Though accounting serves a rather perfunctory purpose of control and assessment of the firm’s financial performance, there are other, practical financial activities to think about.
Credit Checking Potential Customers
When a business extends credit, it’s in effect loaning customers money, and any company wants to be reasonably sure that the money will be paid back. the most effective assurance of having the ability to gather is to check each customer’s credit history before extending credit. That can be as simple as a call to a bank. However a business chooses to test a customer, it’ll want to build a credit relationship slowly and punctiliously. Remember, not every customer deserves the identical credit terms; thus, it’s best to approach credit on a case-by-case basis. One thing to notice is how long the corporate has been in business. Companies that are around for at least five years are more likely to pay their bills on time—or they wouldn’t be around anymore. The key ways to test a customer’s credit include credit reports, credit references, financial statements, personal credit reports on the owner or CEO, and letters of credit.
Credit Reports. It’s always a decent idea to get a possible customer’s credit report before you extend credit. Credit reports zero in price from $15 for a one-page report back to quite $1,000 for a close filing. The reports show historical payment data; bankruptcy records; any lawsuits, liens, or court judgments against a company; and a risk rating that predicts how likely customers are to pay their bills. Even if a prospective customer has little or no credit history, running a credit report continues to be worthwhile because it’ll reveal relevant data, including bankruptcy filings, corporate records, fictitious business name filings, court judgments, and tax liens.
Credit reporting agencies can send a credit report via mail, fax, or via the planet Wide Web. Some agencies also provide reports online. If you request a substantial number of reports, you may be ready to sign a contract that may reduce a per-report price.
Credit References. additionally to credit reports, or for companies not covered by credit reporting agencies, you may want to test a customer’s credit references yourself. These references can be informative, but they aren’t foolproof. After all, a customer picks his or her own references. to achieve a more realistic picture, ask a customer for a comprehensive list of suppliers. Call several and ask if a possible customer owes them money. If so, find out if payments are being made in an exceedingly timely manner. Ask these suppliers for names of other suppliers and other customers and make contact with them as references.
You might want to call the customer’s banker moreover. While specific information could also be inappropriate or illegal for a banker to provide, you’ll seek some general information. Ask how long the bank has had a relationship with the corporate. Has the bank given it any credit? If a loan was given, did the corporate meet its obligations?
Personal Credit Report of the Owner or CEO. When contemplating doing business with a brand new, closely held private company, it may not be possible to get a credit report, references, or financial statements. However, you’ll be able to run a private credit check on the owner or CEO of the business. If that person features a strong credit history, it’s likely he or she is going to see to that that the corporate pays its bills on time. If the owner or CEO features a history of debt dodging or late bill payment, the corporate could imitate. If a review raises concerns, schedule a gathering with management to deal with the problems.
You may want to debate credit issues with any investors within the firm as well.
Red Flags. additionally to the quality inquiries into a company’s credit situation, you must keep your eyes open for other things that could indicate a credit problem:
Does the business engage in unusual price-cutting or discounting strategies? Such practices may hinder the company’s ability to pay what it owes in an exceedingly timely fashion. Does the corporate have already got trade credit relationships with other companies? You don’t want to work with a customer that’s already overextended. Are any company assets already pledged as collateral? Does the corporate operate in a very cyclical industry or in an exceedingly business that’s liable to seasonal turns? what’s the overall economic climate? When business is nice you may be more willing to increase credit. When things are slow, however, you’ll want to be more tightfisted in extending credit to higher-risk customers.
Finally, concentrate to the results of research. Sometimes “no” is the right answer when it involves extending credit, regardless of howmuch you wish the business.
Reading a Credit Report. A credit report could be a snapshot of a company’s or an individual’s financial activities. Credit reports typically include historical payment data, bankruptcy records, Uniform Commercial Code (UCC) filings, loan information, leases, payment trends, and comparative industry data. A typical credit report on a corporation contains its corporate name, address, and sign. It also includes the name of the chief executive officer, the company’s Standard Industrial Classification
(SIC) code, an outline of its line of business, and also the date when the company began operations. Also included are the amount of employees, sales, and a net worth figure. In many cases, a report includes a numerical credit rating. Financial information can run the gamut from basic sales and payment data to detailed transactional analysis. the data should include a summary of any lawsuits, liens, or court judgments that are outstanding, plus any relevant bankruptcy filings. If available, there will even be information on changes in ownership, relocations, company acquisitions, and publicly reported news events, including fires or natural disasters. the number of data depends on the stature of the corporate and whether it’s publicly owned.
