How To Set Up The Payroll System For Your Business

As a Small Business Owner, your job description includes ensuring that the people who work for your business get paid as and when due. You must also ensure that the business only pays for work done or service rendered, that the business tracks the hours and days of work or service recorded by the people it has engaged to do so. This is where the payroll system of the business comes into service.

Payroll is an essential function of any business. A Small Business Owner must understand the need for a payroll system, how it works, the one that is best for the business, its cost, and how to set it up.

A business with a few or a growing number of employees will have great difficulty in manually tracking their work hours, work days and earnings. It will get more challenging as the business runs its monthly cycles while striving to comply with the relevant Federal and State laws, and making the mandatory deductions from the earnings of its employees. After paying its employees each month, the business must also track the year-to-date spending on payments as staff salaries. A business will be overwhelmed and distracted if it tries to perform these administrative tasks manually. It is therefore important to automate them.

A functional payroll system should automate the requirements of accurately running the payroll of the business. It should automatically calculate how much each employee should be paid on every pay day, according to the number of hours or days of work. It should track and pay them correctly. A big advantage of using a payroll system is that taxes are automatically deducted from the pay cheques of employees. With an automated payroll system, the Small Business Owner will be saved the worry of paying payroll taxes or misreporting the wages of an employee, which will bring the additional benefit of freeing the attention and time to focus on running the business.

To find the right payroll solution, the business must assess its revenue, and understand the system that will best serve its purpose. Here, the Small Business Owner could choose between doing its payroll work in-house or outsourcing it to a third party. Where the business is small or in its start-up stage, the latter option is advised as it frees the business to focus on its core activity. In this case, the business can engage a Payroll Service Provider, and make payments on a monthly or per-payroll basis. A monthly pay structure will entail a base monthly fee, plus a fee per employee while a flat monthly fee will allow unlimited payroll runs at no extra cost.

In choosing a payroll system, the Small Business Owner will start by assessing the needs of the business. He or she will be looking for features like multiple payment options, which will allow the business to pay its employees through direct deposits into their bank accounts or issuance of cheques to individuals or any such instruments that are convenient to both parties. The system should also be able to handle statutory deductions, employee compensations and produce detailed payroll reports. It also helps for the payroll software to integrate with the human resources software. Once the business decides the payroll system that it needs, it is time to look for service providers who can fit the purpose. In picking a service provider, the Small Business Owner must consider the best one for budget, without foregoing set requirements or falling into the temptation to settle for a less expensive option that doesn’t meet the needs of the business.

For a minimum, the payroll system should function in a human resource and finance capacity. It should interface with finance because payroll is a key overhead cost of the business. It should also perform a human resource function because it involves tracking hours and days worked by employees, and bears information on benefits.

Setting up a payroll system for a small business is fairly simple. Once the Small Business Owner understands the payroll system that is best for the business and its staff, he or she will proceed to choose a service provider to work with. They will agree on a service plan, following which the business and the service provider will on-board the employees by getting them to provide their personal, employment and tax information. Thenceforth, the payroll software will function in an intuitive and efficient way, by automatically calculating and providing for all emoluments and deductibles related to each employee’s wages.

In summary, an automated payroll system is a necessity for a business that plans to grow. It is not optional. While the payroll process could be daunting for a small business, the use of a payroll software and a payroll service provider offers a seamless solution that automatically calculates deductions, and gross and net pay. More importantly, it will keep the necessary paperwork in one place that is easily accessible to the owner and managers of the business.

Do you need help in setting up the payroll system for your business? Let’s explore your options at https://smefinance.org/thesmelab.

Would you like to chat with aspiring and practising Small Business Owners about the payroll needs of your business? Join THE SME GROUP, our official Facebook page, at https://www.facebook.com/groups/smefinance/

Crowdfunding As Source Of Capital

Crowdfunding is an option for raising money for financing a project or business. It enables the fundraiser to receive money from many people by use of an online platform. Instead of the more common process of getting big amounts of money from a few people, crowdfunding asks thousands and millions of people for small amounts of money, and does so over the internet. Crowdfunding gives entrepreneurs access to a wide audience of potential investors, rather than trying to find a few big investors. It also frees the entrepreneur from the hassle of raising funds on his or her own, and leaves time for concentration on building the business.

A crowdfunding campaign begins when a fundraiser presents a fundraising proposal to a target group on an online platform. In return, members of the group who accept the offer make and deposit a financial pledge which is kept in escrow with the managers of the platform, for a fee. A Small Business Owner wishing to crowdfund a start-up or going concern would consider various options, depending on the nature of the project or business.

In peer to peer lending, the crowd will put money in a project or business as a loan to be re-paid with interest. In such a case, instead of getting a loan from one source, like a bank, the credit is advanced by a by a group of lenders.

There is also the option of equity crowdfunding whereby the business owner gets money from a large pool of people in exchange for interests in the business; like it happens on a stock exchange transaction, albeit on a small scale.

Under a reward-based crowdfunding, groups of individuals make contributions to a project or business and, in compensation, they receive non-financial rewards like goods or services, in proportion to the contribution that each one makes.

Crowdfunding can also be based on profit or revenue sharing. In such cases, businesses can get funding from crowds with the promise of sharing revenues or profits that accrue from the business.

What are the key benefits of crowdfunding Small and Medium Enterprises? The usual sources of patient capital include dipping into personal saving, borrowing from family and friends, securing bank loans, applying for government grants, and pitching to angel investors and venture capitalists. Crowdfunding has the advantage of achieving a quicker launch of the business idea, by bypassing those sources, many of which are time-consuming and expensive, difficult to close, and may only be obtained with stringent conditions or high price tags.

