders (equity). Key metrics to review in this report include current assets, current liabilities, and owner’s equity.
Why this Report is Matters:
3. Cash Flow Statement
Cash flow is the lifeblood of any business. The cash flow statement tracks how money moves in and out of your business over a given period. Key metrics in this report, include operating cash flow, cash inflows (customer payments or sales revenue) and cash outflows (expenses, payroll and operating costs) and the overall change in your cash position.
Why this Report Matters:
4. Revenue or Sales Performance Report
For many businesses, revenue comes from multiple products, services or business segments. A revenue or sales performance report helps track where income is coming from and how these sources are performing over time. Key metrics in this report may include revenue by product line or service category, sales trends and performance by department or salesperson.
Why this Report Matters:
5. Accounts Receivable Aging Report
The accounts receivable (AR) aging report shows how much money customers owe your business and how long invoices have been outstanding. This report typically groups receivables by time periods such as 30, 60 or 90+ days past due. Key metrics to review include total outstanding accounts receivable, aging categories and the percentage of overdue invoices.
Why this Report Matters:
Successful businesses don’t rely on guesswork; they rely on data. By reviewing these top five financial reports each month, Profit and Loss (P&L) Statement, Balance Sheet, Cash Flow Statement, Revenue or Sales Performance Report, and Accounts Receivable Aging Report, business owners can gain a clearer understanding of their financial position and overall performance.
Regular financial review of these reports not only helps minimize risk and maintain compliance but also provides valuable insights that can support better decision-making, improve profitability and long-term growth. When business owners stay proactive with financial analysis they are better equipped to navigate the challenges, seize opportunities, and builder a stronger, more sustainable business.
If you have questions about your financial reports, please contact the CAAS team at CK. Our trusted advisors work with business owners to improve financial reporting, strengthen accounting processes and provide insights that support smarter business decisions.
CPA | CK Principal
A growth mindset is essential for any business that wants to make a lasting impact on its stakeholders, customers, employees and community. Leveraging technology, tools and expert advisors can help support that growth, but it can also reveal weaknesses within an organization, particularly in its financial infrastructure. As your business expands, accounting should do more than simply track what has already happened. It should actively provide insights, support decision-making and help guide your business forward. The following strategies can help strengthen your financial foundation and support sustainable growth.
Many new businesses begin with cash accounting because it is simple and helps track how much money is coming in and going out. However, cash accounting does not always show the full picture. It only records transactions when cash changes hands, which can make it difficult to see how sales align with related costs.
As your business grows, accrual accounting becomes more useful. It records revenue along with expenses in the same period they occur. This allows you to better understand which products or services are truly profitable.
As your business grows, regular financial reporting is vital. Set a monthly financial reporting cycle for the areas that matter the most for your business and consistently follow it. Accurate and timely reports of these areas help you trust your numbers and make informed decisions. A good practice is to review the previous month’s financial statements by the 15th of the current month.
Accounting software and applications are excellent tools for recording transactions efficiently and accurately. Your team can focus on interpreting numbers and analyzing costs, along with identifying excess expenses and helping leadership make informed business decisions. When technology handles the routine tasks, your team can fully understand and act on the data.
Your past financial statements can help guide future decisions. Use historical financial data to build sales forecasts for each product line. Accurate cost estimates will help you see how those sales translate into profits that help your business grow. It’s also helpful to establish key performance indicators (KPIs). These metrics both financial and non-financial allow you to track progress towards your goals and measure the overall success of your business.
Even strong internal teams can benefit from outside perspectives for financial reporting and analysis. Working with experienced professionals with strong backgrounds in accounting and forecasting can help your staff interpret data effectively. Consulting with these professionals regularly throughout the year, not just at tax time, can provide valuable insights into your business that help refine your growth strategies. Additionally, advisors can also recommend tools and methods for establishing an accounting and reporting system tailored to your needs.
Growth creates opportunity, but it also increases complexity. With clear reporting, effective technology, and forward-looking analysis, your financial data becomes a powerful guide rather than a guess. Supported by the right systems and expertise, you can make confident, informed decisions that turn momentum into lasting success.
If you’re looking to strengthen your accounting department and team, consider contacting Cray Kaiser’s CAAS Department. Our team can work with your staff to improve your financial reporting and build systems that support your business as it grows.
