Accounting and Budgeting

What�s the Best Way to Pay My Bills?

SBOCTeam — Tue, 02 Dec 2008 15:03:00 GMT

Part 1: Checks

By Christopher Freeburn

Paying the bills doesn't make anyone's list of favorite things to do. But, like it or not, bills come due and must be paid. No one knows that better than small business owners, who face a myriad of bills every month, ranging from office supplies and equipment leases to office rent, insurance, and marketing services.

Small business owners not only have to pay their bills, but do so in a way that lets them best manage their company's cash flow, insuring that there will be enough cash available to the business at any one time to meet all immediate obligations. In order to achieve this, small business owners must choose between the available payment options to select the one-or the combination of several-that best serves their business's needs.

The paper option

By far the most popular way for small businesses to pay their bills is the simple, old-fashioned paper check. Drawn against a bank account, checks have been the primary means of bill payment for both small businesses and consumers for decades. But that is now changing.

"Checks are facing stiff competition from other forms of payment," says Jim Sheridan, a Boston-based banking consultant. "Credit cards and electronic payment systems are growing quickly. Most businesses still use checks to pay bills, but the trend is definitely heading toward plastic and electronic payment systems. The last stronghold for paper checks are bills that are sent through the mail, but even there we are beginning to see movement away from paper checks."

Nevertheless, checks remain a popular method of bill payment by small businesses for good reasons. "There are some advantages to using checks over credit cards of electronic payments," says Sheridan.

Floating money

Paper checks still offer small businesses a short period of time between when a check is written and when the money is actually transferred out of the issuing business's account, often referred to as "float." During this time the money is still available to the business, and depending on the type of checking account, may still be collecting interest. This float period varies based on a number of variables. A check sent to a utility company, for example, will be marked as received when the check arrives in the mail, but the utility may not send the check to the bank for several days.

The leeway provided by float periods is decreasing, however. In 2004, Congress passed a law permitting banks to send electronic images of checks to each other instead of having to send the actual checks for processing. Under the law, electronic scans of paper checks became equivalent to the actual checks themselves. Since electronic transmission of scanned checks is significantly faster than actually shipping paper checks back and forth between banks, float times have fallen considerably as more banks adopt the system.

Accounting and control options

The traditional paper check also provides definite accounting advantages since the check itself becomes physical proof of a transaction. It is difficult for another party to dispute the receipt of payment if you have a copy of the cancelled check. In recent years, many banks have moved away from returning the actual cancelled checks along with your monthly account statements in favor of printed images of the checks. "It is far more cost effective for banks to print a scanned image of the cancelled check on your statement than it is to physically send you the actual check," explains Sheridan. "Both in terms of the resources needed to transport the actual check to your local bank and then send it out and the mailing costs of doing so." The scanned images on your monthly statement, however, still constitute valid evidence of a completed transaction.

Checks also allow a small business owner to change his or her mind and cancel the payment, even after the other party has received the check. A "stop-payment order" placed on a particular check will cause the bank to decline it. This ability can prove useful to small business owners if a given good or service is found unacceptable after the check has been written. However, most banks charge a fee for a "stop-payment" order, and stop-payment fees are usually among the highest charged by most banks, ranging from $15-$35 per stopped check. "Stop payment fees are like an insurance premium for the bank," explains Sheridan. "If you issue a stop payment order on a check and the bank accidentally pays the check-which does occasionally happen due to miscommunications-then the bank is liable for the amount of the check, not the customer."

Disadvantages of checks

The once unassailable dominance of paper checks as a means of paying bills has been eroding because of the clearest advantage of credit cards and electronic payment methods: cost.

Depending on your bank and type of account, your bank may charge you a small fee for processing every check you write. Purchasing blank checks also requires paying a fee (again, depending on the bank and type of account). These fees can add up.

Additionally, paper checks need to be physically presented to the payee. For the most part, that means sending them in the mail. With postage costs rising sharply over the past few years, small businesses that mail a lot of checks are beginning to notice the cost. "Rising postage prices are a significant reason why so many businesses and consumers are turning away from paper checks for regularly recurring expenses like credit card and utility bills," Sheridan observes. "Equally, it takes a lot less time to pay these bills electronically and avoid the bother of writing a check and mailing it." Credit card and electronic payment systems can also be set up to pay bills automatically at a specified time each month, thereby eliminating the possibility that a payment would be forgotten or lost in transit, which might result in penalty fees or loss of service.

Cash Flow and Accounting

SBOCTeam — Thu, 06 Nov 2008 22:18:00 GMT

by MOBI.1

Cash fuel drives you in business just as jet fuel keeps a plane aloft. A pilot is very careful to accurately predict the fuel requirements. You should place the same importance on cash flow control because if, at any point in the future, you run out of fuel, like the pilot, you've got a BIG problem.

Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your balance of cash is at the end of designated periods of time. This is a great tool because you can predict your future needs for cash before the needs arise.

In cash flow control, for each of a number of intervals of time, you make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, say a month, you start with the cash you now have. To this you add IN items and subtract the OUT items, which results in the cash at end of the month. The cash at the end of month becomes the starting cash for the next month.

The attached cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. Your projection should be made for an upcoming 12-month period. The projection will be a useful tool for you to arrange financing before it is required by showing your banker that you are sophisticated enough to provide for future cash in order to preserve liquidity.

You can use this simple cash flow format to make up your own cash flow projection for the business you have in mind. It is so simple, yet can be so valuable!
© 2003-2007 My Own Business, Inc. All Right Reserved.

