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| The Basics of Money Management*
Before you start making money, you've got to figure out how you're going to accept payments, establish payment and credit terms, and manage your finances.
Charging clients for your products or services and managing the earned money can be tricky business because cash flow and managing your accounts properly is what keeps your business humming along.
Consequently, getting paid in full and on time, as well as understanding money management, has to become a priority, even if you elect to hire an accountant or bookkeeper to manage the books.
Opening a Bank Account
Once you've chosen a name and registered your business, you will need to open a commercial bank account. When you go, make sure you take personal identification as well as your business name registration papers and business license, because these are usually required to open a commercial bank account. If your credit is sound, also ask the bank to attach a line of credit to your account, which can prove very useful when making purchases for the business or during slow sales periods to cover overhead until business increases. Also be sure to ask about a credit card merchant account, debit account, and other small business services.
Bookkeeping
Setting up and keeping your financial books is an integral part of money management and you have the option to do it yourself or to hire an accountant or bookkeeper. If you do it yourself, you should hire the first two years an accountant to prepare year-end financial statements and tax forms. In our modern world, there is quite a lot of bookkeeping software around and you should use it as it makes your life much easier. We made good experience for instance with accounting software such as Quickbooks and Quicken which are easy to use. For small businesses with little cash flow, you might just use a basic ledger and record all business costs and sales. To find an accountant or bookkeeper in your area, you can contact the American Institute of Professional Bookkeepers or the U.S. Association of Chartered Accountants. In Canada, you can contact the Chartered Accountants of Canada or the Canadian Bookkeepers Association.
In today's super-competitive business environment, you must provide customers with different ways to pay, including cash, debit card, credit card and electronic cash. There is a cost to provide these payment options (account fees, transaction fees, equipment rental and merchant fees based on a percentage of the total sales value) and it is worth to check out the most economic alternatives as fees vary widely.
In the world of service businesses, one the most popular way people still pay for services is with a check. Make sure you don't get left holding a rubber check, especially when dealing with new clients. Ask to see a photo ID and write the customer's driver's license number on the check. If the amount of the check exceeds a few hundred dollars, ask the buyer to get the check certified or pay with a bank draft instead, especially if the client is new to your business. Also get in the habit of checking dates and dollar amounts to make sure they are right.
If you want to accept Debit Cards, you will need to buy or rent a debit card terminal. Most banks and credit unions offer business clients debit card equipment and services and it will set you back about $40 per month for a terminal connected to a conventional telephone line and about $100 per month for a cellular terminal, plus the cost of the telephone line or cellular service. You also need to consider a transaction fee charged by the bank and payable by you every time there is a debit card transaction, which ranges from 10 cents to 50 cents per transaction, based on variables such as dollar value and frequency of use.
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In several business areas and in particular in Internet businesses it is crucial to success giving your customers the option to pay for purchases with a credit card or electronic cash service (most important: Paypal). To offer customers credit card payment options, you will need to open a credit card merchant account. Get started by visiting your bank or credit union or by contacting a merchant account broker such as 1st American Card Service, Cardservice International or Merchant Account Express to inquire about opening an account. Consider that you'll have to pay an application fee, setup fee, purchase or rent processing equipment and software, pay administration and statement fees, and pay processing and transaction fees ranging from 2 to 8 percent on total sales volume. But these fees must be viewed as the cost of doing business.
Payment-terms Policy
Every small-business owner also needs to establish a payment-terms policy. Although you certainly want to standardize the way you get paid, at the same time you will also have to be flexible enough to meet clients' needs on an individual basis. Setting payment terms covers deposits, progress payments and extending credit. It's important to establish clear, written payment terms with clients prior to providing services or delivering product. Your payment terms should be printed on your estimate forms, included in formal contracts and work orders, and printed on your final invoices and monthly account statements.
Securing Deposits
If you're run a service business, you have to get in the habit of asking clients for a deposit prior to providing services, especially if the work also involves product sales that have to be paid for by you in advance. In this case, the deposit should be for at least the value of the materials. If you're supplying labor only, try to secure a deposit of at least one-third to one-half of the total value of the contract in advance of providing any services.
Progress Payments
Progress payments are also a way to ensure that you do not leave yourself open to financial risk. The key to successfully securing progress payments is to prearrange your contract and payment terms. Agree on the amount that will be due at various stages of the project. You can use percentages to calculate the progress payments, such as 25 percent deposit, 25 percent upon delivery of any materials, 25 percent upon substantial completion, and the balance at completion or within 30 days of substantial completion. Or you may arrange for more concrete progress payments based on indicators that are relevant to the specific scope of work, the job or the services provided. Regardless of the system you use, progress payments on larger jobs can dramatically lessen your exposure to financial risk.
Extending Credit
In most cases there's no need to extend credit to consumers unless you deliver a service such as pest control that's billed monthly or a major contract that is completed in stages. As a general rule, when a transaction is complete you should be paid in full. However, in the case of business-to-business sales, commercial clients will generally want some type of credit on a revolving-account basis, such as 30, 60, 90 or sometimes 120 days after delivery of the product or completion of the service. Ideally, you want to be paid as quickly as possible, so you might want to offer a 2-percent discount if invoices are paid within one week. And if you do extend credit, make sure to conduct a credit check first, especially when large sums of money are at stake. There are three major credit-reporting agencies serving the United States and Canada: Trans Union, Equifaxand Experian. All three credit bureaus compile and maintain credit files on just about every person, business and organization that has ever applied for credit.
Debt Collection
No matter how careful you are when it comes to extending credit privileges to customers, once in a while you will not be paid on time or at all. What can you do to get paid? The first rule of getting paid is to keep the lines of communication open with your delinquent client, and keep the pressure on to get paid through the use of nonthreatening telephone calls, letters and personal visits. You cannot legally intimidate clients into paying you, but you can explain why it is in their best interest to pay you--namely, to keep your business relationship intact, that nonpayment can hurt their credit rating or that you may sue them if they do not pay.
Another option is to hire a collection agency to collect the outstanding debt. Collection agencies generally charge a percentage of the total amount owed as their fee, which can range up to as much as 50 percent. The Association of Credit and Collection Professionals is a good starting point for finding a collection agency to work with.
Your final option is to take the delinquent account to small-claims court, but remember that small-claims courts have limits as to how much you can sue for in your state or province, ranging from $1,500 to $25,000. Filing fees vary by state and province as well, and these must be paid upfront. But if you win, the fees are added to your award. As a rule of thumb, small-business owners that take people to court for nonpayment generally represent themselves, as the amount of the potential award is usually small and doesn't justify lawyers' fees and expenses. Even if you win, you will not necessarily be paid the amount you're awarded. You may win a judgment, but still have to chase the defendant through garnishment of income or seizure of assets to get paid. You can learn more about the small-claims court process and filing fees by contacting your local courthouse.
About the author: James Stephenson invests his 15 years of small business, marketing and sales experience into his books. He has started and operated numerous successful home based businesses, and is the author of Ultimate Start-Up Directory and Ultimate Small Business Marketing Guide, as well as the 202 Series.
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