Small Business Credit and Collections

Credit and Collections is a key function performed or supervised by the owner in a small business. It provides more business than possible otherwise, but it also creates a significant level of financial risk. Familiarity with the credit terms of one's industry and the typical bad debt experience in that industry is important to know. A bad debt experience of 1% of sales is considered a cost of doing business in some industries.

The credit, collection function should be organized with written policies and procedures concerning: credit application, checking credit, granting credit, following up credit granted and collections. Applications should be based on industry standard forms with at least three commercial references. Local credit agencies and possibly national agencies should be joined to provide the best possible basis for the credit granting decision. Credit limits should be established based on the time in business, the legal form of the business entity, their credit history, financial stability based on financial reports and the volume of business. Sole-Proprietors should be asked to sign a personal guarantee. You would start with a smaller number and based on the applicants payment history increase the limit as general economic conditions allow and their payment history justifies. Credit should be monitored regularly based on an aging of the account.

Follow-up should begin with confirming receipt of the invoice. Then at regular intervals +30, +60 and +90 the follow-up process should be routine and worded to reflect the seriousness of the time past due. At an appropriate point the account should be suspended until payment is received and the account is back to within terms. At the 90 day point a letter should go out notifying the customer that if payment is not received promptly the account will be forwarded to an attorney.

Bad checks can be filed on in the Justice of the Peace office in the State, County and Precinct where it was passed. Checks should be marked NSF or account closed. Stop payments have to be filed on in civil court. Each NSF check should be accompanied with proof that it was mailed as certified in an attempt to collect the debt before it can be filed on in court. Account closed checks can be filed without the proof of certified mail. An affidavit must be completed, signed and notarized. The original returned check, proof of certified mail and the affidavit must be submitted together.

These actions will not guarantee payment, but they will eliminate any surprises that could have been foreseen if due diligence was exercised.

Budgeting for the Small Business

What is a Budget?
A budget is a projection of future revenues and expenses for the organization preparing it. It is comprised of a balance sheet, income statement and cash for the coming year. During the year individual months can be compared to results. At the end of the year full years can be compared.


Why Create a Budget?
A budget allows you to monitor your company's operations. Your yardstick is whole dollars. Closely monitoring your operations: revenues, costs, profits and cash flow allows you to adjust as needed to stay on track and reach your goals.


How to Use a Budget
A budget is a financial yardstick to measure the organizations effectiveness in reaching the goals set by management. A budget also lets creditors know that management plans ahead in anticipation of foreseeable needs.


A Budget Will Show:
Projected revenues and the expenses needed to reach the profit goals. If your revenue projections turn out to be inadequate for the total expenses, adjust your plan by acting to raise sales, or adjust your plan by acting to cut costs. Every organization should have a budget before making any long-term decisions such as: leasing property or equipment, or purchasing equipment. The place to make adjustments is on paper where they are less costly.


The three main parts of a budget are total revenues, total cost and profits.


Total Revenue
Sales are the reason for budgeting. It is important to estimate sales based on past history and anticipating any future events that could have an impact -- including inflation. Sales are the base from which costs and profit can be estimated.


Total Costs
Total cost includes fixed, variable, and semi-variable. It is complicated because fixed costs are not dependent on a level of operations, but can change due to inflation. Variable costs change directly with the level of sales activity. Semi-variable costs have a fixed and a variable component. Inflation and Other Adjustments (price increases). A budget will be as good as the numbers used to make it. Therefore, it is important that your estimates and calculations be as accurate as possible.


Profit
Profit after tax should be large enough to make a reasonable return on your investment of dollars and time. Your targeted profit should allow for this. You can research your industry to determine if your investment is justified.


The Budgeting Process
When creating a budget, you must consider: What is your profit goal, how much will it cost to achieve, and what level of sales will support profit and cost. It is safer to overestimate costs and underestimate revenues associated with the products or services you offer.


Constructing a Budget
You can start with a forecast of sales or a forecast of profits. For practical purposes a forecast of revenues would be preferable. Then forecast the expenses necessary to make the profit target. A product oriented company would forecast gross profit based on anticipated purchases, returns, freight in, etc. Adjustments would be made based on the resulting net profit after taxes and interest. The adjustments could be annual or monthly. Actual would be compared to budget monthly.


The Master Budget
A master budget is only necessary if you are tracking more than one process, activity or department. In that case you would prepare separate budgets that are interconnected by a master budget. This is typical of cost centers or profit centers.


Summary
A budget focuses the activities of an organization so that everyone is working toward common goals. Employees feel more a part of the organization and it helps them realize their importance to the organization in achieving the goals.