Can You Continue to Fund Your Business Growth? A Look at Your Balance Sheet

Can your membership business continue to fund its growth? The balance sheet can answer this for you right away.

By knowing how to read a balance sheet, you’ll also be able to have a relevant discussion about it – or a discussion about the balance sheet of a business you’re interested in acquiring.

In addition, the balance sheet has two other uses: 1) Vendors and lenders can use the balance sheet in considering the creditworthiness of the business. 2) Owners and potential investors can use it to help determine the value of the business.

Let’s look at the balance sheet to get a picture of your financial health.


Getting to Know the Balance Sheet

First off, the balance sheet is a snapshot that helps you identify and analyze trends in the health of your business. The balance sheet reports on the financial condition of a business at a specific point in time.

Balance sheets are often shown with information from two or more dates, such as year-end information for the last two years.

Other key financial statements, such as profit and loss statements and cash flow statements, report financial activity over a given period of time.

Breaking It Down: How to Read a Balance Sheet

The balance sheet is made up of three parts:

  1. Assets — what you own
  2. Liabilities — what you owe
  3. Owner’s equity — the owner’s stake in the company

Take a look at the example balance sheet below. The company and amounts are fictional.

Balance-sheet-example-showing-assets-liabilities

 

All About Assets

Let’s look at the left column first titled Assets.

What are assets? Assets are the things that the business owns that have monetary value, such as equipment. The assets are listed in order of liquidity, which is how quickly the items can be turned into cash.

Here’s an explanation of each line item:

Current Assets — assets that can be turned into cash within one year of the balance sheet date. The most liquid asset of every business is of course cash.

Accounts Receivable — amounts owed to the business by customers who made recent purchases on credit terms.

Inventory — items purchased by the business for resale to customers.

Prepaid Items — items that have been purchased but will be used and expensed on the profit and loss statement in a future period. A good example of a prepaid item is paying an insurance premium six months in advance.

Fixed Assets — sometimes called Property, Plant, and Equipment (PP&E), fixed assets are not considered very liquid and are therefore excluded from the current assets. Except for land, fixed assets depreciate over a period of years. They are listed at their purchased amounts, less accumulated depreciation to arrive at their net amount. Land is thought of as never losing value and is therefore not depreciated over a period of time.

A Look at Liabilities

What are liabilities? Liabilities are what the business owes to the various creditors and vendors. Like assets, liabilities are shown in current and non-current sections.

Again, an explanation of each line item from the top:

Current Liabilities — those amounts that must be paid within one year of the balance sheet date.

Accounts Payable — monies owed to vendors and suppliers for items acquired on credit.

Wages Payable — owed to employees and taxes payable amounts due to governmental taxing authorities.

Unearned Revenue — an item that is often not well understood by non-financial individuals. Unearned revenue is money received by the business for services not yet rendered or product not yet delivered to the customer. A good example in the member-service industry is membership fees paid-in-full by a member for the next year. The money has been received but the service for which the member is paying has not yet been rendered. Examples would be a one-year Martial Arts membership or a six-month Personal Training package. The service is still owed to the customer and therefore the revenue is unearned and reported in the liability section.

What Financial Analysts Look for When Reviewing Your Balance Sheet

One of the most common ratios that analysts use when viewing a balance sheet is called Working Capital, which is defined as current assets less current liabilities. The current ratio tells the reader whether or not the company has the liquid assets required to pay its obligations owed during the next year. If current liabilities exceed current assets, the company has no working capital.

Current Ratio is another common ratio used which is current assets divided by current liabilities. Higher ratios indicate more liquid companies. It is possible to be too liquid as investors would view the company as sitting on idle cash that could be invested elsewhere.

Non-Current Liabilities — amounts owed to creditors beyond one year ahead. Non-current liabilities are also referred to as long-term liabilities. The most common long-term liability is bank loans which are paid over several years.

Owner’s Equity — this equals assets less liabilities. The equity is comprised of the investment made by the owners into the company and the earnings retained by the company (versus distributed to the owners as dividends).

