small business management class:
Please answer the three question from the article below:
Q1)In setting up an accounting system, which one of theaccounting functions is best illustrated in the article? Explainhow you know. ?
Q2)Which one of the five common financial statements is bestillustrated in the article? Provide facts to support youranswer?
Q3)Which one of the uses of financial accounting is bestillustrated in the article? Explain how you know. ?
The article:
HUGH MCHUGH, owner of Overhill Flowers Inc. in the Philadelphianeighborhood of Overbrook, made a declaration a few years ago. "Nomore house accounts," he told his staff.
These accounts offering credit were a business staple for theflorist for years, covering about 85% of his business. Hospitals,corporations and other customers would order flowers, and he'd billthem at the end of the month, dutifully printing out statements,mailing them, processing the checks. Sixty days would often elapsebetween the time flowers were delivered and when the bill was paid.Customers often paid late, and about 2% didn't pay at all. "That'sa significant blow to a small business with profit margins of 12%,"he says.
Now, if anyone asks to open a house account, he requests acredit- card number, so he can collect immediately; for thosealready with house accounts, he got their approval to switch themto credit-card accounts. The simple change has not only ensuredthat he'll be paid, but it also has smoothed out the bumps of cashflow, as well, so that now in January, he isn't nervous aboutmaking payroll while he awaits payment for holiday bouquets.
Collecting debts efficiently, Mr. McHugh realized, is one of thebest ways for small businesses to manage the ebb and flow of cashand hang on to precious capital. It's not unusual for businesses toborrow, often at high interest rates, or sell chunks of equity thatthey'd rather keep, because they've managed collections poorly. Butmost entrepreneurs would rather focus on their product, theirservice, their marketing, their lease, their health insurance --anything -- before dealing with the gritty work of collections.
"One thing business owners always tell me is that they neverthought about this when they started their own business," saysMichelle Dunn, who owned her own collections agency, M.A.D.Collections, for years, and has written several books on thetopic.
The time for an entrepreneur to think about collecting fromcustomers is when he or she is writing the business plan, says Ms.Dunn of Plymouth, N.H. She advises businesses to establish a"credit policy" mandating that before they hand over a product to acustomer who says "bill me," they will run a credit check on thebuyer. She also advises small businesses to join Equifax or someother credit bureau to be able to pull credit reports for anyoneapplying for credit, and also to report late payers.
Small start-ups, she says, are often so happy to have customersthat they are slow to take action for nonpayment. That's a mistake,she says. It's best to promptly make a phone call, and follow upwith a letter, so the nonpayer understands that it's a seriousmatter. Any payment at all on the account -- even $5 -- isworthwhile, she says, because it establishes a legal recordacknowledging the debt. "Once you get any kind of payment towardtheir balance, they have to pay the rest if you wind up in court,"she says.
Her years spent tracking debtors have honed unusual instincts.She has found, for instance, that when she would call a young manabout a debt and a woman answered the phone, she'd ask for thecreditor by just his first name. "So many times it would be themother of the guy," Ms. Dunn says, "and just think it was a girlcalling. I'd say, 'Do you have his work number or his cell number?'and she'd give it to me," she says.
She also advises anyone who deals with college kids to not giveup on the slow payers. "It's not pay, not pay for years," she says."Then they are about to get married and need a loan. Suddenly,they'll pay to clear the debt." It also helps to remind nonpayersthat the unpaid debt shows up on their credit report, making itdifficult for them to obtain additional credit.
Entrepreneurs who take a laissez-faire attitude on collectionstend to have sad tales to share -- particularly solo operators,such as consultants. David Leopold of Cincinnati puts networkstogether for small business, making money by brokering thoserelationships. When a client was late paying him, he was stuck andstill had to pay his own vendors. "I had to borrow money at a veryhigh interest rate," he says. "That hurt." Another time he took aclient to court for nonpayment of $1,500, but because the clientwas "a friend," he had no written contract. The judge threw out hiscase. "To a small-business proprietor, that check is our paycheck,"he says.
Even with a contract, collections can require great stamina. Aclient owed Julie Phillippi, a Cincinnati marketing consultant,more than $3,000 for months. She could have turned it over to acollections agency or written it off, but the principle mattered toher. "I did good work for him," she says.
After months, she took her contract to small-claims court, andfollowing many delays, won a judgment against him. He ignored it.She put a lien on his house. She tried to garnish his wages. Shefinally took a step called a "personal body attachment," in which acouple of bailiffs were going to arrest him for contempt of court.At that point he paid, in cash. One bright spot amid the six monthsof aggravation: The lawyer representing her adversary was soimpressed by her resolve that he hired her for a marketingproject.
The nasty episode made her review how she handles collections.Now she invoices twice a month, rather than once. "It's a pain, butI get money in the door more often," she says. And she has begun totack on a 10% interest payment for bills more than 30 days late,which she highlights with a marker. That has speeded up payment,too.
Big corporate customers are a different sort of challenge, saysBrenda Cusick, a founder of ClickWare Inc., a Moorpark, Calif.,database company. She makes it a point to become chummy with theaccounts-payable clerks who work for her big clients, calling tocheck on an invoice, but always chatting about the clerk's childrenor recent vacation -- details that she meticulously tracks in herown database. Those relationships tend to speed an invoice througha big corporation's otherwise slow bureaucracy, and have helpedClickWare and its sister company grow to about $3 million inrevenue without outside investors, she says, even as the foundershave poured money into developing new software products.
Her rapport with the accounts clerks came in quite handyrecently. Ms. Cusick got word from a very big corporate client thatit was undergoing a financial audit. The auditor concluded that thebig corporation was indeed paying Ms. Cusick promptly -- but itwasn't taking a 2% discount to which it was entitled for earlypayment. Many companies offer such a discount, but typically theonus is on the customer to subtract the discount from the payment.For Ms. Cusick's client, the 2% over many months piled up to morethan $10,000. The company wanted it back from ClickWare.
Panicked, Ms. Cusick called the accounts-payable clerk at thebig company. "Don't do anything yet," the clerk advised. Soon Ms.Cusick got a second notice demanding reimbursement. "Sit tight,"the accounts-payable clerk told her, adding that other vendors gotthe notice and were resisting. Ms. Cusick did nothing, and nofurther correspondence arrived. "I made two friendly phone callsand saved thousands of dollars," she says.
Similarly, Ms. Dunn of M.A.D. Collections says her bestcollection "trick" is simply being nice and straightforward. Sherecognizes that many debtors have been beset by medical crises orother tragedies. In those cases, she'd often intercede on theirbehalf, making a case to settle the debt for a smaller lump sum,say, when an income-tax refund arrived. "Some people have actuallysent me thank-you letters for being so nice," she says, telling herthat they paid her before other creditors because she took the timeto listen to them. "I've saved those letters," she says