In part 3 of our video series about college foundations, Dan Swanson, an assurance manager at CK, shares his perspective on working with college foundations. In this video, he explains key year-end considerations, like tax reporting and nonprofit audits and how proactive planning can take the stress out of the process. He also highlights how CK partners with foundation staff and boards to prepare for audits, maintain clean records and ultimately free up time to focus on fundraising and advancing the foundation’s mission.
Transcript:
Welcome, everybody. I’m very excited to be here today. My name is Dan Swanson. I am an assurance manager here at Cray Kaiser. I’ve been with the firm for about 12, 13 years now, and I wanted to talk about a subject matter that I’m very passionate about, and that is college foundations, and some of the important factors that we need to be considering, some of the hot topic issues.
What are they doing with year-end tax reporting? Even though they’re a nonprofit, there’s still some year-end tax reporting that needs to be done. So how do we alleviate that requirement? Nonprofits need year-end audits. So how do we help the foundation get through the year-end audit procedures? We here as auditors kind of have a leg up in that because we know what they’re going to ask for. We know what type of work papers they need. We know the routine so we can be your advisor to get you through that process.
So another value add that I think teaming up with Cray Kaiser has is the year-end audit. So as foundations, as a nonprofit organization. The foundations that we do work with, they’re required to have an annual audit performed. And typically it’s in conjunction with the college’s audit. They’re both separate audits, but they need to be issued kind of simultaneously. So an issue that comes up a lot is, oh no, it’s year-end audit time, what do we do? How do we get prepared? What are the auditors going to ask for? What do we need to do?
So what’s super cool about, you know, teaming up with Cray Kaiser is we’re also auditors. So as auditors, we know the process. We know what questions are going to be asked. We know the expectations that the auditors are going to have on the foundation. So having all that knowledge and all that experience, we can advise and we can consult with the foundation, counting staff, board members, et cetera, okay, here’s what we think needs to happen, and we can get them prepared ahead of time in advance. So come year-end audit time, all that worry, all that stress hopefully goes away because we’re ready. We have clean records. Everything reconciles. We’re super transparent. Any question the auditors have, we’re going to be able to explain, okay, here’s what we did, and here’s why we did it, here’s our work paper to support that balance or to support that transaction. Having a good clean records done monthly really sets you apart come audit time.
You know what we typically do with the foundations, I work with is the auditors will have a request list. And so what I like to do is schedule a meeting with the foundations and we’re going to go through this request list one by one and I’m going to help educate them. Okay they’re asking for this and here’s why. You know we’ll take care of this request as kind of your outside accountants or you guys take care of this because this deals with donor information and you know you have that at the ready. So we kind of divide up responsibilities on the audit. Here’s what we’ll take care of. Here’s why they’re asking for it. And we’ll meet again in a couple weeks and see where we’re at, so when the auditors are here are present they have everything they need to do to get through it timely. And we try to get out ahead of any requests that way the auditors have what they need and it’s simply they just need to get through it.
So again that’s the fun part again because I know what they’re going to ask for. I know what they need. I know how they think. And I can help educate the foundation staff and make sure that they’re as prepared as can be, come year-end audit time so these things don’t drag on and on and on and then becomes this high stress situation. If I can relieve that stress, if I can relieve that angst, then I feel like I’m doing my job.
And so far, knock on wood, the foundations every year, in my opinion, I think the audits have gone very smoothly and so that’s where my cool that’s kind of awesome. You know, we’re doing it we’re teaming up with them they’re getting through this, this year on audit procedure. It’s not this overwhelmingly stressful task. So again a lot of them, they’re fundraisers, so accounting isn’t their fortitude. So if we can come in and help educate on the accounting piece then I can free them up to go out and fundraise and spread the mission on the foundation. So that’s, I’ve got the accounting. I’ll help you out.
But again, selfishly, I’ll do the accounting so you can go out and do what you do best. So that’s where I think coming to Cray Kaiser adds value. If you have any questions that you would want to ask me, please feel free to reach out. You can go to the Cray Kaiser website and you can find me. Again, I’m Dan Swanson. I’m an assurance manager here.
MSA, MST | In-Charge Staff Accountant
On December 2, 2025, the Internal Revenue Service (IRS) released a draft of the new Form 4547, titled Trump Account Election(s). This form allows authorized individuals (typically parents or guardians) to elect to open a “Trump Account” for eligible minors. These accounts are part of a new federal initiative designed to help children build financial assets early in life. One of the most notable features of Form 4547 is the option to receive a $1,000 “Pilot Program Contribution” from the U.S. Treasury for children born between 2025 and 2028.