The crowdfunding process can also produce insight for the promoters of the business or project, which can help to refine the idea and improve its market entry strategies. This could happen through feedback in the course of interaction with prospective investors during the crowdfunding exercise, which could help to validate the proposal on offer and facilitate buy-in for the vision of the business.

Furthermore, crowdfunding as an alternative source of equity and debt finance is much cheaper than traditional sources. The business owner does not need to make an upfront payment or pay a set-up fee. The crowdfunding platform charges a small percentage of the fund raised; on the basis of no success, no fee.

Another advantage of crowdfunding is that the entrepreneur is able to structure the ownership of the business in a way that helps him or her to retain a majority control of the business. This is possible because of the large number of contributors involved, with each holding a small stake in the business; unlike when the funding is raised from a few people who, individually, make significant contributions to the funding of the business.

Crowdfunding clearly offers a business or project a way to market itself through a digital campaign to potential investors with a view to getting them to become investors. It is a viable option for the Small Business Owner seeking funds to start or grow a business or embark on a project. For an investor, crowdfunding provides an opportunity to have a stake, at minimal risk, in a diverse portfolio of multiple businesses. However, despite its growing popularity as a new source of investable funds, there is still an absence of enabling policies to guide the practice.

8 Questions Investors Ask Before Funding Start-Ups

Many founders, after preparing their business plans and making several pitches, don’t seem able to move their prospects into pulling out their cheque books to fund their projects. This happens even when the project promoters believe they are ready to take their start-up to the market. They believe they have a scalable way to sell their product or service and create sustainable streams of revenue. They think they have a credible plan to achieve competitive advantage in the market and make a return for investors. If this sounds like you, and you are still wondering why investors turn you down after pitching your business plan, you may need to return to the drawing board. Here are eight questions you should answer if you want an investor to seriously consider investing in your start-up:

1. What Is The Purpose Of The Business? A business exists to offer value, through a product and/or a service, which it provides to customers who, in return, pay for the value with cash or its equivalents. The money thus received finances the costs of running the business and leaves a profit to meet the needs of the proprietor(s) of the business.

This process requires the creation of products or services, marketing needs for acquisition, retention and expansion of customers, and financing to cash flow to build streams of revenue. In essence, value is that which is perceived by the customer, as represented by a benefit. The product or service to be introduced by the business must therefore solve a problem for the customer. Therein lies the purpose of the business.

For a start-up to excite the interest of an investor, it must answer these questions in the affirmative: What’s the purpose of the business, that is, what value will it create? Will the value satisfy a strong market demand? Can the business attract and retain the right talent, maintain customers and drive profits?

2. What Problem Is The Business Trying To Solve? There is a place for marketing and sales efforts that pitch the features and benefits of a product or service. But that cannot take the place of connecting with the challenge being faced by the customer. The business must ask: What problem will our product or service solve for the customer?

In seeking answers to this question, the business must remember the questions in the mind of the customer: What’s in it for me? Why do I need it? Why do I want it? What problem does this solve for me? What does the product or service do better or different than its competitors to solve the problem? The business must offer satisfactory answers to these questions before it can make a sale to the customer. The business must find a pain point and un-cover a market before it can make money.

3. What Is The Solution To The Problem? The business must demonstrate that it has gone through the problem solving process, having identified the problem, decided on an ideal solution and chosen a plan of action. This exercise will help the investor in evaluating the effectiveness of the proposed solution to the identified problem. It will also indicate whether the business is on track to transform the current situation into one that addresses the need of the customer and meets the objective of the business.

The basic idea is to establish the preferred reality. One way to do this is to determine a minimum viable product or service that will be needed for a launch. This must be something that customers can use, which will give the business the opportunity to test it and determine its fitness for the market. This provides a practical way of testing the waters before investing time and resources in moving forward.

4. Who Are The Competitors? A new entrant into the market must define its competitors, which means going beyond the big names in the sector and looking at every business that can potentially impact its success. The direct competitors will be those already marketing and selling products and services, similar to the one(s) being planned, to the same audience that the business is targeting. Indirect competitors will be those who address the same customer needs as the business plans to do, but do so in ways that don’t exactly match but overlap with that of the business.

Knowing and keeping direct and indirect competitors within radar, and tracking them across the variables helps the business to continually innovate and iterating towards finding a better fit with its customers’ needs for solutions to their pain points. This invariably widens the net as the business seeks the maximum possible scope for competitive advantage.

For the investor, the questions are: Can the business do as well or better than its competitors? If it can’t, why continue? If it can, and the market can welcome another player, then the business is onto something.

5. How Will The Product Or Service Be Different? Standing out from the crowd gives a business an edge, and makes it different from its competitors. A differentiator helps a business to distinguish itself from other businesses in its market. A business can differentiate itself by focusing on a feature or benefit which solves a problem, satisfies a need, or cures customers’ pain.

There are a variety of ways a business can position itself in the marketplace. Examples include but are not limited to Convenience (ease in buying a product or using a service); Reliability (product or service that hardly fails); Quality (luxury item) and Superior Customer Service (always there for customers).

Does the business have a secret weapon? Does it have something exclusive to it, like technology, data, intellectual property, relationships, etc. to distinguish it from competitors? If it doesn’t have any of these, it must assure the investor it is prepared and able to compete as just another runner.