When All Is Said and Done

So now you have a basic understanding of what a balance sheet is and what the terms mean.

Remember that the balance sheet only shows a snapshot of the company at one particular date in time. It’s a useful tool to ensure your business finances are properly managed — and it can help uncover the true worth of your membership business.

To get the complete story on the health of your business, you must review the balance sheet, along with the profit and loss statement and cash flow statement.

Profit & Loss Statements: What Every Business Owner Should Know

As an owner or manager of a business I’m sure you have heard of Profit and Loss (also known as P & L). But do you know what it is and understand its components?

It”s important to understand in order for you to talk knowledgeably with your managers, bankers, tax advisors, and investors. In this article, I”ll show an example of a P & L Statement and explain what the terms mean.

A Profit and Loss Statement or Income Statement is one of the documents that show the financial condition of a company. Other documents include a Balance Sheet, Cash Flow Statement, and the Statement of Retained Earnings.

Here is an example of a P & L and an explanation of each item:

ABC Example Company, Inc.

Profit and Loss Statement
For the Year Ended December 31, 2011

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The first section of the Profit and Loss Statement is the heading which shows the name of the company and the period of time for which the statement relates. Every Profit and Loss Statement is for a specified period of time. It is usually for one year but could be a week, month, quarter, or any other time period.

The first line of the P & L, after the heading, is Sales, or Gross Revenue. This is all the money reported for sales of products and services. The term gross is used in business to mean that the item is shown prior to deducting certain expenses.After expenses are deducted, the term used is Net.

Next are Discounts and Returns which must be subtracted from the sales to arrive at Net Revenue. On occasion, you will see these first three lines shown as one line which would read as Revenue Net of Discounts and Returns.

After that comes the Cost of Sales. These are costs which can be directly traced to the products or services sold. Examples of such costs are the purchase costs of items sold, labor associated with making the products or providing the service, and sales commissions.


Net Revenue Less Cost of Sales arrives at Gross Profit or sometimes called Gross Income.

Again, it is called gross because there are still some expenses that must be deducted to show the net profit or net income. Those expenses are called the Operating Expenses. These are the expenses that cannot be directly traced to the products or services sold. Occasionally you will hear these costs be referred to as Overhead Costs. Examples of operating expenses are owner and management salaries, marketing costs, utilities and the like.

After the operating expenses are deducted, we arrive at *EBITDA. This is an acronym for Earnings before interest, taxes, depreciation and amortization. EBITDA is a key indicator for companies that have a large amount of debt and/or property, plant, and equipment (fixed assets). This line shows the bankers and creditors how much money is available to run the business going forward. EBITDA is sometimes referred to as operational cash flow. This is generally not a line that you would see on the P & L of a small company with little debt or fixed assets.

Interest and taxes are self-explanatory. Depreciation is the term used to spread the cost of fixed assets over a period of several years. For example, a building is purchased for $500,000. Rather than showing this cash outflow as an expense in year one, the building would be placed on the balance sheet as a fixed asset and depreciated over say 30 years. So the depreciation expense that you would see on the Profit and Loss Statement would be 1/30th of $500,000, or $16,667.

Amortization is a similar term used to account for items over a period of time greater than one year. It usually refers to loans.

After interest, taxes, depreciation and amortization are deducted, we arrive at the last line which is called Net Income. This is sometimes called the bottom line. We started with Sales, which is the top rung of the company ladder, and as we deducted certain items, we descended the ladder to arrive at the bottom rung or bottom line.

I hope this brief explanation of a Profit and Loss statement helps you in all your future discussions regarding your business’s profitability.

Of course, should you have any questions, feel free to contact me at mconnor@membersolutions.com.

About the author: Michael Connor is the Director of Finance for Member Solutions. He is responsible for the financial reporting and budgeting process for Member Solutions as well as overseeing all cash flow and managing banking relations.

Opening Another Business Location? Consider This First

Client Question: I’m thinking of opening another location. What are the most important considerations to keep in mind before taking this big step?

