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.

Divide and Conquer

SBOCTeam — Tue, 09 Oct 2007 20:07:00 GMT

Keeping your business and personal finances separate makes sense for both you and your company
By Reed Richardson

Many small business owners view their business as an extension of themselves, an outlet for their drive or creativity. Other small business owners are so busy building their businesses that they have little personal life outside it. In either case, most small business owners have sunk so much time, work, and investment into their businesses that the business's finances may become inseparable from their own. But letting the boundaries of personal and business finances overlap can lead to problems that are better just avoided altogether.

Since many entrepreneurs start their companies with their own money, it's natural that the line between business entity and owner is blurred, especially in the early days. Corporations, partnerships, LLCs and LLPs are required by law to maintain official business accounts, but sole proprietorships-the most popular form of small business-are not required to do so. Many fledgling business owners haven't set up a business checking account or obtained a business line of credit or credit cards, so they use their own checks or credit cards when purchasing materials their new business needs. "It's very easy to charge that new printer or PC on your own credit card," says management consultant C. Davis Fogg. "After all, it's your business, and you're the one doing the buying." But doing so creates problems when you file your taxes, Fogg warns. "If you want to deduct business expenses from your tax bill, you are going to have to demonstrate to the Internal Revenue Service (IRS), that they are in fact business expenses," Fogg explains. If all the business purchases are mixed together with your personal spending, the IRS may question whether or not the deductions you claim are valid. If you deduct office equipment as a business expense, the IRS wants to make sure it is only used for business. If you've charged it on your personal credit card, the IRS can legitimately ask if the purchase was entirely business related. This can lead to a time consuming and ultimately expensive confrontation with the government. "No one likes an audit," Fogg says.

Segregating business expenses by using a company checking account or credit card keeps a sharp line between you and your business. This makes it much easier to justify deductions at tax time, since purchases like computer equipment or office supplies, which potentially could have personal uses as well, are clearly defined as business expenses. It can also keep the IRS from going on a fishing expedition through your personal finances, which might prove invaluable on its own.

This is particularly true if your business operates from a home office. The IRS has always been particularly picky about allowing home office deductions, Fogg says. Any evidence that you have used office equipment or space for personal purposes could give the IRS an excuse to deny important tax deductions. But aside from tax issues, mixing personal and business finances muddies your business's accounting. If it becomes difficult to parse your personal expenses from your business's, it will be difficult to get a good handle on exactly how well your company is doing. Worse, it could count against you in the event you try to get a business loan to expand your business. "Banks want to see clear, clean business accounts before they lend you any money," says Kay McDermott, a New York City-based CPA. "You need to demonstrate to the bank that not only is your business generating enough revenue to repay the loan, but that you are running the business professionally enough to keep that revenue coming in."

Co-mingled personal and business expenses often result in messy financial statements, Berman warns. Many banks will interpret that as a sign that you don't take your business seriously enough to maintain proper accounting. That alone can sink your chances of getting a loan or line of credit. Failing to separate business and personal finances is much less excusable today than it was in the past. Today many banks cater to small businesses and have established products and services geared to cater to small business needs. Additionally, there are numerous accounting and business management software packages available at very reasonable prices to help small business owners construct and maintain accurate and professional accounting records for their companies.

Reed Richardson is a writer/editor for Business 24/7 magazine.