6. What Is The Size Of The Market? Knowing the size of the market is a foundational part of launching a start-up venture. The aspiring Small Business Owner must know to determine it, and how it will impact potential revenue in the addressable market. Investors like to see big numbers, but don’t want a business that inflates them. The business must back its claims with data and research, how they are derived and the assumptions behind them.

Does the business know the true and realistic size of the market? Who has the need for the product or service, and has the means to buy it? How many of them currently exist? Who would the business share the market with, and what piece of the pie can the business take? Is the market big enough for the investor to care? The investor wants to know that the addressable market is large enough to matter.

7. How Will The Business Make Money? In simple terms, a business makes money by finding answers to four key questions: 1.What will it sell or offer to its customers? 2. Who are the customers that constitute its primary target market? 3. Why will these customers want to buy what the business is offering? 4. How does the business make money while producing the product or providing the service, and selling them to its customers?

The answers to these questions will define the strategy of the business, which will unveil its business model. Bottom line: How will the business make money? Will it make enough money to grow to the point of turning a profit? The investor wants to know.

8. Who Are The Managers And Key Personnel Of The Business? An essential requirement for a successful start-up is its ability to pull together a management team. There must be serious thought on critical positions to be filled and who should fill them. In a small business, some staff will wear several hats, but the duties and responsibilities of each hat must be clearly identified and spelt out. 

Talent is everything. The business will rise or fall with the quality of its people. The founding team must have the correct balance of personnel and skills. Potential investors want to see a team that holds the promise of taking a start-up to lofty heights.

* Do you need help in preparing a business plan for your start-up or new project? Fill out the questionnaire at https://smefinance.org/thesmelab.

** If you like to link up with aspiring and practising Small Business Owners on how to plan your business, join our official SME Finance Facebook Group at https://www.facebook.com/groups/smefinance/

9 Ways Businesses Make Money

A business is an organisation or entity engaged in commercial, industrial, or professional activities. Regardless of the products being offered or service delivered, continuous cash-flow is needed to sustain a business. For this reason, the Small Business Owner must understand that the primary business of a business is business. That is, making money. The Small Business Owner must therefore answer the Big Question: How will the business make money? In other words, what is the business model?

A business model is the underlying principle of how a business is run. It is the design to generate revenue for the business. The business model explains how the business works. It describes who the business sells to, and how it makes a profit. Every business relies on a specific business model for taking its product or service to the market. The model answers two basic questions: Who is the customer, the person who needs the product or service produced or provided by the business?  It also answers the question: How do the business generate revenue? Here are nine tried and tested models for generating income that are available to anyone starting a business:

 

1. Bricks and Clicks: A business has two basic choices. It can adopt the brick or click model, or a combination. The brick model is where the business operates offline, and does business in person, face to face, from a physical location in a building. The click model is where it conducts business through online purchases and transactions, usually though computing devices. This is the model for businesses that operate in the e-commerce space. The trend is for businesses to combine the brick and click model as brick business now strive to establish digital shops, which enable them to trade online and offline.

 

2. Bait and Hook: The bait and hook model is where a product or service is offered for free or sold to a customer at a low price, which serves as a bait for hooking the customer to buy the same or similar product or service at a higher price. The model creates an impression that the customer is getting a bargain, while making money for the business. A popular example is the replaceable razor which sells cheaply with few blades that become dull after a few shaves. Thereafter, the customer continues to buy blades as refills for the razor head. This model is also common in the book trade where authors give readers one or two chapters of a book in soft copy or e-book format for free, as a bait to hook the customer into buying the complete book.

 

3. Subscription: This is a model where the customer pays a recurring fee at regular intervals, typically monthly or yearly, for continued use of a product or service. This model strengthens the relationship of the business with its customers while it continues to deliver value. It also aligns customers’ cash flow with access to the product or service, as they can decide to pay as they go or pay up front. This model, originally common with newspaper and book publishing businesses, is now standard fare for such businesses like software, television, telecommunications and electricity services.

4. Premium: A premium model offers a high end product or service to discriminating customers who value quality and brand image. The goal of this model is to achieve a high profit margin on a low sales volume. A business can use this model to enhance the value of its product or service against those of its competitors, by charging prices that are higher than what the market is offering. This creates a perception that the product or service has a higher value. The business also enjoys the advantage of generating higher profit margins from its sales. Whereas premium pricing is usually associated with big brand names, like a Mercedes car and Rolex watch, a small business with a unique and proprietary product or service, can differentiate them with a quality image and a higher price

 

5. Freemium: This is a hybrid of the words, free and premium. It is the pricing strategy where a basic version of a product or service is offered for free but money is charged for its upgrades that promise additional features. This is a popular model for businesses seeking to enter new markets and need to entice users to their products or services. The offer of a free trial, as distinct from a paid-only model, lowers the entry barrier for the new player, and helps to grow recurring revenue. Publishing and software companies that offer free trials prior to paid services are good examples of the fermium model.

6. Advertising: Making money from advertising deceptively appears to be one of the simplest and easiest ways models, which is why many business seek to use it as a source of revenue. An advertising-supported revenue model is based on the business attracting an audience by creating content or engagement, and then selling access to advertisers. It focuses on the sale of advertising as a major source of revenue. This approach drives the traditional broadcast and print media, and online media, which generally generate revenue from advertising, customer subscriptions or combine both.

Television, radio, newspapers and magazines provide information and entertainment for their viewers, listeners and readers. While they make money from subscribers to their services, they earn most of their income from advertisers seeking the attention and patronage of their audiences. These advertisers pay to place advertising messages within their non-commercial content.