Before taking this step, Martial Arts business owners must take a very serious look at their operations. They must ask themselves if the first location is built around them or if it’s built around systems. If the answer is that it is built around them, then I would suggest making some changes before opening another location … otherwise, the level of stress and burden does not simply double, it goes up exponentially. Additionally, if the business is built around “you”, it is kind of difficult to be in two places at once and you will either end up with one location failing or possibly both!

In order for Martial Arts school owners to make the jump from one to multiple locations, everything must function as a business … and a “successful location” does not mean it functions as a “business.” Let’s look at this a bit further …

FIRST THINGS FIRST

Michael Gerber, in his book, E-Myth Revisited, does an excellent job of describing how many people build themselves a job but not a business. I highly recommend this book to everyone considering multiple locations. If you are unsure of the answer to the question about your business being built around you or around systems, then I will simply ask you this … Can you leave your business right now and have everything still operate essentially the same with you not there for a day, a week, a month?The answer to this question (if you are honest with yourself) will tell you where you are.

Some may say, “Well, I would need another instructor or sales person if I wasn’t there” … and that’s fine … so if I put another instructor there, would your operations continue? Or do operations rely on the position being filled by you? If it relies on you, then it’s not a system, it’s your job, but there is hope … you can start today and build systems so you can step away or even promote yourself out of being tied down to the business. This opens up a tremendous opportunity for growth much like franchises do for their franchisees.

I am in a position where I can answer this question with an absolute “YES, I can step away and leave.” In fact, as I update this article, I am sitting under a cabana in Mexico with my wife and friends about 10 ft. from the pool and maybe 50 yards from the ocean. I say this not to brag, but as evidence or proof that it is possible – because, at one time, I was one of the WORST offenders of micromanaging and having the attitude of “I have to do it all because I can do it better”. Back then I was chained to my business and limited myself in many ways. Some may then point out that I”m working in Mexico, but that”s just because I enjoy it, not because I have to … and meanwhile all of my businesses are running, making money and growing.

A common trait among martial arts business owners is that we are passionate and willing to work very hard and long hours. This is both a strength and eventually a weakness. One of the reasons most owners work so many hours is because they know they can do things best (like I mentioned that I used to do). They do not delegate tasks for fear that others will not do it as well as they do, and they have so many things to do that they cannot afford to take the time to effectively train other staff. This is an ongoing problem that leads to burnout and frustration for many. Years ago I realized and accepted the fact that even though someone I train may not be able to accomplish as much as I do, eventually we can accomplish much more as a team.

Think of the math.If you have five staff members each accomplishing 80% of what you could do, that is still 5 X 80% = 400% of what you could do by yourself.

This is the mentality we need to take to move from being “achievers” to “leaders” in our businesses and is a must to move towards the goal of multiple locations.

I mention all of the above first in answering this question because far too many people in every business field (not just martial arts) have taken the step to open a second location and it has turned into stepping on a land mine rather than taking the step towards “doubling their profits,” which is what most people believe will happen.

In the majority of these cases, the likely cause of the problems was the fact that the business was too dependent on the owner or one key person, and systems were not in place to help others be successful in executing the business operations. Essentially it was a personality based business. Though personality is important, if you base your entire business on this, you are not building an asset you can sell. You are also not building a system to duplicate because we allow ourselves to overcome the shortcomings of our business through our own individual skills and relationships.

If as an owner, you can honestly say that your martial arts school is built on systems and that you could walk out on your staff and the school would still operate effectively, then we can move on to the next step in consideration of a second location.

This is not usually the case, especially for those out on their own. More often schools who work with an organization or a franchise have additional support for this, but in every case, an honest assessment here can save a school owner piles of money and grief from making a bad decision before they are ready by letting them know there is more preparation to be done.

In my next post, I’ll cover additional benefits and necessary planning steps to opening a new location. Until then, take a hard look at your business and honestly answer the question:

Is your business built around you or is it built around systems?

