Please answer the three question from the article below:
Q1) In setting up an accounting system, which one of the accounting functions is best illustrated in the article? Explain how you know. ?
Q2) Which one of the five common financial statements is best illustrated in the article? Provide facts to support your answer?
Q3) Which one of the uses of financial accounting is best illustrated in the article? Explain how you know. ?
The article:
HUGH MCHUGH, owner of Overhill Flowers Inc. in the Philadelphia neighborhood of Overbrook, made a declaration a few years ago. "No more house accounts," he told his staff.
These accounts offering credit were a business staple for the florist for years, covering about 85% of his business. Hospitals, corporations and other customers would order flowers, and he'd bill them at the end of the month, dutifully printing out statements, mailing them, processing the checks. Sixty days would often elapse between the time flowers were delivered and when the bill was paid. Customers often paid late, and about 2% didn't pay at all. "That's a significant blow to a small business with profit margins of 12%," he says.
Now, if anyone asks to open a house account, he requests a credit- card number, so he can collect immediately; for those already with house accounts, he got their approval to switch them to credit-card accounts. The simple change has not only ensured that he'll be paid, but it also has smoothed out the bumps of cash flow, as well, so that now in January, he isn't nervous about making payroll while he awaits payment for holiday bouquets.
Collecting debts efficiently, Mr. McHugh realized, is one of the best ways for small businesses to manage the ebb and flow of cash and hang on to precious capital. It's not unusual for businesses to borrow, often at high interest rates, or sell chunks of equity that they'd rather keep, because they've managed collections poorly. But most entrepreneurs would rather focus on their product, their service, their marketing, their lease, their health insurance -- anything -- before dealing with the gritty work of collections.
"One thing business owners always tell me is that they never thought about this when they started their own business," says Michelle Dunn, who owned her own collections agency, M.A.D. Collections, for years, and has written several books on the topic.
The time for an entrepreneur to think about collecting from customers is when he or she is writing the business plan, says Ms. Dunn of Plymouth, N.H. She advises businesses to establish a "credit policy" mandating that before they hand over a product to a customer who says "bill me," they will run a credit check on the buyer. She also advises small businesses to join Equifax or some other credit bureau to be able to pull credit reports for anyone applying for credit, and also to report late payers.
Small start-ups, she says, are often so happy to have customers that they are slow to take action for nonpayment. That's a mistake, she says. It's best to promptly make a phone call, and follow up with a letter, so the nonpayer understands that it's a serious matter. Any payment at all on the account -- even $5 -- is worthwhile, she says, because it establishes a legal record acknowledging the debt. "Once you get any kind of payment toward their balance, they have to pay the rest if you wind up in court," she says.
Her years spent tracking debtors have honed unusual instincts. She has found, for instance, that when she would call a young man about a debt and a woman answered the phone, she'd ask for the creditor by just his first name. "So many times it would be the mother of the guy," Ms. Dunn says, "and just think it was a girl calling. I'd say, 'Do you have his work number or his cell number?' and she'd give it to me," she says.
She also advises anyone who deals with college kids to not give up on the slow payers. "It's not pay, not pay for years," she says. "Then they are about to get married and need a loan. Suddenly, they'll pay to clear the debt." It also helps to remind nonpayers that the unpaid debt shows up on their credit report, making it difficult for them to obtain additional credit.
Entrepreneurs who take a laissez-faire attitude on collections tend to have sad tales to share -- particularly solo operators, such as consultants. David Leopold of Cincinnati puts networks together for small business, making money by brokering those relationships. When a client was late paying him, he was stuck and still had to pay his own vendors. "I had to borrow money at a very high interest rate," he says. "That hurt." Another time he took a client to court for nonpayment of $1,500, but because the client was "a friend," he had no written contract. The judge threw out his case. "To a small-business proprietor, that check is our paycheck," he says.
Even with a contract, collections can require great stamina. A client owed Julie Phillippi, a Cincinnati marketing consultant, more than $3,000 for months. She could have turned it over to a collections agency or written it off, but the principle mattered to her. "I did good work for him," she says.
After months, she took her contract to small-claims court, and following many delays, won a judgment against him. He ignored it. She put a lien on his house. She tried to garnish his wages. She finally took a step called a "personal body attachment," in which a couple of bailiffs were going to arrest him for contempt of court. At that point he paid, in cash. One bright spot amid the six months of aggravation: The lawyer representing her adversary was so impressed by her resolve that he hired her for a marketing project.
The nasty episode made her review how she handles collections. Now she invoices twice a month, rather than once. "It's a pain, but I get money in the door more often," she says. And she has begun to tack on a 10% interest payment for bills more than 30 days late, which she highlights with a marker. That has speeded up payment, too.
Big corporate customers are a different sort of challenge, says Brenda Cusick, a founder of ClickWare Inc., a Moorpark, Calif., database company. She makes it a point to become chummy with the accounts-payable clerks who work for her big clients, calling to check on an invoice, but always chatting about the clerk's children or recent vacation -- details that she meticulously tracks in her own database. Those relationships tend to speed an invoice through a big corporation's otherwise slow bureaucracy, and have helped ClickWare and its sister company grow to about $3 million in revenue without outside investors, she says, even as the founders have poured money into developing new software products.
Her rapport with the accounts clerks came in quite handy recently. Ms. Cusick got word from a very big corporate client that it was undergoing a financial audit. The auditor concluded that the big corporation was indeed paying Ms. Cusick promptly -- but it wasn't taking a 2% discount to which it was entitled for early payment. Many companies offer such a discount, but typically the onus is on the customer to subtract the discount from the payment. For Ms. Cusick's client, the 2% over many months piled up to more than $10,000. The company wanted it back from ClickWare.
Panicked, Ms. Cusick called the accounts-payable clerk at the big company. "Don't do anything yet," the clerk advised. Soon Ms. Cusick got a second notice demanding reimbursement. "Sit tight," the accounts-payable clerk told her, adding that other vendors got the notice and were resisting. Ms. Cusick did nothing, and no further correspondence arrived. "I made two friendly phone calls and saved thousands of dollars," she says.
Similarly, Ms. Dunn of M.A.D. Collections says her best collection "trick" is simply being nice and straightforward. She recognizes that many debtors have been beset by medical crises or other tragedies. In those cases, she'd often intercede on their behalf, making a case to settle the debt for a smaller lump sum, say, when an income-tax refund arrived. "Some people have actually sent me thank-you letters for being so nice," she says, telling her that they paid her before other creditors because she took the time to listen to them. "I've saved those letters," she says.