Anita Campbell of Small Business Trends

Some businesses try to encourage early payments from customers by offering what are known as trade terms.  Typical trade terms might be 1/10/30.  Those terms mean that the buyer gets a 1% discount if paying within 10 days, and the balance is due in 30 days from the date of the invoice.

Sounds simple enough, right?

But I wanted to know if trade terms work in the real world, especially from the point of view of the company extending the trade terms.  So I asked John Mariotti, President and CEO of the Enterprise Group, and formerly the CEO of Huffy Bicycles.  He’s had a lot of commerce experience, both as buyer and seller.  Here’s what he had to say:

Question:  Why do sellers offer early payment discounts?

Mariotti: There are five reasons the seller would be willing to offer a discount to encourage early payment:

• Companies want their money.  It sounds simplistic — but isn’t.  Getting paid early is important in business.
• They want their money ahead of other people.  The buyer may not have enough money to go around.
• The longer it takes, the greater the risk that something happens and you don’t ever get your money.  The earlier you get paid, the less risk.
• It helps you from the perspective of working capital.  The more money you have in hand, the less need to find working capital from other sources.
• It lowers your costs of borrowing and can even substitute for loans.  The more money you get in hand, the less you have to borrow. This is important in times when it’s hard to borrow money or interest rates are high.

Question:  Is there ever a downside to offering discounts for early payment?

Mariotti: Yes.  Consider:

(1) Discounts cost you money.  Again, it sounds obvious — but discounts add up. A 1% discount for monthly invoices amounts to 12% interest a year.  A 2% discount, as some companies offer, would amount to 24% interest.

(2) Look out for the “double whammy.”  If you are having trouble getting a buyer to agree to a price increase, you might attempt to negotiate by offsetting the increase with an early payment discount. But the customer may squeeze you over price AND expect the discount — and still pay you later. read more

Last year,  during the 2008 financial crisis, the FDIC insurance coverage limits were hastily raised from $100,000 to $250,000 per depositor.

At the time, those higher FDIC limits were intended to be temporary, just through December 31, 2009.  The good news for consumers and small business owners alike is, the $250,000 FDIC insurance coverage has been extended through December 31, 2013.

In other words, you do not need to worry about that coverage going away at the end of this year.  Coverage was also extended to $250,000 through December 2013 for federally-insured credit union deposits through the National Credit Union Administration (NCUA).

The increased limit is large enough that with just a little advance planning, there’s no reason whatsoever for middle-class Americans to lose a dime from putting money into FDIC-insured banks or NCUA-insured credit unions.

In fact, by intelligently combining accounts having different types of ownership, you and your family and your business combined can effectively get a lot more than $250,000 in insurance coverage.

But — there are some gotchas that consumers and small business owners should watch out for — because under certain circumstances, you may have LESS coverage than you think you have.  Before I get into those gotchas, let’s take a look at how FDIC insurance works and the critical role it plays.

FDIC Insurance in Practice

From the typical consumer or small business owner perspective, FDIC insurance is pretty simple.  As long as your deposits are under the FDIC insurance limits, there’s zilch chance of losing any money you have in the bank.  The Federal government, which stands behind the Federal Deposit Insurance Corporation (FDIC), will repay your money in the event your bank fails.

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If you’re like me, you’ve been hearing bad economic news for so long that you just might be tuning it out.  Well, here’s some news that you don’t have to tune out — because it’s positive.

The National Federation of Independent Businesses recently came out with the latest edition (June 2009) of its Small Business Optimism Index (PDF) — and it’s a second month in a row of more positive optimism by small businesses.  It’s an important development.

The NFIB chart that I have so often pointed to in past months showing an ugly downward trend, now has a decidedly upward trend in the line more recently.   It’s much less painful to look at:

Here’s the money quote, by NFIB Chief Economist William C. Dunkelberg, and Policy Analyst Holly Wade, of the economic outlook for the economy for the rest of 2009 (bolding added by me):
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As I grow my business, I have learned that one of the most valuable uses of my time as a small business CEO is to manage the financial health of my business. In other words, is my business strong? Or — heaven forbid — are we skating on such thin ice that one or two bad months could mean the end?

My goal is to have a healthy business that can withstand a few ups and downs (emphasis on the downs) and let me get a good night’s sleep.  That’s my layman’s definition of a financially healthy business.

Monitoring and managing your business’s financial health involves more than simply maintaining a cushion in your bank balance. It’s more than just keeping accurate books. It is more than staying up to date on your accounts payables and not letting your accounts receivables get too stale. Those activities are important, true.

But managing your business for financial health is about taking a big picture view of your business, as interpreted through the detail of your financial statements.  Sound contradictory?  It’s not.

What I am talking about is understanding your financial statements, identifying which numbers matter most on those financial statements, and interpreting those numbers to make informed business decisions. In other words, you are identifying key numerical indicators that tell you how fiscally healthy your business is.