About the author: Jeff Dousharm began his martial arts training over 22 years ago with Senior Grand Master Bert Kollars, one of the founders of Tiger Rock Martial Arts International. He’s a 7th Degree Black Belt and a certified instructor in different programs ranging from Taekwondo to CDT. He currently operates seven Tiger Rock Academies in Nebraska and Florida, www.tigerrockmarialarts.com.

Jeff also owns several companies outside of the martial arts field including Tomorrow”s Online Marketing (websites, SEO and online marketing), Paradigm Impact Group (speakers, professional development and business consulting), J. Victorian Development (commercial properties), Point Blank Tactical Safety and Firearms Training, and a few other startup companies being launched in 2012. He can be reached at JDousharm@windstream.net or Jeff@paradigmimpactgroup.com

Planning & Preparation Tips for Opening Another Business Location

Question: I”m thinking of opening another location. What are the most important considerations to keep in mind before taking this big step?

In my previous post, I recommended taking a long hard look at your business ― well before taking the plunge to open a second business location.

After your self-assessment, if you can honestly answer that your business is built on systems ― that your business would function efficiently and effectively without you being there — then, in my opinion, you are ready to seriously consider opening a second business place. In this post, I’ll cover some of themust-have elements to successful expansion and the benefits of running a multi-location business.

Based on historical information, owners opening another business location must lay out a very detailed business plan

I sit on a board of directors for CDR (Community Development Resources) and for the SBA … and I am still shocked at how many small businesses apply for a loan and do NOT have a business plan. The same is true with most martial arts schools and fitness businesses … they have an idea but not a true business plan. Some put together detailed class plans and curriculum, but then leave the business to chance. You can still have a profitable (though not maximized) operation in this way, but it will definitely be built around you, not the system or a plan, and this can be even more dangerous as it leads to false assumptions and beliefs.

As part of the business plan, the owners must carefully consider the actual budget.

A unique benefit to opening multiple locations in a surrounding area is the concept of cost sharing. For example, two locations that are somewhat close to one another can share:

• Advertising expenses
• Operational staff expenses (some duties can be handled by the same staff for both locations)
• Event and seminar expenses
• Insurance expenses
• Inventory expenses
• Legal expenses
• Accounting expenses
• And more

Of course, some of these areas depend on the actual ownership and business structure so be sure to check with your CPA and attorney in planning this process.

If the locations are not in a close proximity to share some of these expenses, the second location can still benefit from the historical data and records of the first in the business plan. Additionally, the first location can serve as a source for more staff, instructors, and support for the second location. Take advantage of what you know from your first location to provide for a very realistic and accurate plan for your new facility and location. The more planning and preparation that goes into the second location, the greater your chances of success will be.

The final area I will mention is the idea of capital. Though there are some cost savings in shared expenses and efficiencies we have developed through experience (also known as making costly mistakes in our past), we all get the idea that we will be able to do our next location “cheaper.” This is good in theory, but it rarely happens.

We need to be sure we have enough capital up front to really make things happen.

Lease space, utilities, build-out, advertising costs and other expenses are always on the rise. These areas offset many of the savings.

I opened my first part-time club in 1994 and my first full-time “school” in 1997. The cost comparison to my more recent openings or moving facilities to new locations is an increase of about 3-5 TIMES the amount it cost before! Then consider the potential cost of employee turnover which generally has a greater risk of occurrence with multiple locations.

Ask yourself what roles must be filled to make that new location fully functional. If you put a key person into a role at the new facility and that person quits, do you have a contingency plan? These can be alarmingly large costs of doing business, so I would generally recommend that once you figure your capital needs to make the second location happen, double it, or at least raise it by 50% because experience in multiple industries shows that this is generally the reality. This is not a negative thing, but rather a positive because when you are fully prepared for a new location and have the capital you need, you can fire off the marketing campaigns you need and do the things necessary to make it successful versus cutting corners and hoping that you somehow make it.

In summary, plan for the worst, budget for the worst, realize you will not likely be doubling your profits, and then get ready for a lot of work to make your next location a real success story.