 

 

The attraction of the advertising-supported revenue model is that your medium will almost always find companies that want to pay to reach your audience if you are able to provide specific details about their character and size. This explains why newspapers and magazines give away thousands of copies to businesses and institutions in their communities as they drive their circulation, readership and, by extension, advertising revenue.

The downside, however, is that an advertisement-dependent model may be hard to implement because building an audience that is attractive to advertisers is neither easy nor cheap. Furthermore, it hardly lends itself to multiple revenue sources and is among the first to be negatively impacted in a down economy. It can also be severely challenged by the availability of alternative sources for similar or related information or content being provided by the medium. This explains the disruptive effect of the internet where online sources have eliminated the exclusivity once enjoyed by the traditional media, not to mention digital platforms like websites, blogs, etc. that has turned this model on its head.

 

7. Aggregator: The aggregator business model has entered and disrupted almost every industry. Travel. Taxis. Hotels. Food. Groceries. Name it. The model runs on organising previously unorganised activities, and providing a service under a brand to an identified population. Airbnb for hotels and Uber for taxis are ready examples.

The aggregator assembles information about the providers of goods and services in particular industries, partners with the providers and markets their services under their own brand name, doing so with a uniform quality and prices. The providers of goods or services are not employees of the aggregator, and simply work with the aggregator under contract to continue to own the goods or services that they provide. Under agreement, the aggregator focuses on marketing and creating leads for the providers who, on their part, focus on providing quality products or services to the customers.

This win-win relationship provides a platform where the customer and the goods or services providers are both customers of the aggregator, albeit in differing ways. Meanwhile, the goods or services providers remain members of their original industries, and continue to compete among themselves as before.

The key challenge for the aggregator is finding the money to build the brand and ensuring delivery of a standardised quality for every user by different providers. The aggregator provides the goods or services provider with customers and, in return, charges a commission. Alternatively, the goods or services provider quotes a minimum price at which to operate, leaving room for the aggregator to add a take-up rate before quoting the final price to the consumer.

8. Buy Low, Sell High: If you plan to start a business based on buying products cheaply and reselling them for a profit, you can bet on the buy low, sell high model. Basically, your buying-and-selling business will run on purchasing items cheaply and re-selling them for more than their cost. Your profit will be the difference between what you paid for the product and what you sold it for.

Your mantra will be: Buy low, sell high. No more, no less!

This is about the easiest business an aspiring Small Business Owner can start. It is a low-budget enterprise and requires a minimal investment. There is limited financial risk as the money you spend to get started will go into buying inventory, which you can dispose if you decide to wind up. The profit potential is good as you can mark up your product for a reasonable margin. You can start and operate a buying and selling business without specialised skills. And, in the internet makes it easy to buy and sell as you can easily open an online store.

9. Value-Added Reseller: This is a model where a business produces a product or provides a service, for re-sale by other businesses. The difference is that the re-seller adds value by modifying the original product or service. Such industry-specific additions help the reseller to develop a distribution network for the product or service, and fast-tracts the generation of revenue. Value-added resale programmes are common in technology industries, particularly those in the software business.

While the foregoing does not exhaust the possible models available to a start-up, it provides a range of options, depending on the nature of the business. An aspiring or practising Small Business Owner would benefit from considering each model and deciding if one or more of them can birth their business. The bottom line is to pick a model that delivers the best value and highest revenue for the business.

Do you need help in finding the most viable revenue model for your small business? Contact us at https://smefinance.org/thesmelab.

When To Use A Loan To Grow Your Business

Small Business Owners, in the face of the Covid-19 pandemic, continue to grapple with the double challenge of how to survive the lockdown and thrive thereafter. There are also worries that some Small Business Owners may go out of business if they do not get help. Fortunately, there is a growing range of support for them, like the single-digit loans on offer by the Central Bank of Nigeria under its N50 billion stimulus package for Micro, Small and Medium Enterprises (MSME).

While Small Business Owners scramble for this loan and similar credit facilities, they should stop and think. They should answer the question: Why should they use a loan to grow their business? Every business seeks to grow and rank above its competitors. Similarly, every business needs cash to grow. It takes money to make money.

Simply defined, a loan is money that is borrowed, to be repaid with interest. For a Small Business Owner, a loan is usually the last resort, after exhausting other options. Thus, before settling for a loan, the Small Business Owner must know the type of loan the business needs, as determined by the purpose of the loan. He or she must also have a deliberate plan of how to utilise the funds. And, most important, after considering the amount, duration, interest rate and repayment terms, he or she must have a clear and viable plan of how to repay the loan. With these in mind, here are some ways a Small Business Owner can put a loan to good use:

1. Purchase Of Equipment: When a business needs a machine or tool to work or the one in use is outdated or has exhausted its lifespan, the options are severely limited. It must be replaced since the business needs it to work. If the item is costly and cannot be replaced from the daily cash flow of the business, financing its purchase with an affordable loan becomes a ready recourse. Such a purchase repays itself by delivering a better product or service for its customers, and helping the business turn a profit.

2. Purchase Of Inventory: Inventory can be a major expense item for a small business. Ensuring adequate inventory at all times can be a stretch on cash flow. It is a constant struggle for a small business to maintain a balance between its cash flow and the need to keep relevant stock, which sometimes requires large purchases. In the end, it makes business sense to take a loan to purchase inventory, make profit and get a return on investment.

