Money Management Basics Before you start making money, you have to figure out how to manage it. Our in-depth guide has everything you need.
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Editor's note: This article was excerpted from 202Services You Can Sell for Big Profits.
Getting paid and money management can be tricky businessbecause, in addition to customers, cash flow and managing youraccounts properly is what keeps your business humming along.Consequently, getting paid in full and on time, as well asunderstanding money management, has to become a priority, even ifyou elect to hire an accountant or bookkeeper to manage the books.You will still need to familiarize yourself with basic bookkeepingand money management principles and activities such asunderstanding credit, reading bank statements and tax forms, andmaking sense of accounts receivable and payable. You also have togive careful consideration to the purchase payment options youoffer customers, including cash, checks, debit cards, credit cardsand online payment options, as well as establishing payment termsand debt collection in the event of nonpayment.
Opening a Bank Account
Once you've chosen a name and registered your business, youwill need to open a commercial bank account. Setting up a businessbank account is easy. Start by selecting the bank you want to workwith--think small-business-friendly--and call to arrange anappointment to open an account. There's not much more requiredthan that. However, when you go, make sure you take personalidentification as well as your business name registration papersand business license, because these are usually required to open acommercial bank account. The next step will be to deposit fundsinto your new account (even $100 is okay). If your credit is sound,also ask the bank to attach a line of credit to your account, whichcan prove very useful when making purchases for the business orduring slow sales periods to cover overhead until businessincreases. Also be sure to ask about a credit card merchantaccount, debit account, and other small business services.
When it comes time to set up your financial books, you have twooptions--do it yourself or hire an accountant or bookkeeper. Youmight want to do both by keeping your own books and hiring anaccountant to prepare year-end financial statements and tax forms.If you opt to keep your own books, make sure you invest inaccounting software such as Quickbooks or Quicken because they're easy to use andmakes bookkeeping almost enjoyable. Most accounting softwareprograms allow you to create invoices, track bank account balancesand merchant account information, and keep track of accountspayable and receivable.
If you're unsure about your bookkeeping abilities even withthe aid of accounting software, you may wish to hire a bookkeeperto do your books on a monthly basis and a chartered accountant toaudit the books quarterly and prepare year-end business statementsand tax returns. To find an accountant or bookkeeper in your area,you can contact the U.S. Association of Chartered Accountants or theAmerican Institute ofProfessional Bookkeepers. In Canada, you can contact theChartered Accountantsof Canada or the Canadian Bookkeepers Association.
If you're only washing windows on weekends to earn a fewextra bucks, there's little need for accounting software oraccountant services. Simply invest in a basic ledger and record allbusiness costs and sales. Since you are doing it on your own, besure to use a commonsense approach when calculating how much toinvest in your business vs. expected revenues and profits. Alsoremember to keep all business and tax records in a dry and secureplace for up to seven years. This is the maximum amount of time theIRS and Revenue Canada can request past business revenue andexpense information.
Before you start making money, you've got to figure out howyou're going to accept payments, establish payment and creditterms, and manage your finances. This how-to will help.
Accepting Cash, Checks and Debit Cards
In today's super-competitive business environment, you mustprovide customers with many ways to pay, including cash, debitcard, credit card and electronic cash. There is a cost to providethese payment options--account fees, transaction fees, equipmentrental and merchant fees based on a percentage of the total salesvalue. But these expenses must be viewed as a cost of doingbusiness in the 21st century. You can, however, reduce fees byshopping for the best service with the best prices. Not all banks,merchant accounts and payment processing services are the same, andfees vary widely. You can also check with small businessassociations such as the chamber of commerce to see if they offermember discounts; it's not uncommon to save as much as 2percent on credit card merchant fees. Just remember, consumersexpect choices when it comes time to pay for their purchases, andif you elect not to provide these choices, expect fewer sales.
