Taking Credit Card Payment

Good morning.

It is still a little early and I am supposed to keep this is secret from Brendan, but today he is receiving the President’s Education Award.  And on top of that, this is officially his last week of the 5th grade and is moving onto middle school next school year.  I am extremely proud of Brendan for his accomplishments at school and at home as he is just a super-awesome young man to hang around with.  Congratulations Brendan, I love you!

I have updated this post for a picture of Brendan after receiving his award.  He also received recognition for his hard work in band and in their Pride Group.  You are awesome Brendan!

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Small Business and Selling on Terms

One of the more challenging choices a growing small business faces is how and when to sell on terms.  The fact is, the simplest way to run your business is on cash – that is, getting paid with cash or possibly a check when you do something or sell something.  Any other sale is on terms; this includes taking credit cards (as I will explain in a moment).

The closer you are to selling to the end-using person, Business-to-Consumer (B2c) sales, the closer you can get to collecting cash on delivery.  There are 2 key parts to a  cash-based B2C transaction – 1) relatively low unit price and 2) ability to take ownership of the goods/service at the time of sale.  If you are a Food Truck in a downtown area, I would encourage you to stick to a “Cash Only” policy.

“What about accepting credit cards?”, you ask.  “Isn’t that the same as cash?”

No, accepting credit cards is not the same as cash, no matter how much the credit card industry wants you to believe otherwise.  But it can be very beneficial to your small business to accept credit cards from customers.  Now, I am going to apologize because this might get a little confusing but bear with me.

When someone wants to buy from you but doesn’t have the right amount of money on-hand, they have to ask to pay for it later. (Think Whimpy from Popeye’s cartoons where – he will gladly pay you Tuesday for a hamburger today) You are taking them on faith that the payment will be coming when they promised.

From an accounting standpoint, you have created an Account Receivable (A/R) from Whimpy.  The sale of the burger happens today and you collect Tuesday (unfortunately you never seem to sell on a Tuesday so you can collect same day).  Now, the sooner you collect that A/R, the better your cash flow will be.  But what to do when you have other bills to pay and the money won’t be in for some period of time?

You Sell your Receivable

A few years ago, there was a very large industry which specialized in buying – or loaning against – A/R.  This is known as factoring.  These company’s would give you money for your A/R and then collect the face value from the Customer.  You would receive a little less than face value but you had cash today to pay your bills.

This is exactly how taking credit card payments works.  Let’s walk through the Whimpy hamburger sale.

Whimpy buys $50.00 worth of hamburgers a week.  He always pays on Tuesday for the hamburgers bought Wednesday to Sunday.  You still have other bills to pay, so you are wondering what you can do about this.

  • Does it make sense to deny Whimpy his $50.00 of hamburgers if he can’t pay for them daily?  That could be a good percentage of your weekly sales so that might not be a great idea.
  • If you could find someone willing to give you $45.00 every Friday who would then collect the $50.00 from Whimpy on Tuesday, would this help your cash flow?
  • Or, if Whimpy has a credit card, he can buy his $7.00 hamburger every day and we can pay the Credit Card Company $0.25 per transaction (hamburger) and they can worry about collecting from Whimpy on their terms.  Over the course of a week, your this $50.00 of sales costs you $1.75 so you actually net $48.25.  Would this be even more helpful to your cash flow?

For today’s small business selling B2C, selling on Credit Card terms can offer a substantial boost to revenues and profits.  The truth is, most people are not running around with lots of cash in their pockets so your ability to sell to them can be limited on a cash-only basis.  Accepting their ability to essentially “Pay you tomorrow for the hamburger today” may beat “Sorry I would buy from you but I don’t have any cash”.

Now, I am not suggesting that the fees charged by credit card companies are fair or reasonable, or even that they are not as it depends on what you want and need. I honestly believe though, your first consideration as a small business owner is what you can do to increase sales.  Offering a new term to current and potential customers might be an easy solution to get you access to new business.  But remember there is a cost.

Every credit card offered has different fees they charge a merchant and it can be confusing.  You will need to have a conversation with several different merchant services providers and even your bank.  It might also be helpful to bring your accounting professional into that conversation so you get an unbiased, independent evaluation of your credit card acceptance options.  If you do not have an accounting professional or would like a second opinion, contact us at Currie & McLain and we would be happy to have a free no obligation conversation with you about your business and if offering to accept credit cards (or other terms) is right for you.

Have a great Tuesday.

Beginning Accounting Dashboard

I wrote in Friday’s blog about the Dashboard I kept which tracked the Company’s cash, A/R and A/P.  I realized, while enjoying a very warm Vancouver weekend with the boys and Kubae, that I should share a dashboard you can use in your business.  If you would like to have a copy of the accounting dashboard emailed to you, send me an email using the contact form below and I will send it right out to you.

A word of warning, I have 2 Macros working on this dashboard.  One macro automatically updates the graphs on the Dashboard and the other prints the Dashboard to a pdf.  The Excel Workbook is saved as Dashboard.xlsm which is a Macro-enabled file. You will have to enable Excel to run the Macros.

I have also protected the Worksheets and the Workbook.  There is no password though so you are free to make changes if you like.  I recommend saving the file as a different file name prior to making any major changes so you always have the original to fall back on should something go wrong.

How to Use the Accounting Dashboard

There are two worksheets working in Dashboard.xlsm.  DataforDB is the worksheet where you have your accounting person enter the data. There are two sections – the first is the “end of day” balances for Cash, A/R, A/P and an amount for the upcoming payroll. The available cash automatically calculates for you.