Before getting a loan for the purchase of inventory, the Small Business Owner must be guided by the sales history and sales projections of the business, and the cost of the loan against the total projected sales of the business. This analysis must show that the projected return will be cover the total cost of the loan and leave a surplus; meaning that the loan can be turned into profit.

3. Marketing: Not much happens in a business until it sells its product or service. One sure-fire way of growing a business is by running marketing campaigns, with a view to acquiring new customers while retaining old ones. However, customer acquisition is an expensive enterprise. A marketing campaign, traditional or digital, requires funding. Where the business cannot finance its marketing plan from its regular trading activities, a loan for this purpose is a wise decision if it will increase sales volumes and revenues that can be re-invested in the business.

4. Capacity-Building: A business is as good as the people who run it. As often happens in a start-up, the entire business might not be more than the owner, a one-man band working in multiple capacities. As the business grows, the business will need to acquire new hands with differing and complementing competencies. This is the time to boost the capacity of the business, by investing in the human capital that will keep the business innovative and competitive. This can also apply to an old business seeking to expand its trading activity. Using a loan to hire fresh talent, which translates to additional executive capacity, is a worthy step towards enhancing productivity and increasing the revenue base of the business.

5. Building A Credit Profile: The average small business does not have a credit history, simply because it does not have a record of past borrowings. Reason is that the big lenders don’t consider small businesses as credit-worthy. How does a Small Business Owner get out of the chicken and egg quagmire? To break this jinx, a small business with its eyes on big loans in the near future must start preparing now. It must begin to build its creditworthiness by procuring small, short-term business loans and making regular and timely payments on them. This way, the small business will build a track record, have cordial relationship with lenders and ready itself for a big loan when it needs it.

All said, contracting a small business loan is not a casual affair. A Small Business Owner must contract a loan only when it is the right thing to do. A properly utilised loan can energise a business for long-term growth.

Do you need help in getting a loan your small business? Contact us at https://smefinance.org/thesmelab

8 Tips For Collecting Outstanding And Overdue Invoices

The collection of outstanding and overdue invoices can be a major pain point for many Small Business Owners. It is a necessary challenge that small businesses grapple with from time to time. Beyond consuming resources, it shifts focus and time from the core competencies of improving the business and delivering better service to customers who settle their invoices as and when due. But, because the business needs money to continue trading, the Small Business Owner must do whatever needs to be done to keep the cash flowing, especially those tied to slow-paying customers.

Here are some proactive tips to improve management of the accounts receivable of the business and keep its operations running while it strives to cash in its unpaid invoices:

  • State Terms Of The Contract: The accounts receivable management process begins with the contract of sales. All sales transactions must clearly state when payments fall due, whether cash on delivery, on receipt of invoice, 30 or 90 days credit or whatever. The agreed term and due date must feature prominently on the contracts of sales and the invoice that originate from them, so that customers’ accounts payable departments and the sellers’ accounts receivable departments know exactly when invoices are due for settlement.
  • Charge A Late Payment Fee: Add a Late Payment Fee in every contract of sale. This can motivate customers to pay outstanding invoices on time or risk bearing additional charges for failing to do so. Each invoice should be clear on what the late fee is, when it will kick in and how it will start counting. It is important to include these information in the contract of sales, which must be reflected on invoices and reminder notices.
  • Send A Gentle Request For Payment: In the daily rush of work, it is easy for a customer to forget that an invoice has passed its payment date. In such a case, it is helpful to send a gentle reminder to the customer, by letter, text, email or similar means. It is important that the message reminds the customer of the outstanding payment in a friendly tone and restates details of the unfinished business. This process can begin with setting an alert on a calendar at the time of sending out the first invoice. This will prompt the due date of the invoice, and a check will determine whether to send out a reminder. The business should invest in an accounting system or invoicing software to automate this schedule of procedures for staying on top of overdue invoices.
  • Follow-Up With A Phone Call: When the friendly reminder does not yield the desired result, a personal touch should follow. Follow-up with a phone call to nudge the customer into paying the invoice. The phone conversation should stress how the non-payment is negatively affecting the business. It should attempt to discover why the customer is failing to pay, and aim to move the parties towards working out a solution that resolves the problem.
  • Negotiate Payment In Instalments: Where it is evident that a customer is willing but unable to pay, possibly because of cash flow challenges, it can be agreed for the customer to pay small amounts over time. Negotiating with, and allowing, the customer to make payments in instalments could be a win-win alternative to not paying at all. This will ease financial pressure on the business as it receives money due to it, albeit over an agreed and extended period. The customer also gets the respite of delaying the payment while parties remain in good standing to do more business in the future.
  • Send A Letter By Courier: If the gentle efforts to collect an unpaid invoice are proving ineffective, it may be time to step up more stringent efforts, like engaging a debt collector or initiating legal action. As a first step, send a second reminder, this time, by courier. By signing to receive the letter, the customer is providing proof of the attempts to get paid, and a subtle hint that parties may be heading for a tangle.
  • Handover To A Debt Collector: Handing an unpaid invoice to a debt collector could be the next option. A debt collection agency specialises in debt recovery and will relentlessly pursue an assigned debt until it receives payment. The debt collector will get a percentage of what it collects as its success fee and/or charge a fee, depending on the terms of engagement.
  • Initiate Legal Action: If the debt collector fails, and the amount being owed makes it worthwhile, initiating legal action against the customer might be the last card. While suing the customer might prompt the customer to pay the invoice, remember that a lawyer will charge legal fees and litigation can be expensive.