I say these things not to be “Mr. Doom and Gloom,” but mainly because I know that when you prepare properly, you come out the other end a lot better off and can avoid stepping on the land mines that destroy all the hard work we have put in to get to where we are now.

Some people imagine becoming Black Belts and that when they are Black Belts they will be able to fight off one, and maybe even multiple attackers and never even get hit! Reality says that in a fight you are going to get hit, and it’s those of us who are prepared to deal with the hits and keep fighting who make it through. Business is much the same way. We are all going to take hits, we just need to be prepared and train our people to win whether it’s a fight or a sale or the grand opening of your next location!

One of my favorite quotes I will leave you with is from Rocky:

“The world ain”t all sunshine and rainbows. It is a very mean and nasty place and it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain”t how hard you hit; it”s about how hard you can get hit, and keep moving forward. How much you can take, and keep moving forward. That”s how winning is done. Now, if you know what you”re worth, then go out and get what you’2013-10-17 18:50:44’re worth. But you gotta be willing to take the hit, and not pointing fingers saying you ain”t where you are because of him, or her, or anybody. Cowards do that and that ain”t you. You”re better than that!”

Rocky Balboa Speaking to his son in Rocky Balboa (2006)


About the author: Jeff Dousharm began his martial arts training over 22 years ago with Senior Grand Master Bert Kollars, one of the founders of Tiger Rock Martial Arts International. He’s a 7th Degree Black Belt and a certified instructor in different programs ranging from Taekwondo to CDT. He currently operates seven Tiger Rock Academies in Nebraska and Florida, www.tigerrockmarialarts.com.

Jeff is also a member of the Member Solutions Business Advisory Team and owns several companies outside of the martial arts field including: Tomorrow”s Online Marketing (websites, SEO and online marketing), Paradigm Impact Group (speakers, professional development and business consulting), J. Victorian Development (commercial properties), Point Blank Tactical Safety and Firearms Training, and a few other startup companies being launched in 2012. He can be reached at JDousharm@windstream.net or Jeff@paradigmimpactgroup.com

Buying an Existing Martial Arts School or Fitness Business? 8 Tips to Hit the Ground Running

Are you considering buying an existing martial arts School or fitness facility? It’s essential that you cross all your T’s and dot your I’s prior to pulling the trigger.

Here are eight tips for you to consider so you can hit the ground running.

1) Get comfortable regarding the reason that the seller is selling.

Retirement would be a great reason as they would want the school (and their reputation) to have continued future success. Other reasons that the seller may disclose are: family issues, change in profession, focusing their time on another school location or the like.

Rarely, if ever, would a seller tell you that they are selling because they are losing money. Take every reason they give you with a grain of salt and remember that if everything were peaches and cream then they would most likely not be selling. Be very wary of a seller that has only owned the business for a short while.

2) Insist that the seller signs a non-compete agreement, no matter what reason they give for selling the business.

The non-compete prohibits them from owning, working for, or forming any alliance with another gym or Martial Arts school for an agreed-upon time and geographic region.

3) Be sure to perform due diligence on the business location.

It’s been said many times, but cannot be stressed enough, that location is one of the most critical components of success for a business. Get comfortable that there is adequate traffic flow, adequate parking, and access to potential members. Also consider the physical safety of members at your new location, as safety is a top priority.

4) Meet with a reliable commercial real estate agent.

Discuss the future happenings of the business community that may positively or negatively affect your location.

5) Get professional help.

Hire a CPA to review the tax returns of the business for the previous several years. You want to see years of steady, reliable cash flow. If you see losses for reasons other than a high salary for the owner, then you need to honestly ask yourself how you will turn the business around.

Have the CPA work with a commercial real estate broker in putting together the offer price on the business. The first offer should be a lowball offer. It’s easy to increase future offers but very difficult to lower future offers unless you find deficiencies during due diligence. The CPA should also assist you in getting proper licensing and tax identification numbers for both federal and state.

