Money Management Basics

As soon as you have named and registered your business, your next step should be to open a business checking account. Setup is easy: Select a business-friendly financial institution that you feel comfortable working with and make an appointment with a representative to establish your account. When it’s time for your appointment, bring along your personal identification, business name registration paperwork and your business license with you—your representative will need this documentation to get your account started. When setup is complete, you can deposit any amount of funds into your account. If you have good credit, you can even ask the representative to attach a line of credit to your account, which may come in handy when you make business purchases or when you want to cover overhead during slow sales periods. While you’re there, it’s also a good idea to get more information about a debit account, a credit card merchant account or any other services you may need for your small business. 

You have two choices when it comes to setting up your company’s financial books: You can either do it yourself or have a professional do it for you. You can even have the best of both worlds and opt to keep your own books while an accountant prepares your year-end statements and tax forms. If you prefer to go completely solo, then you’ll want to invest in business-grade accounting software, which makes the bookkeeping process fast and easy. Most programs give you the option to monitor accounts payable/receivable, create invoices, keep an eye on your business checking account balances and more. Not too confident in your bookkeeping skills? You can always hire a bookkeeper who will take care of the job each month and an accountant to audit the books quarterly before preparing your statements and tax returns. You can find a local accountant or bookkeeper by contacting the Association of Chartered Accountants in the United States (ACAUS) or the American Institute of Professional Bookkeepers (AIPB).

If you consider your business a side job, hobby or weekend gig, you probably don’t have to buy accounting software or enlist the help of an accountant or bookkeeper. A much better option would be to invest your money in a basic ledger instead, where you can keep a running record of your expenses and profits. Use your best judgment when figuring out how much you should spend on your business in comparison to how much revenue you expect to make. Store all of your financial and tax documents in a safe, dry place for up to seven years, which is the maximum timeframe within which the IRS can request information about past business revenue and expenses.

Customers want options when it comes to making payments—and cash, checks and debit cards are by far some of the longest-standing and most popular payment methods to date. Providing these particular payment options does come with a price to the business owner—which includes account, transaction, equipment rental and merchant fees—and unfortunately it just has to be accepted as a standard cost of running a business. Not providing these payment choices could drive customers away, which would be detrimental to your business. What you can do to reduce that expense, however, is to shop around for the best-quality service that comes at the fairest price. Different financial institutions, merchant accounts and payment processing services have different fees, so it can benefit you to find the one that suits your budget. Some small business associations, such as the Chamber of Commerce, may even offer member discounts. Reach out to them for more information.

Although cash is the easiest and fastest way to get paid, it’s also the most risky payment method because it can be easily misplaced or fall into the wrong hands. And because cash transactions leave you with no paper trail, you would have a hard time collecting from your insurance in the unfortunate event that your money is lost or stolen. To avoid finding yourself in such a situation, get in the habit of depositing your cash at your financial institution every afternoon. If you can’t make it to your financial institution every day, buy a high-quality safe where you can temporarily store your cash.

Especially if you are selling a service, you are likely to receive check payments from your customers. When you do, it is very important that you take several safety measures to avoid accidentally taking a fake check. Remember to always ask the customer for photo identification and record their driver’s license number on the check. Double-check the date and dollar amount to catch any possible errors. If the check is for $300 or more, it would be best if the customer paid with a certified check or draft instead. Mistakes can be very costly to you and can take a lot of your time and effort to rectify.

In order to accept debit card payments, you must first buy or rent a debit card terminal, which you can find at most financial institutions. The equipment will cost about $40 a month when it is connected to a land line, or about $100 a month connected to a cellular line—all in addition to the cost of that landline or cellular line. You are also required to pay the financial institution a transaction fee, typically between 10 and 50 cents, every time a customer uses their debit card.

With the continuous growth of online shopping and the increasing demand for fast, convenient payment options, credit cards have become the purchase method of choice for many consumers. Failing to provide your customers with the opportunity to purchase your goods or services with a credit card could be damaging to your business. In order to offer your clients the credit card payment option, you’ll first need to open a credit card merchant account with either a local financial institution or a merchant account broker. Depending on how good your credit score is, you may or may not run into some roadblocks when trying to open a merchant account. If you do, then you may want to consider opening an account with an online payment service provider, described below. But if your credit is in good standing, you will find that opening a merchant account will benefit you in several ways.

Studies have shown that merchants can increase their sales by 50% simply by offering their customers the option to pay by credit card. It also makes it much easier for you to accept payments online, by phone, through the mail or in person. If you charge customers for your service on a monthly basis, you can also make payment easy by automatically charging their credit cards each month with their signed permission and agreement. Of course there is a cost associated with offering the credit card payment option: These include application, setup, equipment, administration and statement fees, and you will also have to pay a transaction fee between 2% and 8% of your total sales volume. If it means that it will help you run a successful and profitable business, however, these charges are fairly minimal in comparison with your potential return.

