WHETHER YOU’RE AN OLD hand at business or you’ve just joined the game, you most likely have learned that it’s all about cash flow.
Financially speaking, there are only five cards in the business owner’s deck: Borrow, Earn, Spend/Invest, Give and Save. Knowing when to draw and which card to play separates the up and- comers from the has-beens.
Many entrepreneurs have lamented the limits on their personal credit cards or cursed the delay in payment from a key client. Maxing out the credit card and hoping for quick payment on goods and services delivered is how the majority of start-ups get started. That’s reality. But once the business is established, the trick is to maintain the balance of cash flow through multiple channels and through every life stage of the business.
Buying time
The formula is much easier to understand than to implement. Cash flow consists of cash received (collected income or revenue) and cash paid (expenditures), and has only two directions: in and out. Take more in than you pay out on a consistent basis, and you win. Wallow too long in the red, and you lose. As in a high-stakes card game, timing is everything.
Using cards of the credit variety for both collections and disbursements can be the best way to put time on your side. All you need is a merchant card processing account at your bank and a business credit card.
On the revenue side, merchant accounts enable you to accept business and consumer credit cards, as well as purchasing cards used by large companies to pay vendors. A merchant account can significantly speed up the collection of receivables and even prevent loss of sales. You can establish immediate credit for new customers, in many cases saving weeks in the credit approval process.
On the purchasing side of the equation, a business credit card can buy time between your payment to a vendor and your receipt of the credit card statement — time you can use to generate sales and collect more cash. Business credit cards make bill payments more efficient and accounting easier.
Both types of accounts, available at business banks, are great tools for controlling the timing of cash inflows and outflows.
Let’s start with managing cash inflows. The first question that business owners ask about a merchant account is, “How do I know if we need one?” Counterintuitive though it may be, the answer has little to do with the size of your business and everything to do with the needs of your customers. If you’ve had one or two customers ask, “Do you take credit cards?” you can be sure there are more who would choose to pay by credit card if you let them. Keep in mind that your customers want to use credit cards for their cash flow purposes, too.
Managing cash flow
Here are some of the ways you can manage your cash inflows through a merchant account:
• When customers pay with a credit card, the money generally appears in your business checking account within 48 hours after settlement as collected funds. Check your records for the average lag time between billing your customers and receiving payments. If it takes longer than it would for a credit card payment, you may be compromising your cash flow situation.
• Accepting credit cards and purchasing cards may increase your sales because some customers, especially large companies, will not make purchases any other way. It also can help close the sale on the spot because credit card payment is convenient for the customer. If you take credit cards, make sure your salespeople are well versed in promoting the advantages to customers.
Successful e-commerce strategies depend upon credit card transactions. Be proactive in addressing concerns that your customers may have about the confidentiality of their credit card information.
• Merchant card services can reduce your risk of fraud, because bank fraud specialists review the accounts for suspicious activity, saving merchants thousands of dollars in fraudulent charges. Make sure your bank has the resources and expertise to “seek and destroy” credit card fraud.
Taking payments by credit card keeps you out of the role of a collection agency, which can compromise your relationship with a customer whose payment is late. Consider the effect of collection activities on your customer relationships, especially if you’re in a service business.
• Taking credit cards is faster and more efficient than processing checks, especially if you use readily available credit card processing software that integrates all facets of the transaction, from invoicing to inventory management to shipping. Reducing transaction time and effort lets you focus on generating cash flow.
Encourage customers to use credit cards by saying, “If you have a company credit card, we can take care of this right now.” Or send an invoice saying “Payment is due within five days” and ask for a credit card number, expiration date, billing address verification and signature.
While a merchant account brings the money in faster and can help to close more sales, a business credit card account helps a business to manage disbursements and minimize losses.
At M&I Bank, 80 percent of our business credit card holders are smallbusiness owners and their employees. Typically, better than half of them pay the full balance on their card account each month. Most card holders initially come to the bank for a loan, a line of credit, or some other type of financing, then apply for a business credit card account to help manage their cash flow.
Specifically, here’s why so many small-business owners opt to use a business credit card:
• Business credit cards allow for a cash advance. Cash advances come in handy as immediate, short-term loans for emergencies. Discipline yourself to pay off all cash advances within six months or less, in equal monthly installments to avoid burdensome interest on debt.
Purchase security
• Like personal credit cards, business credit cards allow you to delay payment beyond the purchase date, interest free, up to the due date of the invoice. If your statement ending date is the 6th of the month, make major purchases after the 7th and get at least 20 days of float.
•Using a business credit card for major purchases, such as office furnishings and equipment, gives you “purchase security” at no additional fee. In many cases, you can get reimbursed for items that you paid for by credit card if they are lost, damaged or stolen. Inspect every item you purchase, report loss or damage at once, and keep all receipts for 90 days.
Purchase supplies with a business credit card and use the reports to establish preferred customer status, including discounts. When you choose a credit card, be sure it comes with the option of reports you can use.
• It’s hard to beat the convenience of paying by credit card, freeing up staff time and the cost of cutting paper checks. Credit card use ends the guesswork as to when checks may have cleared and gives you a more accurate day-to-day financial picture. Many service providers such as contractors, consultants and attorneys now take credit cards. Use credit cards for paying both product and service vendors. You may be able to negotiate discounts, and you still get the float.
Reports and transaction information help you accurately forecast your cash flow and find ways to save. Don’t choose your business credit card based on low-interest offers — that’s not true added value. Instead, take advantage of the information and card payment features that save you money and help you to manage your business.
• Business credit cards help you track your company’s travel and entertainment expenses by employee and are easier to administer than traditional expense reimbursement accounts. If you plan to issue cards to employees, get a card that offers fraud protection.
Winning in business isn’t easy no matter what business you’re in — and winning always depends upon cash flow. To determine if a business credit card and merchant card account is your best cash flow solution, ask yourself two simple questions: “Would I rather make disbursements now or later? Would I rather get paid now or later?” Don’t forget — timing is everything.
[contact] Margrette Newhouse is senior vice president/group leader, business banking/executive and professional banking for M&I Bank, Minneapolis: 612.904.8194; margrette.newhouse@micorp.com Trish Sackrison is vice president, merchant and credit card sales for M&I Bank: 612.798.3816; trish.sackrison@ micorp.com