According to the IRS instructions, the the most efficient way to file Form 4547 is by submitting it with the authorized individual’s electronically filed current-year federal income tax return. For the initial rollout, this would likely coincide with the filing of the 2025 tax return.
If the form is not filed with the tax return, it may still be filed separately using paper filing.
The IRS has announced plans to launch an online portal at trumpaccounts.gov in mid-2026. This portal may eventually allow authorized individuals to make Trump Account elections online. However, it is important to note that contributions to Trump Accounts will not be allowed before July 4, 2026.
In early December, the Michael & Susan Dell Foundation announced a $6.25 billion philanthropic commitment to fund 25 million Trump Accounts. Through this initiative, the foundation plans to contribute $250 per account for children who:
This program is intended to support children who do not qualify for the $1,000 federal Pilot Program Contribution. Parents can assess potential eligibility by entering their zip code into Census Reporter which provides median income data from the U.S. Census Bureau. Additional details about the Dell Foundation contribution aren’t available yet but we will provide an update as soon as more substantive information becomes available.
To learn more about how Trump accounts, Form 4547 or related contribution programs may impact your family, please contact one of the trusted advisors at Cray Kaiser. We can help you navigate new developments and plan accordingly.
CPA | CK Principal
As it does every year, the Internal Revenue Service recently announced the inflation-adjusted 2026 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Additionally, tax professionals and their clients may use the optional standard mileage rate to calculate the deductible costs of operating vehicles for moving purposes for certain active-duty members of the Armed Forces, and now, under the One, Big, Beautiful Bill, certain members of the intelligence community.
Beginning on Jan. 1, 2026, the standard mileage rates for the use of a car (van, pickup or panel truck) are:
The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for over 15 years.
Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. Notice 2026-10 contains additional information.
If you have questions about the standard mileage rate or calculating the actual cost of using your vehicle for business, please contact Cray Kaiser.
Accounting & Advisory Services (CAAS) Manager
Understanding the difference between net income and retained earnings is essential for any business owner who wants to build long-term profitability. While these two accounting terms are closely related, they serve different purposes and offer valuable insights into your company’s financial health.
Retained earnings represent the leftover net income after dividends have been paid to owners or shareholders. Instead of being distributed these profits are reinvested, back into the business forming a fundamental part of equity. These funds can be leveraged for various productive uses, including financing new projects, investing in research and development, or upgrading infrastructure.
In other words, retained earnings reflect how much profit your business has chosen to retain for future growth rather than pay out. This healthy practice forms an important part of the shareholders’ equity section on your balance sheet and also strengthens a company’s financial position over time.
The formula for retained earnings is a simple formula:
Retained Earnings (RE) = Beginning RE + Net Income – Dividends.
For example:
If a business. begins the year with $300,000 in retained earnings, earns $100,000 in net income and pays out $20,000 in dividends, the ending retained earnings would be $380,000.
Net income measures how much money your company earns after all taxes, operating costs and expenses have been deducted. It’s a key indicator of the company’s profitability for a specific period. It’s important to note that while net income contributes directly to retained earnings, the two serve different purposes:.
It’s also important to note that net income is taxable, while retained earnings are not, since taxes have already been paid on those profits.
Dividends represent the portion of profits distributed to shareholders, typically paid in cash or as stock dividends. To maintain healthy dividends, a company must ensure they have sufficient retained earnings to support these payouts while also funding growth.
You can find retained earnings in the equity section of your balance sheet, typically on the right side, along with liabilities and shareholder equity. Some companies also prepare a separate statement to track retained earnings, showcasing the inflow and outflow of these critical funds.
Even simple calculations can go wrong if not handled carefully. When tracking retained earnings:
Accurate calculations ensure your financial statements reflect the true state of your company’s growth and performance.
Both net income and retained earnings are more than just numbers, they’re essential indicators of financial health and business growth strategy. By understanding these concepts:
A clear understanding of net income versus retained earnings helps business owners build smarter growth strategies and maintain financial resilience.
Ready to delve deeper? Our Client Accounting and Advisory Services can review your Retained Earnings and help you plan for sustainable business growth. Contact us today to schedule a consultation.