Cash is the first way to get paid, which is great becauseit's liquid and there's no processing time required. Asfast as the cash comes in, you can use it to pay bills and investin business-building activities to increase revenues and profits.The major downside is that cash is risky because you could getrobbed or lose it. In cases like that, collecting from yourinsurance company could prove difficult if there's no papertransaction as proof. Even if you prefer not to receive cash, thereare people who will pay in cash, so get in the habit of makingdaily bank deposits during daylight hours. Also invest in agood-quality safe for cash storage for times when you cannot get tothe bank.
If you're running a service business, one the most popularway people still pay for services is with a check. You have to takea few precautions to ensure you don't get left holding a rubbercheck, especially when dealing with new clients. Ask to see a photoID and write the customer's driver's license number on thecheck. If the amount of the check exceeds a few hundred dollars,ask the buyer to get the check certified or pay with a bank draftinstead, especially if the client is new to your business. Also getin the habit of checking dates and dollar amounts to make sure theyare right. I have been caught a few times with wrong dates anddollar amounts and it can be time-consuming to have to get a newcheck because of a simple error.
Debit cards are another option, but to accept them, you willneed to buy or rent a debit card terminal. Most banks and creditunions offer business clients debit card equipment and services.The processing equipment will set you back about $40 per month fora terminal connected to a conventional telephone line and about$100 per month for a cellular terminal, plus the cost of thetelephone line or cellular service. There is also a transaction feecharged by the bank and payable by you every time there is a debitcard transaction, which ranges from 10 cents to 50 cents pertransaction, based on variables such as dollar value and frequencyof use.
Opening a Credit Card Merchant Account
Many consumers have replaced paper money altogether in favor ofplastic for buying goods and services. In fact, giving yourcustomers the option to pay for purchases with a credit card isoften crucial to success. This is especially true if you plan to dobusiness on the web because credit cards and electronic cash areused to complete almost all web sales and financial transactions.To offer customers credit card payment options, you will need toopen a credit card merchant account. Get started by visiting yourbank or credit union or by contacting a merchant account brokersuch as 1st American Card Service, CardserviceInternational or Merchant Account Express to inquire aboutopening an account. Providing your credit is sound, you will runinto few obstacles. If your credit is poor, you may havedifficulties opening a merchant account or have to provide asubstantial security deposit. If you are still unsuccessful, thenext best option is to open an account with an online paymentservice provider, which is discussed in the next section.
The advantages of opening a credit card merchant accountenabling you to accept credit card payments are numerous. In fact,studies have proven that merchants who accept credit cards canincrease sales by up to 50 percent. Not to mention that you canaccept credit card payments online, over the telephone, by mail andin person, as well as sell services on an installment basis byobtaining permission to charge your customer's credit cardmonthly or per agreement. Of course, all these benefits come at acost, especially when you consider that you'll have to pay anapplication fee, setup fee, purchase or rent processing equipmentand software, pay administration and statement fees, and payprocessing and transaction fees ranging from 2 to 8 percent ontotal sales volume. Once again, these fees must be viewed as thecost of doing business.
Online Payment Services
Online payment services allow people and businesses to exchangecurrency electronically over the internet. These services are verypopular with consumers and merchants. PayPal is one of themore popular online payment services with more than 40 millionmembers in 45 countries, offering personal and business accountservices. Both types of accounts allow funds to be transferredelectronically among members, but only the business account enablesmerchants to accept credit card payments for goods and services.The advantages of online payment services are that they'requick, easy and cheap to open, regardless of your credit rating oranticipated sales volumes, and you can receive payment from anycustomer with an e-mail account. You can have the funds depositeddirectly into your account, have a check issued and mailed, orleave funds in your account to draw on using your debit card. Theonly real disadvantage is that most services redirect yourcustomers to their website to complete the transaction. This canconfuse people who in some cases will abandon the purchase.Nonetheless, the advantages of online payment services far outweighany disadvantages.