The second section is where you can have accounting enter the data for Sales completed that day, Cash received that day, Purchases made that day and Cash Payments made.

After the data are entered into the worksheet, click the Update Dashboard button.  This runs a macro which updates the graphs.  You can also do this manually by clicking on Data Refresh All.

The second worksheet is the Dashboard.  Here is where the graphs are for the balances section from the DataforDB worksheet and for the daily transactions section.

The transaction graphs for A/R and A/P have “Slicers” attached. These are ways you can look at your data without bothering the basic graph.  For instance, It may be helpful to how sales are by day of the week so I included that as a Slicer for the A/R section.

You can have your accounting person complete the data at the end of the day (or first thing the next morning) and then it can be emailed to you.  All they do is click on the button Print Dashboard and it will generate a pdf file named Dashboard that is saved in the users documents section. They can also go to File Saveas and change the file type to pdf if they want to prefer the manual method.

Your team can also simply email you the spreadsheet or save it to where you can get access to it on your time.

I hope this helps you think of new ways to get access to the pulse of your business without you needing to dig through your accounting system.  Try using it and let me know your thoughts. If you or your accounting specialist needs help or would like to understand how a Dashboard can be helpful, send me a comment and I will see what I can do for you.

Enjoy your first taste of Pacific Northwest Summer.

 

Balance Sheets for Small Business

One of the major differences I found between public accounting and private accounting is the actual “attention to detail” required in private accounting.  My day actually began by updating and reviewing the dashboard – which focused on the primary accounts and the transactions that made up the changes from the day before.  There were only three primary balance sheet accounts that I focused on daily and I will explain why below.

The Balance Sheet for Small Business

These three accounts represent the assets and liabilities that the business actually controls.  That doesn’t mean that the other balance sheet accounts are not important – they are – but that they are what I term “accountant controlled” meaning that the account exists because the accountant believes it helps in understanding the Company’s assets and liabilities.  The three key accounts for a small business owner to follow are Cash, Accounts Receivable (A/R) and Accounts Payable (A/P).

Cash

To steal a phrase, “Cash is King” and cash is very important in a small business.  It is the one asset that small business owners cannot get enough of and it can drive every decision.  Often our management meetings started with the question, “How much cash is in the bank?”  It is also the one account where we have a good independent record of the balance – the bank statement.  And with the ability to log in to the bank’s website and look at the balance and recent transactions, the small business owner has an unprecedented ability to know where the cash balance is daily.

Trying to run the business only on the balances in cash can be dangerous though.  For instance, having $100,000 in the bank: What does that tell us?  Some business owners are worried when cash is that low and other small business owners rejoice.  So, for every management meeting I answered the question of “How much cash is in the bank?” by linking the cash to the next two accounts.

Accounts Payable

Accounts payable (A/P) is a measure of what the small business owes vendors for the all goods and services purchased and that haven’t been paid for yet.  A small business gets the privilege of having an A/P balance by paying their vendors on their terms.  Moving from cash/COD/Credit Card payment to net30 day terms is a major milestone for a small business as it means the vendor trusts the business to buy today and pay later.

To continue the example above, if cash is $100,000 and accounts payable is $20,000, my answer to the question, “How much cash is in the bank?” is “We have $80,000 available today.”  The owner and management team need to understand that the A/P is a claim on the cash and ignoring it can lead to big problems when vendors put the Company on credit hold for not living up to their promise.  I looked at accounting’s role as “Keeping the promises that the sales professionals made” and we purchased goods and services on terms for the sales team to sell to customers.  You should never let the promise go unfulfilled.

Accounts Receivable

Accounts receivable (A/R) is exactly like A/P but for the benefit of the customer.  At some point, especially in business-to-business (B2B) transactions, there is an expectation that the customer can buy on some customer-friendly term such as Net 30.  It is a trust relationship between the small business and the customer and it is important that the small business manage this trust relationship.  Selling on terms can get you access to new customers but can lead to failed commitments from the customer.  This, sadly, is a fact of business but the potential for loss should not keep the small business from selling on fair terms.

Continuing the example, if cash is $100,000, A/P is $80,000 and A/R is $100,000, how is the question answered?  My answer would be, “The Company has $70,000 available.” Why would I answer that way?  Because of the experience of many years in public and private accounting.  Below is how I come up to the answer.

The Company will want to keep its promise to the vendors and pay on terms.  So the company plans to pay out $80,000 – leaving $20,000 in the bank.

The Company wants to believe that all its customers follow this same pattern – that terms are important and they want to honor them.  We want to believe that all of the $100,000 due from customers will be paid in the next 30 days.  But the reality is that some will be late.  So, to ensure that the Company does not make plans or promises it cannot keep, the safe and conservative approach is to say only 1/2 will be collected, or $50,000.  The $50,000 plus the $20,000 equals the $70,000 of cash available for the business.

Back to Cash

Knowing how much cash is available allows the small business owner to make more effective decisions.  If payroll is $90,000 over the next 30 days, the business may need to draw on the Line of Credit.  By starting with cash and then subtracting the Company’s promises (A/P) and adding in a reasonable amount of the customer’s promises (A/R) the business owner can start making better decisions about how business gets done.

If you would like more information on how to get clarity on your accounting, feel free to contact me or visit our website.  We will be happy to email you our free guide to “Five Important Things Business Owners Need to Know about Financial Statements” to help you understand what Bankers think about when they review your financial statements.