6) Hire an attorney

Have an attorney review any past, present, or pending lawsuits regarding the business and associated property, as well as to prepare all related paperwork regarding the purchase. If you know the seller on a personal basis, then one of these professionals should do the negotiating for you.

7) Be clear on your expectations.

There are several questions that you need to address prior to owning your own facility. How many hours per week will it take to successfully run this business? Is that more or less than the hours you’re currently working and are you (and your family) comfortable with those hours? Do you expect to make a profit in the first year? What will it take in terms of hours worked or losses incurred that would cause you to pull the plug and either close or sell the business? Doing a little self-reflection and honestly answering such questions will assist you in future decisions and help keep your family relations intact.

8) Analyze your personnel skills.

Are you a Martial Artist with a burning desire to own your own school or are you a business manager? They are not one and the same. The quality of the staff at your facility will be critical and dependent upon proper personnel management, delegation, training, and correction. If you do not have these skills then you will need to hire a business manager that does.

Business Owner Cheat Sheet: Financial Terms Defined

Every business owner, manager, and director needs to understand the basics of finance in order to be successful. At some point you will find yourself in a discussion in which certain financial slang will be used and it’s important for you to comprehend the language. This article will simplify those sometimes puzzling, but need-to-know, financial terms. This will be a good first step in learning the common jargon used and what each term means.

A

Accounts Payable — The monies owed by your company to your vendors and suppliers. Accounts payable arise when you purchase something on credit and receive an invoice from the supplier. Examples would be an invoice for janitorial services or an invoice for one hundred new uniforms that you purchased for resale.

Accounts Receivables — The monies owed to the company by its customers. It’s an asset sometimes referred to as A/R or debtors. Accounts receivables are the result of selling goods or services to a customer on a non-cash (credit) basis in which the customer promises to pay at some point in the future.

Amortization — Spreading the costs of intangible assets over time rather than expensing them all at once. See definition of intangible assets. Amortization is similar to depreciation which spreads the cost of tangible assets over time.

Assets — Things that the company owns such as cash, fixed assets, inventory, and accounts receivables.

B

Balance Sheet — A financial statement that shows assets, liabilities, and owner’s equity. While a profit and loss (P&L) statement covers a period of time (usually a month or year), a balance sheet is a statement as of a specific date such as December 31.

C

Cost of Goods Sold (COGS) — The cost associated with the goods sold during a given time period.

Current Assets — Cash (and/or assets that are easily converted to cash) within one year of the balance sheet date. Cash, accounts receivables, short-term investments, and inventory are the best examples. Current assets are also known as liquid assets.

Current Liabilities — Liabilities of a company that are to be paid within one year of the balance sheet date. These include such things as accounts payable, wages payable, and loan payments due in the next twelve months.

Current Ratio — One of the measurements of a business’ financial strength. It is calculated as current assets divided by current liabilities. Current ratio is used to measure a company’s ability to pay back its liabilities due in the near future.

D

Depreciation — Allocating the cost of tangible fixed assets over the time period in which they are utilized. For example, you buy exercise equipment for your facility. Rather than expensing the full cost in the year of purchase, you would place them on your balance sheet as fixed assets and depreciate them over a number of years.

E

EBITDA — (pronounced “ee-bit-dah”) Earnings Before Interest, Taxes, Depreciation, and Amortization. This is net revenue minus operating expenses. EBITDA is also known as Operating Profit.

F

Fixed Assets — Non-current assets that a company uses to assist in the generation of income. Fixed assets are also known as Property, Plant & Equipment (PP&E). Examples of fixed assets include buildings, real estate, equipment, and furniture. These are tangible assets that benefit the company for periods of time greater than one year and are depreciated over their life.

G

Gross Sales — The total of all sales during a period of time prior to returns, discounts, and allowances.

Goodwill — Goodwill is a type of intangible asset. It only arises when a buyer purchases another business from a seller and the amount paid is greater than the fair market value of the tangible assets purchased. Goodwill is not amortized while other intangible assets are.