Get Whats Coming to You

SBOCTeam — Thu, 17 Apr 2008 12:31:00 GMT

How To Get What's Coming to You

By Chris Freeburn

The key to maximizing the success of any business, big or small, is to maximize the amount of cash coming in, while minimizing the amount going out. That means making sure you are collecting as much revenue from customers as you can, while saving every penny possible on purchases made from suppliers. For a big business, this maximize/minimize strategy can boost profits, for a small business it can mean the difference between success and bankruptcy.

Make it easy
The best way to encourage prompt payment from your customers is to make payment as convenient as possible. That means offering them a variety of ways to pay. "Every customer is different," says Dave Bowman of TTG Consulting, a Los Angeles based consulting firm. "Each customer has his or her own unique financial situation and, depending on that situation, may prefer one method of payment over others." If you accept a broad array of payment options, you drastically increase the chances of both making the sale and getting paid quickly.

With credit and debit cards now the dominant payment that customers - both individuals and small businesses prefer to use when purchasing goods or services, accepting plastic is rapidly becoming almost a necessity. Credit and debit card issuers are eager to have their cards accepted as widely as possible, which means that it has become extremely easy for even the smallest businesses to obtain merchant accounts and credit and debit card processing equipment. Still, when choosing a merchant account, it helps to shop around and compare offers to get the best deal. Increasingly, consumers are using online bank transfers and wire transfers to pay for purchases in addition to credit cards. Most merchant accounts can be set up to accept these quick forms of payment in addition to credit and debit cards. Technology is quickly increasing the payment method options available to customers. "It's important for any small business to keep up with the latest popular options," Bowman says.

Discounts for early payment
One way to encourage early payment is to offer an incentive to the customer. Try offering a small discount say, one or two percent - off the total amount of the bill, if the bill is paid within a specified period after the invoice is sent. The period should be long enough to permit delivery of the invoice and a prompt response. Ten days is normally enough. "Providing incentives is a great way to motivate customers," says Bowman. "If you make early payment something that's in their own financial interest, they are more likely to take the hint."

Impose late fees
An alternative method is to impose a late fee, either in a specified amount, or in terms of a small percentage of the overall bill, for payment received after a specified amount of time. The amount of time after which the customer incurs a late fee must be reasonable, otherwise you will risk alienating customers who are struggling to meet their own bills. Late fees should begin at least 30 days from the date of the invoice.
Make sure that your company's late fee policy is noted clearly and prominently on the invoice, and that your sales people mention it when closing the sale. The customer must be aware of the policy for it to have the intended effect. Customers who were unaware of the policy will not be pleased if hit with unexpected penalties. "Nothing will irritate a customer more than being hit with a late fee without clear warning," warns John Tschohl, president of the Service Quality Institute. "If the customer doesn't believe he or she was fairly warned about the policy, that late fee could cost you future business."

Communicate with customers
Your customers have their own problems to worry about. Sometimes bills get misplaced or forgotten by busy people. Before taking any punitive action, beyond any late fees already spelled out on the invoice, over a serious late payment, take the time to send out a letter reminding the customer of the overdue payment and requesting quick payment. Be sure to include a copy of the original invoice, the date it was sent, the amount due, and any policies your company has regarding late payments. Be professional and non-threatening. Even good customers are sometimes late. However, advise the customer that continued failure to pay his or her bill will result in further action, including the possibility that you will send the account to collection. The potential damage to their credit rating may prove sufficient to motivate them to pay.

Debt Collection
If all other efforts fail to induce late or non-paying customers to finally pony up, you can always hire a collection agency, or pursue a case in your local courts. In general, you should wait at least 90 days after the account was due, and only after several attempts to reach the customer by telephone and letter, before engaging a collection agency.
Sending an unpaid bill to a debt collection agency should be the very last option, short of initiating legal action against the non-paying customer. Debt collection agencies usually charge a percentage of any money recovered - normally 15-35%, depending on the agency and the size of the debt. Recognize that any account that is sent to a collection agency is very likely the last business you will do with that customer.

If the collection agency fails to obtain payment, you can consider hiring a lawyer and suing for the unpaid bills. However, given the expense involved, this option should only be pursued in the event of a large outstanding account balance and only if you believe there is a good chance of repayment.

Reducing your payments
If it is important to consider selling merchandise to your customers as building a relationship with them, then it is equally important for a small business owner to consider purchasing as forming comparably valuable relationships with your suppliers. Keep in mind that your suppliers have their own pressures and concerns so see if you can address those when negotiating a purchase. For example, many products have a "slow selling" period. If you know what periods are slow months for your suppliers, you may be able to negotiate a lower purchase price, or more lenient credit terms, for items purchased during this period. By helping the supplier move product during a slow period, you may increase the supplier's good will toward you and your business.

You should establish a payment system through which payments for purchased supplies will be received on time, but not unnecessarily early. This keeps your cash in your account for as long as possible. Try to avoid late payments, since they will only prove as annoying to your supplier as late payments from your customers are to you. If the supplier offers discounts for early payment, you should avail yourself of the opportunity. Doing so will save money and build up your credit worthiness with the supplier for times when you may need to buy on credit.

When considering discounts offered by suppliers, you should refrain from buying more than you think you will need, even if the discount is particularly good, or the credit terms are especially lenient. Purchasing discounts will do you little good if you end up with more product than you can sell.

It is useful to cultivate as diverse an array of suppliers as possible in order to obtain the best prices and terms, and to protect against the sudden loss of a supplier.