Unpaid and overdue invoices can damage customer relationships and endanger the financial future of a business. A business will begin missing its own payments once its customers are missing theirs. An effective invoice collection system boosts the cash flow of a business, and helps it to survive and thrive.

Contact Us if your business needs help in collecting its outstanding and overdue invoices.

6 Benefits Of Engaging A Bookkeeper

A bookkeeper in a small business performs many of the duties that accountants do for big businesses: Keeping ledgers, running trial balances, making journal entries, and preparing financial statements and tax returns. A bookkeeper may take full charge of the finances of a small business, and cover chores like opening and closing books at the beginning and end of accounting periods, and issuing financial statements to the owners and managers of the business. In a bigger business, a bookkeeper may simply prepare these documents for review by a qualified accountant.

Given that poor bookkeeping is one of the reasons small businesses fail, the Small Business Owner who cannot employ an accountant must hire a bookkeeper. Here are six benefits that bookkeeping can add to a small business:

1. Strategic Focus: The Small Business Owner is always thinking of how to grow the business. Bookkeeping provides the information for the Small Business Owner to sharpen the strategic and tactical focus of moving the business towards its short and long term goals. The Small Business Owner must use the information that bookkeeping offers to track and adjust its goals accordingly; particularly through preparation of the budget for the

The budget creates the financial roadmap for the business. It plans for expected income and expenses, and the resources needed to achieve them. The budgeting process, by projecting the income and expenses of the business, equips the Small Business Owner to plan the future of the business. By recording the past and present conditions of the business, bookkeeping gives a clear picture of what is working, what is not working and what needs to be done to grow the business.

2. Staying Organised: The Small Business Owner knows that getting and staying organised is a skill that is essential for success in business. This skill is reflected in the ability of the business to produce any information about the business as and when needed.

Such information include the financial records of the business, which may be required by interested parties, like lenders, investors, employees, customers and tax authorities. Failure to provide such information when requested is the sign of a disorganised and poorly managed business. The presence of an efficient bookkeeper ensures that the financial records of the business are organised, easy to locate and available for end users. This state of financial affairs puts the mind of the Small Business Owner at ease, and more focused on other areas of the business.

3. Business Analytics: Bookkeeping provides a management tool for the Small Business Owner to analyse and understand the business. The financial statements regularly generated by the bookkeeper and used for analysis help the Small Business Owner to track the cash inflows and outflows of the business.

These analytics reveal the business lines that are yielding desired results and those that are not. They give the Small Business Owner access to available financial information, and inform better decisions about the business. The bookkeeper provides these information, which enables the business to focus on the strengths of the business, with a view of doing more of what is succeeding, and concentrating on its weaknesses, with a view to improving on them.

4. Financial Management: Bookkeeping enables the Small Business Owner to control the finances of the business. Bookkeeping provides financial information about the business, for a given period of time, in the forms of the balance sheet, income statement, and cash flow statement. These statements offer a snapshot of the business, which shows the Small Business Owner how the business is performing.

Bookkeeping shows how the business is spending money, and invoices owed by the business or its customers. It tells the Small Business Owner if the business is paying its bills on time and getting paid for its products or services on time. It is the measure of the cash inflow and outflow that keeps the business running.

Bookkeeping improves the cash flow of the business. The regular recording of revenues, receivables, expenses and liabilities allow the business to manage the payments of invoices of customers and vendors. Bookkeeping helps to improve cash flow by providing information on outstanding invoices, which can be used to improve the cash flow policies of the business; like shortening the time for receivables and/or lengthening the time for payables, and increasing available cash at a given time.

Bookkeeping also tells current and future investors about the value of investments in the business. The balance sheet, income statement and cash flow statement present the value of the business. Prospective investors are more likely to invest in a business that has correct and current financial records.

5. Growth and Profitability: Bookkeeping tracks the growth of the business. Trading activities produce information over time, which show the trends and cycles of the business. This enables the Small Business Owner to compare performance indicators across months and years, and tell if the business is growing.

Bookkeeping also answers the question: Is the business profitable? The income statement, one of the financial statements produced by the bookkeeper, tells whether the business is making or losing money. It tells the Small Business owner how well, or how bad, the business is doing.

6. Tax Returns: These are required by law, the key ones being company income tax of the business and personal income tax of its employees. Instead of muddling between personal finances and business funds, or scrambling through files for missing invoices or receipts, the wise Small Business Owner can make the tax filing process more efficient by simply engaging an in-house or freelance or outsourced bookkeeper. An experienced bookkeeper, aided by an automated accounting software, will organise and centralise the financial information of the business, and get the Small Business Owner ready at tax time.

Do you need help in handling the bookkeeping work of your business? Contact Us Now or email ted.iwere@smefinance.org.

Managing Your Operating And Capital Expenses

Business expenses are the ordinary costs incurred by a business in order for it to operate, with ordinary cost being one that is common in your trade or business. A key concern of a Small Business Owner is to carefully monitor the expenses of the business, keep its accounting in order, manage its cash flow, and ensure the smooth running of its operations.

In striving to achieve these goals, the Small Business Owner must know what constitutes an expense item, the types of expense items, the differences between expense items and how each expense item impacts on the profitability of the business. How does the Small Business Owner come to grips with the two major groups of business expenses, namely, operating expenses and capital expenses, and be able to understand how they differ and how they affect the profitability of the business?

