Bankruptcy Alternatives
November 30, 2008
Few entrepreneurs would state that they wouldn’t try almost any alternative to avoid business bankruptcy. In addition to the financial impact on the owner, employees, and creditors, business bankruptcy takes an emotional toll as well. If you have an ailing business, you should take the necessary steps to fix the business and avoid bankruptcy. It won’t be simple, but on the other hand, only about ten percent of businesses who have gone under Chapter 11 filings ever recover. So, if at all possible, work to avoid business bankruptcy rather than use it as your first attempt to save an ailing business.
Chapter 7 is an even less desirable option than a Chapter 11 bankruptcy filing. A Chapter 7 filing simply liquidates everything connected with the business and may still leave you with certain attachments against your personal assets. For instance, employee payroll taxes can be covered by attaching the business owner’s personal assets.
A business bankruptcy is painful financially when you must sell assets typically at a loss to you, and you must pay for the services of the bankruptcy attorney in order to get the bankruptcy filed correctly. These specialists in bankruptcy law don’t come cheap. In addition to the financial impact there is a tremendous emotional impact as well to both you and your employees.
Some of the disadvantages of a business bankruptcy include:
Attorney fees - filing for bankruptcy may be the last option to save a dying business, but the hefty attorney fees must be paid, usually in advance. A bankruptcy judge can even order liquidation of the company to pay for the attorney fees and court costs.
Control - when your business is in bankruptcy status, even with Chapter 11, you lose control over all the major decisions of your company. The bankruptcy court gets to decide how your business will be run.
Taxes - going through a business bankruptcy does not eliminate unpaid taxes on your earnings. The Internal Revenue Service can collect back taxes and seize company assets, even when the company is bankrupt. Employment taxes which have not been paid can result in seizure of the owner’s personal assets.
Chapter 11 filing usually makes things worse for the business. Chapter 11 is followed by Chapter 7 in about 90 percent of the cases.
One or more of the following action steps may be used as an alternative to a business bankruptcy.
Downsizing - This is often the most logical first step in cutting back expenses. The business owner may be forced to let 60% of the employees go in order to save the business and the jobs for the remainder of the employees. If cutting back on staffing is in the future for you, make sure you follow all the personnel rules and requirements in letting people go. If you don’t have a written personnel policy to cover terminations of this sort, you’d be wise to have one in place as soon as possible. You need to think about such things as employee benefits, layoff notices, potential labor contract requirements, accrued sick leave, vacation or holiday time, and even contract payouts.
Restructuring Debt - Make every effort to contact creditors and negotiate a more lenient payback plan which will extend payments over a longer period, or perhaps reduce interest rates on the debt. Most vendors will agree to work with business owners to develop a plan for repayment, especially when the alternative is a Chapter 7 filing which may result in no return at all for the creditor. Even if you were to choose a Chapter 11 filing, you would still need to provide a workable debt restructuring plan.
Turnaround Specialist - Rather than spending money on an attorney to manage a bankruptcy, why not explore the services of a turnaround specialist. As the name suggests, these are individuals and firms experienced in working with the management of ailing companies in order to point our solutions to problems which are causing the business to be less than healthy. These turnaround specialists firms have experienced people who know how to pinpoint the problem areas and suggest solutions which work.
Cash Flow - Often the problem with a business which is sliding downhill into bankruptcy is not the debt it carries, but the cash flow. The debts may become due and payable at one time, while the cash doesn’t arrive until days or weeks later. The importance of a good accounting system can’t be denied, but it helps to understand the flow of the cash and how it might be adjusted to help provide an alternative to bankruptcy.
Collecting Cash - Tied to the cash flow of the business is the matter of collecting cash owed to the business. While your customer’s may appreciate your lenient receivable policy, you need to keep receivables at the lowest possible level consistent with good customer relations. As a small business owner particularly, you don’t have the luxury of procrastinating. You need to develop and follow a systematic and consistent collection schedule. You can still be flexible with your customers in the case of extenuating circumstances, but ensure that a firm repayment date is set and held to. If you can see that collection from the customer is not happening, there is a time when it’s better to turn the account over to a collection agency and write it off your own books.
In addition to the above alternatives for avoiding business bankruptcy, you may be able to cut salaries for management and or employees. Again, less money for a while is certainly a better option than losing the business completely. If you’re behind on the tax bill, try to work out an installment plan with the Internal Revenue Service. Don’t try to hide the situation from your employees. Let them know what’s going on and if possible, how they can help. Company loyalty will go a long way in helping to keep your business going even if times are tough.
Finally, make sure you know precisely what your personal obligations will be in the event that you can’t avoid business bankruptcy.
When Good Clients go Bad
November 29, 2008
Particularly for the small business person, a good client in terms of the amount of business which he or she provides can become problematic if the client starts to get slow about keeping the account current. Unfortunately, some large businesses make a habit of paying their accounts only when absolutely forced to do so. The buyer may be practicing good cash flow techniques when he does not pay bills until they are due, but accounts receivable which are aging to thirty, sixty, or ninety days or beyond can have a drastic detrimental effect on the functioning of the small business owner.
