Wednesday, March 04, 2009

Quick Quiz: Handling Money

Here's a quick quiz you can go through with your office manager or bookkeeper.

Don't have an office manager or bookkeeper? Well, then, whoever helps you with the finances. If no one helps you with finances, mark this whole exercise a big fat ZERO and go find someone. Come back when you're done.

(See Hiring Your First Employee and The $200 Miracle.)

Okay, so now for the quiz:

1. You invoiced a client and they sent a check for the wrong amount. It is short $10. Do you . . .
    a. Deposit the check and then contact the client to straighten it out.
    b. Email or phone the client and wait to determine what to do with the check.
    c. Send the check back with a note pointing out the error and requesting a correct check.
    d. Kick yourself for starting this business in the first place.


2. You invoiced a client and they sent a check for the wrong amount. It is short $1,000. Do you . . .
    a. Deposit the check and then contact the client to straighten it out.
    b. Email or phone the client and wait to determine what to do with the check.
    c. Send the check back with a note pointing out the error and requesting a correct check.
    d. Bemoan the fact that life never seems to be as simple as it should be.


3. You invoiced a client and they sent a check for the wrong amount. It is an overpayment of $1,000. Do you . . .
    a. Deposit the check and then contact the client to straighten it out.
    b. Email or phone the client and wait to determine what to do with the check.
    c. Send the check back with a note pointing out the error and requesting a correct check.
    d. Send the client a flyer advertising a $999 product.


4. Your client prepays for managed services. So they have a $3,000 "credit" on your books to pay for the next two months managed services. You invoice for some project labor. It goes pay due. Do you . . .
    a. Ignore it because they have a big credit on the books.
    b. Apply the managed service credit to the past due invoice and send the client a memo.
    c. Charge a late fee on the overdue invoice.
    d. Feel trapped because you feel back punishing them when they've prepaid so much money.


5. A client has an outstanding invoice for $500 that goes "late" (whether that's net 10 days, net 20, net 30). They also have a credit on their account of $200. Do you . . .
    a. Charge a $25 late fee.
    b. Apply the credit to any outstanding late fees and then apply the balance to the past due invoice.
    c. Email or phone the client to ask what they want you to do with the credit.
    d. All of the above.


6. You engage a new client. They give you a down payment for the first month's managed services. Then they order a bunch of equipment and need it in a real hurry. They ask if you can invoice them in arrears rather than being paid up front. Do you . . .
    a. Order the equipment to speed up the process and then invoice the client.
    b. Do not order the equipment. Talk to client and re-state your rules (all hardware and software must be prepaid) and offer to take a credit card.
    c. Order the equipment to speed up the process and then contact the client to see how they want to pay.
    d. Make an exception just this once in order to make the client happy.


7. You give a client a quote for hardware, software, and labor. Only the hardware and software need to be prepaid, but the client sends a check for the whole estimate. Do you . . .
    a. Create an invoice for hardware and software and apply the check, leaving a credit.
    b. Deposit the check and then contact the client to let them know that they have a labor credit.
    c. Email or phone the client and wait to determine what to do with the check.
    d. Both A and B.


8. A client returns merchandise according to your policy (which you have written down somewhere). Do you . . .
    a. Credit their account, write them a check, and mail it.
    b. Credit their account, print a credit memo, and mail it.
    c. Credit their account, apply the credit to any outstanding late fees, apply the balance to any past due invoices, and then email a note about any credit remaining on the account.
    d. Both A and B.


9. A client consistently pays from the bottom of statements instead of invoices. The result is a large and growing credit on their account. They send yet another check, taking their credit to more than $2,500. Do you . . .
    a. Deposit the check and then contact the client to straighten it out.
    b. Email or phone the client and wait to determine what to do with the check.
    c. Send the check back with a note pointing out the error and requesting a correct check.
    d. Call the client and insist on meeting with them and the bookkeeper to train them on your processes.


10. You are at a client's office and they offer to write you a check for a payment that's not due for another 15 days. Do you . . .
    a. Graciously accept their offer and leave with a check in hand.
    b. Say "No, don't bother. Your regular payment schedule is fine with us."
    c. Say you don't care, it doesn't matter, or some such.
    d. Offer the take the client to lunch.


- - - - -

The correct answers are:

1. A: Deposit the check. When you hold other people's money, take possession of it and get it into your cash flow system.

2. A: Deposit the check. See #1.

3. A: Deposit the check. See #1.

4. C: Charge a late fee. And, if it's over $500, suspend their account. These transactions are not related to one another.

5. D: All of the above. In that order.

6. B: Take this opportunity early on to restate your rules.

7. D: Both A and B. Again, take possession of money and then apply your rules.

8. C: Apply all credits as appropriate, but make sure you take care of your business first.

9. A: Deposit the check. See #1.

10. A: Never turn down a check when offered.

- - - - -

Here's the common rules for these questions:

First, when someone gives you money, deposit it. Holding a check will almost always take you down a path of being responsible for someone else's money, creating delays, and keeping the money in the client's bank instead of yours.

It is much better to deposit the check, which makes the money liquid and puts you in control. You can issue a check the client immediately. You can give the money back. You can apply it to their account. etc. Which leads to . . .

Second, you need to be in charge of your finances as much as possible. You're not responsible because clients lose invoices, pay from estimates, overpay, underpay, or refuse to pay late fees. You ARE in charge of taking care of your business.

Third, good behavior on one hand (e.g., prepayments) does not excuse bad behavior on the other hand (e.g., late payments).

Consider the the big picture from an accountant's perspective. Let's assume you're an S-Corp, LLC, or some other entity doing accrual accounting.

- When you invoice a client, you have created a taxable event. You created income for your company at that moment. It doesn't matter if the client pays too much, too little, or too late. The important event took place when the invoice went out.

- Taking someone else's money is not a meaningful financial event unless it is directly related to an invoice. If a client gives you a check for $1,000 over what they owe, you are just holding their money . . . until you invoice them.

This concept is important because too many small business people think that holding each others' money is important. It's not. Invoices are important. Payments are important. Minor discrepancies in cash flow are not important.

Yes, you need to straighten out all the little discrepancies.

But don't think that rejecting a check for $555 so you can collect a corrected check for $550 is worth spending any time on.

You need to accept money that's handed to you and THEN deal with whether it's the right amount, applied in the right way, etc.

Use your money wisely. And if you find yourself using someone else's money, use their money wisely as well!

:-)

1 comment:

  1. Thanks! I Appreciate the Quality Direction.
    That was a Clear concise way of pointing We little business guys to the bottom line. Comtrol The cash
    Bruce

    ReplyDelete

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