Operating expenses, often abbreviated as OpEx, are expenses necessary for the on-going operation of the business. These routine expenses happen on a set schedule or on a semi-regular basis, and appear on the profit and loss statement. Examples of operating expenses are:

  • Rent.
  • Office supplies.
  • Payroll.
  • Licences.
  • Taxes.
  • Repairs and Maintenance.
  • Insurance.
  • Professional fees

Capital expenses, sometimes called CapEx, are long-term assets acquired by the business, as investments that will last longer than one year. Unlike operating expenses that appear on the profit and loss statement, capital expenses are reported on the balance sheet, with a percentage of such expenses being recorded as routine monthly depreciation expenses on the profit and loss statement. Examples of capital expenses include:

  • Purchase of buildings.
  • Purchase of vehicles.
  • Purchase of equipment.
  • Acquisition of patents.
  • Acquisition of other tangible assets.

What is the difference between operating expenses and capital expenses? In the ordinary sense, the Small Business Owner considers all monies spent in the business as expenses, because the monies leave the business. In accounting terms, however, some expenses are not immediately recognised as such while others are recognised as expenses over a number of years through depreciation.

In essence, the expenses made for the day-to-day operations of the business are recorded when they are incurred and are called operating expenses. When the business incurs a capital expense outside its normal operations, which happens occasionally, such expenses are called capital expenses.

As the foregoing suggest, operating expenses and capital expenses are treated differently for tax purposes. While operating expenses are deductible in the year they are made, and the business can take a tax deduction for the expense in the year it makes the expense, capital expenses may not be fully tax-deductible in the year they are made. For example, the purchase of land or building may not be deducted at once in the year of purchase, and only the portion of the asset used in the course of the year may be tax-deductible as depreciation, based on the life of the asset.

More important than the tax advantage, the Small Business Owner must use analysis of operating and capital expenses to improve budgeting for the business.

Budgeting for operating expenses usually begin with looking at the expenses of the business for the preceding year, adjusting for inflation and/or new costs, and creating a plan with the income of the business exceeding its expenses, thereby resulting in a profitable enterprise. However, capital expenses are less frequent and unlikely to be repeated yearly. Except for unforeseen capital expenses that catch the business off-guard, with potential to destabilise the cash flow and operations of the business, the Small Business Owner must allocate portion(s) of the budget, based on the monthly depreciation amount of the asset(s) being provided for, for capital expenses. This is to enable the business to replace its assets when it is time to do so.

If the business plans to acquire a new asset, a capital item, it should determine when it wants to make the purchase, divide the cost of the asset by the number of months between when it will start allocating the funds and when it plans to make the purchase, and provide funds for it accordingly. This will ensure that the business has the money to purchase the asset when it is needed.

Given the differences between operating expenses and capital expenses, and how each of them impacts the tax situation and profitability of the business, what can a Small Business Owner do with this understanding? It helps for the Small Business Owner to discuss the implications of choice of expenses with a hired or part-time Accountant, who will advise on the best solution for the business from a managerial and tax perspective. The Accountant will help to answer questions like:

  • How can the business gain the benefits of using an asset without making a capital expenditure?
  • When should the business lease or rent an asset instead of buying it, thereby making it an operating expense to be fully deducted in the tax year?
  • When is it in the best interest of the business to make the purchase of an asset a capital expense to boost the value of the business?

The Small Business Owner who makes informed decisions on the operating and capital expenses of the business will be equipped to manage the expenses, maintain the needed cash flow and improve the profitability of the business.

Do you need help to manage the operating and capital expenses of your business? Contact Us Now or email ted.iwere@smefinance.org.

4 Steps To Grow Your Current Assets

A current asset of a business is any asset that can be sold or used in operating the business within a given financial year. It is an asset that appears in the balance sheet of the business and can be converted to cash over the next year. It contrasts with long-term assets, like land and similar illiquid investments, which may be difficult or impossible to encash in one year.

As a Small Business Owner trying to understand the items on the current assets section of your balance sheet, it can be difficult to tell the difference between what to count as a current asset and what constitutes a longer-term asset. However, the general rule is that anything that can be easily turned to cash within one year or less will pass as current asset. Here are different types of current assets and what they represent:

  • Cash and Equivalents: These include cash in the bank account of the business, cheques in the name of the business that are yet to be deposited, and petty cash from sales by the business.
  • Accounts Receivable: These are payments for goods or services delivered to customers by the business, but are yet to be paid for by the purchasers. These are credit transactions for which the business has issued invoices to customers who have payment periods of 30, 60, 90 or 120 days, as the case may be. Accounts receivable are classified as current assets because they will be paid for in cash, via a bank transfer, or with instruments that can be converted to cash, like cheques.
  • Inventory: These are goods that the business has in storage for replenishing its stock, while waiting to be sold. Inventory constitutes current assets because the business expects to sell or otherwise liquidate them within one year, particularly if they are perishable, like food and similar consumables. For manufacturers, inventory may include supplies, like raw materials or similar items, needed to make products or keep the business running.
  • Marketable Securities: These are convertible financial instruments, such as stocks, bonds, treasury bills and fixed deposits, held by the business and can be sold for cash. These securities are considered marketable if they can be exchanged at face or near-face value within the year they were purchased by the business.
  • Prepayments: These are future expenses that the business has paid for. They are costs that have been paid for but are yet to be used. An example of a prepaid expense is insurance, for which the premium is usually paid in advance for many months, say one year. Another example is rental payment that covers 12 or more months, but paid for ahead of time. Same goes for subscription services, like when the business pays for a 12-month subscription on its satellite television service. For these prepaid expenses, the business initially records the expenditures as prepaid expenses, or assets, and then charges them as expenses over the period of usage.