Establishing Payment Terms
Every small-business owner also needs to establish apayment-terms policy. Although you certainly want to standardizethe way you get paid, at the same time you will also have to beflexible enough to meet clients' needs on an individual basis.Setting payment terms covers deposits, progress payments andextending credit. It's important to establish clear, writtenpayment terms with clients prior to providing services ordelivering product. Your payment terms should be printed on yourestimate forms, included in formal contracts and work orders, andprinted on your final invoices and monthly account statements.
If you're run a service business, you have to get in thehabit of asking clients for a deposit prior to providing services,especially if the work also involves product sales that have to bepaid for by you in advance. In this case, the deposit should be forat least the value of the materials. If you're supplying laboronly, try to secure a deposit of at least one-third to one-half ofthe total value of the contract in advance of providing anyservices. Your order form or contract should have the depositinformation clearly stated. Information on canceled orders orcontracts and your refund policy should also be on your forms.Securing a deposit is your best way of ensuring that, at minimum,basic out-of-pocket costs are covered should the customer cancelthe job or contract.
Progress payments are also a way to ensure that you do not leaveyourself open to financial risk. The key to successfully securingprogress payments is to prearrange your contract and payment terms.Agree on the amount that will be due at various stages of theproject. You can use percentages to calculate the progresspayments, such as 25 percent deposit, 25 percent upon delivery ofany materials, 25 percent upon substantial completion, and thebalance at completion or within 30 days of substantial completion.Or you may arrange for more concrete progress payments based onindicators that are relevant to the specific scope of work, the jobor the services provided. Regardless of the system you use,progress payments on larger jobs can dramatically lessen yourexposure to financial risk.
In most cases there's no need to extend credit to consumersunless you deliver a service such as pest control that's billedmonthly or a major contract that is completed in stages. As ageneral rule, when a transaction is complete you should be paid infull. However, in the case of business-to-business sales,commercial clients will generally want some type of credit on arevolving-account basis, such as 30, 60, 90 or sometimes 120 daysafter delivery of the product or completion of the service.Ideally, you want to be paid as quickly as possible, so you mightwant to offer a 2-percent discount if invoices are paid within oneweek. And if you do extend credit, make sure to conduct a creditcheck first, especially when large sums of money are at stake.There are three major credit-reporting agencies serving the UnitedStates and Canada: Trans Union, Equifax and Experian. All three credit bureaus compile andmaintain credit files on just about every person, business andorganization that has ever applied for credit.
No matter how careful you are when it comes to extending creditprivileges to customers, once in a while you will not be paid ontime or at all. What can you do to get paid? The first rule ofgetting paid is to keep the lines of communication open with yourdelinquent client, and keep the pressure on to get paid through theuse of nonthreatening telephone calls, letters and personal visits.You cannot legally intimidate clients into paying you, but you canexplain why it is in their best interest to pay you--namely, tokeep your business relationship intact, that nonpayment can hurttheir credit rating or that you may sue them if they do notpay.
Another option is to hire a collection agency to collect theoutstanding debt. Collection agencies generally charge a percentageof the total amount owed as their fee, which can range up to asmuch as 50 percent. The Association of Credit and CollectionProfessionals is a good starting point for finding a collectionagency to work with.
Your final option is to take the delinquent account tosmall-claims court, but remember that small-claims courts havelimits 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 andprovince 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 nonpaymentgenerally represent themselves, as the amount of the potentialaward is usually small and doesn't justify lawyers' feesand expenses. Even if you win, you will not necessarily be paid theamount you're awarded. You may win a judgment, but still haveto chase the defendant through garnishment of income or seizure ofassets to get paid. You can learn more about the small-claims courtprocess and filing fees by contacting your local courthouse.
James Stephenson invests his 15 years of small business,marketing and sales experience into his books. He has started andoperated numerous successful home based businesses, and is theauthor of Ultimate Start-Up Directoryand Ultimate SmallBusiness Marketing Guide, as well as the 202 Series.