Hiscos owner, Stan Sloane, would like to know what you have learned so far in the process of running the company that might benefit other employees/students concerning pre-tax income and its importance.
The primary lesson learned, in regards to pre-tax income, pertains to the companys management of its resources and its cash flow. Schaefer describes six financial metrics that aid in the assessment of a businesss pre-tax profit margin. The primary metric is the pre-tax profit margin. Biery (2013) states, “This number can show you how effective youre being with expenses and if you should decrease certain expenses so that they dont eat up as much of the revenues”(para. 10). In short, Biery is discussing cash flow of a company. A metric that contributes to the pre-tax profit margin is the inventory days ratio.
The inventory days ratio measures the number of days that a company can move its inventory.In Hiscos SWOT analysis, manufacturing is considered to be a weakness for the company. The lack of manufacturing ability illustrates a longer turnover period, and it represents a negative cash flow that impacts the companys annual net income. The longer turnover period is a reason why Hisco could not have a competitive advantage; conversely, the company shortens the days down to 30 it would allow to have a higher turnover of inventory thus increase net income.
With the increase in turnover days, the effect means a higher volume for growth. This determines whether or not the company hit planned market share. Did the market demand grew as planned? The market share finds out whether or not growth achieve expectations. The combination of growth and market share can have a over-estimation or under-estimation that can impact pre-tax income in either a positive or negative way. A change in price can generate an increase in net revenue over plan; conversely, a price increase potentially decrease sales which would also impact pre-tax net income.
The variable cost of inflation is the estimate of the price being paid for raw materials and labor. In Hicos case, it is key to lock in long-term relationships/ contracts with suppliers. These negotiations can contribute to lower variable cost which will increase net income. The variable costs in productivity estimates the productivity of employees. The investment in employee efficiency is key in the variable cost of productivity for Hisco because shorter processing times which increases net income.
The base cost is the sum of a companys discretionary spending. In Hiscos case, the multiple projects that is proposed requires an in-depth research to achieve at target close to plan without over and under estimating costs. These cost will have a profound impact on the companys net income.
The actual net income includes all four quarters combined. With a tax rate of 50%, the total of all four quarter multiplied by the tax rate provides the companys post tax rate; however, the company can use the high turnover days ratio as a tool to lower the companys tax burden. Mather (2016) states, “income subject to tax allows companies with a positive net income to claim an additional deduction as a result of prior year operating losses”(para. 14).
Meet with two other employees/students and share ideas that could help others in a similar employment position as you.
It comes down to a companys cash flow. The financial metrics play a vital role in the assessment of a company, but the additional of return on assets and return on equity plays a vital role in the evaluation of the management of a company. The metrics aid the adjustments to a companys net income by fiscal quarter to ultimately reach the financial objective at the end of the fiscal year.
Biery, M. E. (2013, September 1). How healthy is your business? 6 ways to take its temperature. (Links to an external site.) Forbes. Retrieved from https://www.forbes.com/sites/sageworks/2013/09/01/how-healthy-is-your-business-using-industry-data-to-check-the-temperature/#26ca43e1704a (Links to an external site.)
Mathur, A. (2016, April 20). Why 70% of companies paid zero in corporate taxes: they had zero profits (Links to an external site.). Forbes. Retrieved from https://www.forbes.com/sites/aparnamathur/2016/04/20/why-70-of-companies-paid-zero-in-corporate-taxes-they-had-zero-profits/#7a02689c56e3
Respond to…
Hiscos owner, Stan Sloane, would like to know what you have learned so far in the process of running the company that might benefit other employees/students concerning pre-tax income and its importance.
In the process of running the company, I have learned the extreme importance of tax planning pre-tax income and its effect on the firms overall net earnings and growth. Pre-tax income is an essential part of earnings management that requires forecasting and planning to avoid potential losses and earnings decline (Jackson, 2015). The objective of the company is to generate as much profit as possible. Therefore, I recognize the significance in comprehending pre-tax income from net income to better ensure that Prior to the pre-tax knowledge gained, I would have assumed that the amount represented on the net income graph inferred the company was meeting or exceeding their net income goal. However, this is not the case, instead the amount shown is the total income without taxes. The company needs to be aware and able to distinguish between their pre-tax income and net so that it can know their ability to their liabilities and operating expenses. According to Mathur (2016), “income subject to tax allows companies with positive net incomes to claim an additional deduction as a result as result of prior-year operating losses (para 2). Ultimately, all of these circumstances are important as provides managers with the data needed to determine the firms financial standing and performance prior to the payment of taxes.
Meet with two other employees/students and share ideas that could help others in a similar employment position as you.
The pre-tax profit margin is one method that can help others in my employment position. According to Biery (2013), “this tells how much profit you get to keep from each dollar in sales (para 6). Discussion this and other methods with my employees, one of them suggested adding a chart or graph similar to the Pre-Tax Income Chart displaying the Earnings Before Interest and Tax (EBIT) and Earning before tax (EBT). The EBIT provides the net earnings prior to the deductions and interest, while the EBT delivers earnings after all deductions, such as interest, depreciation and operating costs have been accounted for without taxes. The chart could show both amounts to give a comparison of what was received to what is actually left as profit. The approach could easily be added to the dashboard for continuous tracking and determination of whether you are achieving your targeted goal.
References:
Biery, M. E. (2013, September 1). How (Links to an external site.) healthy is your business? 6 ways to take its temperature. Forbes. Retrieved from https://www.forbes.com/sites/sageworks/2013/09/01/how-healthy-is-your-business-using-industry-data-to-check-the-temperature/#26ca43e1704a (Links to an external site.)
Mathur, A. (2016, April 20). Why 70% of companies paid zero in corporate taxes: they had zero profits. Forbes. Retrieved from https://www.forbes.com/sites/aparnamathur/2016/04/20/why-70-of-companies-paid-zero-in-corporate-taxes-they-had-zero-profits/#7a02689c56e3 (Links to an external site.)
Jackson, M. (2015). Book-Tax Differences and Future Earnings Changes. Journal of the American Taxation Association, 37(2), 4973. https://doi-org.proxy-library.ashford.edu/10.2308/atax-51164
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