Most credit report services concentrate on publicly held companies. Credit rating resources for privately held and newer companies are less formalized. to test payment practices for smaller companies, try talking to their customers, suppliers, and bankers. Remember, too, that while credit reports will be important tools, they’re not ends in themselves. Before making decisions supported credit reports, you’ll want to copy the knowledge with data gleaned from other forms of company research, further as from customers, employees, and private contacts.
Preventing Overdue Accounts
The best thanks to prevent overdue accounts is to avoid doing business with customers who have bad credit histories. However, if you limited yourself to doing business with companies with spotless credit records, a pool of potential customers would be quite small. And unfortunately, with a growing business you frequently don’t have any choice but to try and do business with anyone who wants to try and do business with you. Even then, you don’t always have complete control of the terms of sales agreements. the truth is that the most important and best clients want to be billed quarterly and then have 60 days to pay you. And you certainly don’t want to chop off those clients.
While you don’t want to destroy any potential or established business relationships by laying down harsh payment terms, you want to take some control of assets to avoid wreaking havoc with a cash flow. You’re not a bank, after all. the subsequent five steps can help cash flow without endangering it.
- watch for new customers with bad credit history. You can’t expect that a corporation or an individual with a history of bouncing checks or paying their bills late will change their ways when coping with you. If you want to do business with the chronically late, lay down credit rules early and firmly and start the link off slowly. Keep the number of product or services you offer an organization with an iffy credit record to a minimum until they’ve proven themselves worthy. And no matter what proportion you wish the business, never start doing business with another person or company until you have got a signed contract clearly stating and agreeing to payment terms.
- Once you start doing business with someone, make sure you stamp invoices with the date that payment is due. Don’t rely on the customer to seem at the invoice date and add 30 days—or regardless of the payment terms are—to determine the pay date.
- Offer discounts for early payment and add interest to late payments. A typical discount is 2 to three percent off the whole if the bill is paid within 10 days of the invoice date. the utmost amount of interest which will be charged varies by state.
- Phone customers and begin trying to gather the day after a payment is due. Never wait—let them know that you simply keep close track of assets.
- Until customers pay their bills, don’t do any further business with them. don’t bend on this rule—you’ll only cause yourself more problems and scuttle any chance of collecting what you’re owed. If you actually want to stay doing business with a customer who owes you, insist that any new products or services they receive from you’re COD—cash on delivery.
Collection Agencies
It’s easy to increase an excessive amount of credit when trying to entice companies into doing more business. Extending an excessive amount of credit can cause unpaid accounts, which might quickly and severely limit the cash you have got to grow a business. If you don’t remain top of overdue accounts, the chance of collecting the cash decreases over time.
One way to recover more from delinquent accounts is to rent a collection agency. a set agency locates debtors and collects the money you’re owed. If brought on board early, a group agency can often recover a considerable portion of unpaid accounts.
In addition to increasing chances of really getting paid, using an agency saves you time and money—two of your most precious resources. With their custom-designed phone systems, computers, and software, collection agencies are often more practical in recovering delinquent accounts than you’ll. Although collection agencies charge between 15 and 50 percent of what they recover, you continue to find yourself with more than you most likely could have collected on your own.
When selecting workplace, you must give some thought to these consideratioFind out if the gathering agency could be a member of the American Collection Agency or the jurisprudence League of America, which require that their members adhere to a code of ethics and are familiar with the Fair Debt Collection Practices Act.
Make sure the agency has insurance which will protect a business if the agency errs during the collections process.
Ask the agency to disclose its typical recovery rate and supply you with an inventory of references. Contact a number of the businesses on the list and see how long it took the agency to gather on late accounts, if it collected the entire debt or a little of what was owed, and if the companies were satisfied with the agency’s collection efforts.
GAAP Accounting Rules
Generally accepted accounting principles (GAAP) may be a set of nationally (United States) recognized accounting standards. Using GAAP accounting standards, costs and benefits are accounted for in an exceedingly recognized way to assure consistency with other firms’ accounting principles and for comparing various projects and investments with one another.
Chart of Accounts
The first step in putting in an method of accounting is deciding what you want to trace. A chart of accounts is just a listing and is kept by every business to record and follow specific entries. Whether you opt to use a manual system or a software program, you’ll be able to customize the chart of accounts to a specific business.
Account numbers are used as a straightforward account identification system. The chart of accounts is that the fuel for an accounting. After the chart of accounts, you determine a leger system, which is the engine that really runs an method of accounting on a each day.
The chart of accounts is that the foundation on which you’ll build an method of accounting. make sure to line up a chart of accounts correctly the primary time. Keep account descriptions as concise as possible, and leave many room in a very numbering system to feature accounts in the future.
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