Knowledgeable finance people and savvy business owners call these key indicators “financial ratios.” By monitoring financial ratios, you can benchmark how well your business is doing compared to healthy businesses; watch for early warning signs of ill-health; and develop goals to work toward to improve in any areas of weak financial health.

The Business Owner’s Toolkit says this about financial ratios (also called business ratios):

“In order to assess how your business is doing, you’ll need more than single numbers extracted from the financial statements. Each number has to be viewed in the context of the whole picture.

The true meaning of figures from the financial statements emerges only when they are compared to other figures. Such comparisons are the essence of why business and financial ratios have been developed. read more

For millions of people, the health care system in the United States is a mess.  People are sick … and tired … of having a problem that grows worse each year.  Change is in the air.  The problem is, can we afford to reform the healthcare system?

Well I have a suggestion for how to afford it.  First, though, some background….

How Small Business Are Affected by Healthcare

The healthcare problem hits small businesses particularly hard.  According to the National Federation of Independent Business (NFIB), the cost of healthcare has been the #1 issue for small businesses for over 2 decades.  Amazing, isn’t it, that no one has solved the problem in all that time.

It’s an issue that doesn’t stop just with small businesses, but affects our employees, too.

Fewer than half (47%) of small businesses offer health care benefits to employees.  Of the ones that do, their employees likely have more limited coverage and contribute more toward coverage, than do employees in the large companies.  Employees in the smallest businesses pay an average of 18 percent more in health insurance premiums for the same benefits than those in the largest firms, according to research compiled by the NFIB.

What’s worse, new business owners are reluctant to offer healthcare insurance out of fear that coverage will become too expensive.  So the problem will only get worse if something isn’t done.

It seems to hit the smallest businesses — the solo business owners and microbusinesses with under 5 employees - the hardest.  These are the businesses least likely to have enough revenues to pay for health care. (For more statistics about small businesses and health care, check out the site dedicated to this topic, Fixed for America.)

A Growing Consensus: Something Must be Done

That’s why many are finding the concept of health care reform an attractive idea.  It’s just too big an issue to ignore.

Even Harry and Louise, the iconic spokespeople against the Clinton health plan, have been brought back, this time in favor of healthcare reform (although what that reform is, is not specified) and with the support of the NFIB and the American Hospital Association.

Not everyone agrees on how reform should happen, to be sure.  But most would agree something has to be done.
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Last week President Obama named another Czar.  We now have the TARP czar, the Energy Czar, and the Cyber Security Czar — among others.  According to Reason magazine, there are now 18 czars!

There’s just something about all these czars that brings out a bit of a rebellious streak in me.  Like many entrepreneurs, I have an independent streak anyway.  I prefer to be in control of business and not have others in control of me (otherwise, it would be easier to  just get a job somewhere).  So the idea of Czars — conjuring up images of Imperial Russia with one autocratic leader who is next to God — is not an image in keeping with my sense of independence.

Of course, some suggest that today’s czars are not like dictators and are instead intended to be problem solvers.

Maybe that’s the intention — but it’s not the best management structure.

First,  read more

A few different entities measure how business friendly the 50 states and District of Columbia are, when it comes to taxes.  Today let’s take a look at two of those rankings, and why you should care.

Small Business and Entrepreneurship (SBE) Council Business Tax Index

The Small Business and Entrepreneurship Council every year rates the 50 states and District of Columbia on how tax friendly their policies are toward small businesses.  The SBE’s rankings are here.  The map below shows the states (green is friendliest, red is least friendly, and blue is somewhere in the middle):

The rankings look at 16 different tax measures to come up with one tax score.  Among the taxes included are income, property, death/inheritance, unemployment, and various consumption-based taxes, including state gas and diesel levies. And so what are the top 10  jurisdictions with the best tax systems, according to the SBE?

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The SBA announced an  emergency loan program for small businesses this week, called ARC loans.  An ARC loan is sort of like a bridge loan, although not exactly.  The loans are designed to help struggling businesses that are having trouble meeting their existing obligations.  The loans can be used to meet those other obligations.

I’m not big on writing about SBA loans, for one simple reason:  they apply to so few small businesses.  The numbers of small businesses that get SBA loans each year is a drop in the bucket compared to other financing sources.  Fewer than 100,000 out of the 27+ Million small businesses in the United States get SBA loans each year.  I’m not saying SBA loans do not serve a good purpose — of course they do.  It’s  just that their impact is limited — they touch a relatively small number of businesses.

However, the recently announced ARC Loan program caught my eye because it potentially casts a wider net to touch businesses that ordinarily would not seek out or get an SBA loan.  Plus it is designed to help those struggling the most.  If this program can get started and out from under bureaucracy in time, it could be a useful program.

But, will it actually get off the ground fast enough?  And will lenders buy into it?

Let’s take a look at what the ARC loan program is — and is not: read more