What does the current account position of the business tell the Small Business Owner? Simple. It is a key indicator of the short-term financial health of the business. It signals the capacity of the business to pay its bills as they fall due, and how variations in revenue may affect its operations. More importantly, it enables you, the Small Business Owner, to compare your current assets with your current liabilities, so that you can aim for the right balance of current assets to liabilities.

In essence, if the current assets of your business exceed its short-term liabilities, the assets will cover short-term debts. But a business with too many current assets might also not be investing enough of its profits in income-producing projects. That said, given that you always want the current assets of your business to outperform its current liabilities, how do you boost its current assets? Here are four steps to improve your current assets balance:

  • Cash Is King: Fast-track accounts receivable, which is a key component of your current assets. Strengthen current assets by promptly collecting on invoices. A pile of overdue invoices can seriously damage the cash flow of the business, and worsen its current assets position. The business should send an invoice immediately it sells an item or provides a service. Aim to collect receivables in a timely manner, no longer than 60 days. The longer the wait to collect on an invoice, the lower the chance of collecting on it. Use invoicing and accounting software to automate collections. Follow up with written reminders, phone calls and personal visits, and collect on your invoice, on time, most times.
  • Liquidate Idle Assets: Does your business have assets, like machinery, equipment, inventory, etc., that are lying around, and not in use? If it has, sell them. Liquidating idle assets will increase the current assets of your business.
  • Invest With Care: Always monitor the cash flow of your business, with an eye to leveraging any investable cash. In investing, strive to balance risks and returns, by building a portfolio of assorted instruments, like stocks, bonds, treasury bills, etc., with varying maturities, from 90 days to 12 months, or longer. Carefully chosen investments can bring cash to the business and improve its current assets.
  • Borrow With Caution: Never borrow without a plan or purpose. Only borrow when you need to. When you do, consider how your cash flow will meet the monthly payments. Analyse the cost and benefit of the loan, and determine how it will help to grow the business.

If your business is able to achieve a positive balance of current assets to liabilities, it will be in a position to secure financing that will help it to realise its daily, monthly and yearly trading goals.

Do you need help to improve the current assets position of your business? Contact Us Now or email ted.iwere@smefinance.org.

How To Organise Your Small Business’ Finances

When you are running a small business, you will be wearing many different hats, and struggling with a long to-do list. Your activities will be directed towards getting the business to make money. After all, a business that is not making money is not better than a hobby.

Regardless of your financial goals, your business may not be able to make money if you cannot manage and organise its finances. Here are six simple steps for creating order in the finances of your business:

1. Keep Track Of Your Income: You need to track the income of your business at daily, weekly, monthly and yearly intervals. This will help you understand how much money the business is bringing in.

You can achieve this by using a basic spreadsheet. Better still, you can automate your bookkeeping, which will categorise different income streams of your business, and make them available real-time. This will enable you to monitor whether you are meeting, or missing, the income goal of your business.

2. Track and Audit Your Expenses: There are various expenses that your business must settle in the course of its trading activities. You must track these expenses in the same way that you track the income of the business

This will help you avoid over-spending or making unnecessary expenditures. It will also keep your business in a condition to regularly audit its expenses, and ready when it is time to file its tax returns.

3. Separate Your Bank Accounts: Small Business Owners, especially during start-ups, make the mistake of using the same bank account for their businesses and themselves. This can cause confusion, especially at tax time when you and the tax man have to bicker over what is a business or personal expense, or what is tax-deductible.

You can avoid this by opening a separate bank account for your business, allowing the income of your business to flow through this account, and using it to settle the expenses of the business. This makes it easy to keep track of your cash flow as you review your bank statement at the end of each month.

4. Make It Easy For Customers To Pay You: The essence of your business is to make a product or provide a service that your customers pay for. The flip side is that no sale is complete until your customer pays for your product or service, and the money is deposited in your cash box or bank account.

If your business sells products, your customer could pay cash or use an Automated Teller Machine (ATM) card at the point of sale. If it is providing a service, you may send an invoice to your customer who would send a cheque to you or make an electronic transfer to your bank account. You may also set up a digital cart which enables your customer to buy from an online cart on your website.

Depending on how your business works, you should provide a combination of options for your business to receive payments from its customers, preferably in easy and near effortless processes.

5. Digitise Your Paperwork: Another way to keep your business organised is to digitise most of its paperwork. You should save your documents digitally and back them up with a secure cloud-based service.

You must avoid storing your vital documents in your computer or simply leaving them as hard copies in file cabinets. Some of the key documents you should digitise are:

  • Bookkeeping and accounting records.
  • Bank records and statements.
  • Leases, purchase contracts and similar agreements.
  • Trademarks, Patents, Permits and Licences.
  • Contracts of employment and related records.

6. Hold Regular Finance Review Meetings: The income and expenses of your business will fluctuate. They can be on or off target at different times. To ensure that you are on top of things, that you understand what is happening to the finances of your business, you must check them as often as possible.

It is therefore important for you to schedule a weekly meeting to review the finances of your business. This will keep your business organised, help you stay abreast of what is really going on in the business, avoid liabilities that can cripple the business and keep it productive and profitable.

These simple steps will help you organise the finances of your small business, and keep it profitable.

Do you need help to organise the finances of your small business? Contact Us Now or email ted.iwere@smefinance.org.

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