Yet, the creditor may be reluctant to press for collection of the outstanding debt because of the fear of losing the sales volume brought in by the customer. Or, perhaps the customer has hit a bumpy stretch financially and is not paying as they had in the past. While not wanting to add to the troubles of the customer, the business must maintain its own cash flow in order to survive. If as a merchant you are in the situation of having a previously good-paying customer obviously struggling to pay, or not being prompt with payments. If the customer is making excuses, or begins avoiding your telephone calls or ignores politely worded reminders that the payment is past due–what do you do?
Some merchants avoid turning collection accounts over to a third party collection agency because of the negative press or unfavorable reputation of collection agencies in general. The other alternatives are to continue attempting the customer, or to write off the debt and forget it. Unfortunately, if this happens too many times, it may eventually have a severe effect on the business.
So, if you determine you want to retain the customer and collect the debt, what can you do? Probably your best chance of collecting the debt while retaining the customer is to use the services of a skilled professional debt collection agency. Some of the points which you should think about when you choose a collection agency are:
-
Use an collection agency that is familiar with the type of business debts which you incur. For example, a debt for a doctor bill might be handled entirely differently from a debt for a student loan.
-
The collection agency should be members of professional organizations and should have all appropriate insurance, bonding and governmental licenses.
-
Use should obtain and check references about the collection agency in order to be sure they are dependable.
-
Visit the collection agency often just observe the collectors in action and to let the agency know you care about methods.
-
You should also review reports showing how successful the collection efforts have been in recovering outstanding debts.
Often, by retaining the services of a competent and professional collection agency, the customer can be retained while convincing him or her that the monies they owe to the business are legitimate and must be paid. A courteous and helpful attitude in all dealings with the debtor will always fare better than rude and overbearing collectors when retaining the customer’s business.
Business Financials
November 26, 2008
One of the major components in the successful operation of any small business is an understanding and utilization of key financial information. The documents usually associated with financial reporting include the Balance Sheet, Cash Flow Statement, and Statement in Income and Loss. One other statement, The Statement of Changes in Shareholders’ Equity is used more commonly in businesses structured as a corporation, but can also be used in any business where more detail about the owner’s equity is desirable.
Balance Sheet
The Balance Sheet is set up in the same way as the basic accounting equation, i.e. Assets = Liabilities + Shareholders’ Equity. In other words, if all the assets of a business were sold off at the listed value and all the debts or liabilities were paid off with the proceeds, the amount left or shareholders’ equity is the value of the business.
Assets are anything of value that a business owns. This can be things like office space or computers, or the paper and pens in the supply cabinet. It can also include intangible things like goodwill in the community, trademarks, copyrights and trade secrets. Assets are usually listed on the balance sheet in the order in which they will be converted into cash. Current assets include cash and inventory items which are expected to be sold within one year. Non current assets are intended to be sold, but will generally require more than one year to accomplish the task. The third asset category is Fixed Assets which are those items used in the operation of the business and are not intended to be sold. This might be vehicles, buildings or equipment.
Liabilities are debts owed by the business. They are usually listed according to their payoff dates. Current liabilities are expected to be paid off within the year. Long term liabilities have a payoff schedule beyond one year.
The shareholders’ equity is the amount invested in the business by the owners, plus or minus the earnings or loss since the beginning of the period. Income can either be distributed as dividends or retained as an increase in equity.
Income Statement
The income statement begins with the gross revenue or total income from sales and reduces it by all decreases to revenue first. Reductions to revenue include sales returns and cost of sales to arrive at gross margin. The gross margin is reduced by expense and expenditure categories such as operating expenses and depreciation. The resulting figure is known as income from operations.
Most companies then account for interest income and income expense before arriving at the taxable income figure. Once income tax is subtracted, you have the net income which is often further shown as an earning per share. This is the net income divided by the number of outstanding shares.
Cash Flow Statement
This statement identifies three major sources of cash income and output in order to ensure that the business has enough cash to operate. This is recognition that a company can make a profit as shown on the income statement, but still not have enough cash to get from day to day. The cash flow statement usually consists of three major parts: Cash from Operations, Cash from Investing Activities and Cash from Financing Activities.
Understanding Chargebacks
November 15, 2008
A chargeback happens when a customer contacts his or her credit card-issuing bank and requests for a refund for a particular purchase that they made through their credit card. The reasons for chargebacks can vary greatly, but most are usually a result of dissatisfaction in the transaction.
The customer might or might not have informed the merchant about solving the situation before making contact with their issuing bank; they might even be making up the whole story. Unfortunately for merchants, it is their responsibility to ensure smooth transactions and customer satisfaction. Failure to do this can lead to chargeback.
Most common causes of a chargeback:
- Fraudulent transactions. Most chargebacks result from fraudulent transactions wherein the credit card was used without the proper authorization or the consent from the cardholder (i.e. due to theft or loss of card).