The Internet hasn’t only changed the way people shop; it’s also changed the way people pay for their shopping. Even though credit cards are typically the preferred method of payment for online shoppers, the Internet craze has given rise to a wide variety of options—other than credit cards—for sending electronic payments to online merchants. One of the most well-known and widely used electronic payment services is PayPal, which offers both personal and business account services. Whether you have a personal or business account, PayPal lets you transfer money to other accountholders electronically. Business account holders, however, have the additional option of accepting credit card payments as well. Such electronic payment accounts are easy to open and inexpensive to maintain—regardless of your credit situation. Plus, they let you receive fast payments from any customer with an email address. You have the choice of depositing your funds directly into your account, requesting a check to be mailed to you, or drawing your funds from your account by using your debit card. The main drawback of providing this type of payment service is that it usually redirects your customers to the payment service’s website in order for the transaction to be completed, which may confuse some of your clients. The speed and convenience that electronic payment services deliver to you and your clients, however, are well worth it.

This is a must for anyone who owns a small business. Regulating how you get paid is important, but you should accommodate clients’ individual needs as well. When you set clear payment terms, you are addressing significant concerns—such as deposits, extension of credit, and progress payments—and you must provide them to your client in writing. Typically payment terms are printed on critical paperwork such as contracts, invoices, monthly account statements, and work orders.

Asking your customers to give you a deposit before you provide any type of service is key to ensuring you get paid for your work—especially if you have to pay out of pocket for products or equipment prior to delivering that service. In that situation, the deposit should at least cover the cost of the supplies. If your services involve only labor, then the deposit should be at least one-third to a half of the total cost of the service stated in the contract. The deposit guidelines—as well as information about canceled orders, refunds and dropped contracts—should be clearly stated and printed on all order forms and contracts. 

Another way to protect yourself against financial loss, particularly during long-term projects, is to implement progress payments. To do this effectively, you must coordinate your contract and payment terms ahead of time. Sit down with your customer and work on an agreement as to how much money will be due at each phase of the project. Those payments can be divided based on percentages of the total contract price (e.g., 25% for deposit; 25% after materials are delivered; 25% upon considerable completion; 25% due as balance either upon, or 30 days within, completion) or based on specific amounts you set. 

You typically won’t need to extend customers’ credit unless you are delivering a monthly service or a sizable project that has to be completed in phases. Usually you should be paid in full when the transaction is fulfilled. In business-to-business sales, however, commercial clients usually request credit on a revolving-account basis, such as 30, 60, 90 or 120 days after product or service delivery. Since it is in your best interest to be paid as quickly as possible, you could offer the client a small discount (say, 2%) if they pay their invoices within a week. If you do decide to extend credit, however, remember to run a credit check on the client first, especially if they owe you a large sum of money. You can check a client’s credit through any one of the three major credit-reporting agencies Trans Union, Equifax and Experian.

Unfortunately, despite your best efforts to accommodate your customers and simultaneously protect your business, there will still be some clients who fail to pay you on time—or at all. In order to get the payment that is rightfully owed to you, you must first remember to maintain open communication with that client and be persistent with nonthreatening letters, phone calls and personal visits. Whatever you do, do not attempt to scare the client into paying you, which would be illegal. Instead, keep calm but firm and explain that paying you would benefit them because it will keep your business relationship intact, and failure to pay would result in a lawsuit and a damaged credit rating. If the client is still unresponsive, you could consider hiring a collection agency to collect the debt. Keep in mind that collection agencies will charge you a fee, which is usually a percentage of the total amount collected and can sometimes go as high as 50%. If you need help finding a collection agency, contact the Association of Credit and Collection Professionals for a list of agencies in your area. 

One last option is to take the client to small-claims court, but bear in mind that small-claims courts limit the amount that you can sue the client for—usually between $1,500 and $25,000, depending on which state or province you live in. You also have to pay filing fees upfront, and these fees are different in various states and provinces as well. If you win, however, those fees are added back into your award amount. As the owner of a small business, you may prefer to represent yourself in such a court case, since the award amount is most likely very small and isn’t worth the expense of hiring a lawyer. And winning doesn’t necessarily mean that you will get paid: The possibility remains that, even after the ruling, you will still have to chase down the offender in order to get paid through seizure of assets or garnishment of income. To learn more about bringing a client to small-claims court, contact your local courthouse.