- Buyer-seller disputes. Chargebacks also can occur as a result of the buyer’s dissatisfaction on the product. When the buyer does not get the expected product quality, he or she can cancel the order anytime and apply for chargeback. This kind of dispute usually happens when the customer receives a defective item, an item different from what was agreed upon, or worse, never arrived at all.
- Technical problems. These involve unexpected technical complications between the issuing bank and you, the merchant. Common problems include being charged the wrong amount, being billed twice for the same transaction, as well as authorization problems (transaction was declined by issuing bank but customer was still charged) may be applicable for chargeback.
Avoiding Chargeback
Much too often however, chargeback is used by fraudulent users who take advantage of this credit card feature to get their money back without a valid reason. These are the types that merchant should avoid at all times. To do so, merchants must ensure that the cardholder would not have any reason whatsoever to make a dispute. Here are a few tips to minimize the possibility of chargebacks in your successful transactions:
- When putting up your business, make sure that you use a clear Doing Business As or DBA name that customers will easily recognize. Vague company names that fail to accurately describe what you do might either not sell, or confuse your customers when they review the billing statement sent to them at the end of the month. Unrecognized DBA names reflected on billing statements is a very common cause of chargebacks.
- Put your contact number on your customers’ billing statements. If your DBA is unrecognizable, they can call you up immediately to check who you are and what the charge was about.
- If chargeback is requested and a retrieval request was sent to you, reply to it at once. You are only given limited time to resolve any chargeback so that if you pass up on this time, you will forfeit your chance to counter the chargeback. In case the issuing bank still has more requests or questions, there will still be enough time to get those important information from you.
- Do not, at all times, accept expired credit cards.
- Get full authorization for each sale. If the transaction is declined, never accept them or split them into small amounts.
- Always make sure that the quality of the items you sell is standard and will meet customer expectations. Work closely with your customer so that you can establish a mutual buyer-seller relationship and a satisfactory solution to potential problems.
- If you get unusually large or suspicious orders, always double check to see whether the transaction is legitimate. Verify the customer’s address, and check the customer’s name, phone number and address with the issuing bank. Also, try to use the anti-fraud services being provided by the processing bank such as AVS and CVV2.
- Always get a signed proof of delivery. Make sure that you will be able to show a shipping tracer log which proves that the customer received the goods ordered.
- Only charge the client’s account when the goods have been shipped. If there are delivery delays, do not process the charge just yet.
- Be careful about high-amount orders that are requested to be sent immediately (the following day).
- Make sure that you provide accurate images and descriptions of your products in your website. You should tell your customers exactly what to expect to prevent dissatisfied customers.
Merchants are at the losing end when chargebacks are concerned. But avoiding these instances is possible. It only takes proper caution and doing what you are set out to do: make your customers happy with each sale.
Data Collection
November 2, 2008
For merchants, it is important to remember that you only need certain, specific information from the user to identify and authorize the transaction. For ordinary transactions, you only need the customer’s name, credit card number, contact information and address for verification purposes. A transaction can be completed when you are provided with all these information.
Some merchants tend to make the mistake of going overboard by asking for the customer’s social security or driver’s license number in order to be 101% certain that the order is authorized and legitimate. Going overkill on your data collection practices can lead to detrimental effects to your business. Why, you ask? The occurrence and increasing rates of online identity theft online has led to paranoia on the part of most customers. Fraudsters use numerous techniques for obtaining user information online so that they can use them for illegal transactions. As a result, online users are now hesitant about revealing their credit card numbers out of fear that someone else might obtain it and use it for unauthorized transactions.
Asking too much information then would cause your customers to get suspicious about your website. If they are uncomfortable with the questions and information you ask, they might not proceed with the purchase even if they highly desire your product offerings.
On the other hand, it is often common for merchants to try to get specific information about their customers for marketing purposes. It is common to ask about the customer’s lifestyle, hobbies, interests and annual income. These kinds of information can be used so you can target the customer for future marketing strategies. These questions are understandable, but make sure that you do not ask for more than what customers are willing to reveal.
When asking for information like these that is not necessarily needed for the transaction, always make sure that you make it clear as to what you need it for and what benefits they can get by providing the said information. Make sure you convince them that the information they give will not be used for purposes that will not be beneficial for them.
It is also very important to have a company privacy policy and have it posted somewhere accessible in your website. You can advise your customers to visit your privacy policy page before ordering, as this builds customer confidence.
Also, many online businesses require customer membership before purchasing the products and services available. Signing up to become a member of the site will require customers to come up with a username and password. A password retrieval method is usually employed just in case the customer forgets his or her password. When choosing a password retrieval method, make sure that you provide one that does not ask for very vital information that would cause hesitation on the part of your customer.
In any online business, customer trust is a valuable asset. You must win this trust to ensure success in your venture. However, getting customer trust entails customer respect, especially on matters concerning privacy. Thus, make sure that you treat customer privacy with utmost care by asking just enough information to get your transaction going. Customers will surely thank you for it.