I

Intangible Assets — Assets that are not physical in nature. Examples of intangible assets include patents, copyrights, trademarks, customer lists, non-compete agreements, and franchise agreements. The costs to acquire intangible assets are allocated to expense on the profit and loss (P&L) statement through amortization over the useful life or legal life of the asset, whichever is shorter.

L

Liabilities — Things that the company owes to others such as accounts payables, wages to workers, taxes to government agencies, and loans.

N

Net Assets — Total assets minus liabilities. Net assets is also known as owner’s equity.

Net Income (or Net Profit) — Operating Profit (EBITDA) minus interest, taxes, depreciation, and amortization.

Net Revenue (or Gross Profit) — Revenue minus the Cost of Goods Sold. An example of this would be when a family of three joins a Martial Arts studio. You sell three uniforms for $50 each and grant a $10 family discount. You bought the uniforms for $25 each. Your gross sales would be $150. Your net sales would be $140. Your cost of goods sold was $75, so that your net revenue is $65.

Net Sales (or Revenue) — Gross sales minus returns, discounts, and allowances.

O

Operating Expenses — The money a company spends in order to operate on a daily basis. Operating expenses may be labeled in categories such as:

    • General & Administrative (G&A): This category includes executive salaries, professional fees, rent, insurance, utilities, legal services, and office supplies.
    • Sales & Marketing (S&M): Costs to acquire your base of customers. Sales and marketing expenses include advertisements and lead generation.
    • Research & Development (R&D) — The costs of activities used to develop new products, services, or knowledge. These costs are seen as investments in the future of the company.

Owner’s Equity — The difference between assets and liabilities. On every balance sheet assets equal liabilities plus owner’s equity. Owner’s equity is also known as net assets. It equals the owner’s investment in the business plus retained earnings. The owner’s investment is the net of any money the owner(s) put into or took out of the business. See definition for retained earnings below.

P

P&L— Profit and loss statement or income statement. The profit and loss statement shows the revenue and expenses for a company over a given time period. The time period is typically a month, a quarter, or a year.

R

Retained Earnings — The sum of all profits and losses since the business opened.

W

Working Capital — Working capital is similar to the current ratio as it is a measurement of the liquidity of your business. Working capital is calculated as current assets minus current liabilities. Working capital is measured as a dollar figure, while the current ratio is a percentage.

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Take Charge(back): How to Handle Payment Disputes

Chargebacks Guy Calling Bank to Dispute Charges

“What do you mean they’re disputing the charge? They signed a contract!”

Chances are you’ve been in this circumstance before. One of your customers has contacted their bank to dispute a charge. It can seem like an invasion on your bank account, causing unneeded work and aggravation on your part to settle the situation. Fortunately, there are ways to minimize payment disputes. Let’s talk about payment disputes, why we get them, and how to prevent them.

Why Do Chargebacks Occur?

A chargeback occurs when a cardholder contacts their credit card-issuing bank and asks for a refund on a transaction for a purchase or service made on their card. There are a variety of reasons a customer will charge back a payment. Here are the most common:

  • The customer doesn’t recognize the charge
  • The customer claims that they cancelled services
  • The customer didn’t receive a credit
  • The customer claims fraudulent charges (stolen card)
  • The customer is unhappy with the service or purchase

It’s important to note that consumers have the right to charge back payment when they believe there has been fraud or a product has not been delivered as specified. The Fair Credit Billing Act defines the rules for credit card fraud and billing disputes here in the US. However, disliking a product or being unhappy with the merchant or product does not give the customer the right to charge back a payment through the bank.

Chargebacks are a great tool in the consumers’ hand. As a merchant, we give this power to the consumer when we don’t clearly state the return policy, cancellation policy, or identify ourselves to the customer—which brings us to some tips to prevent chargebacks.

Tips to Prevent Chargebacks from Happening in the First Place

Protecting yourself from chargebacks can be tricky. However, the best defense is the best offense. Put these best practices in place to prevent chargebacks from occurring:

  • Provide the customer with the name and phone number of your company so that they recognize your charge. This is the first reason you may receive a chargeback.
  • Have your return/cancellation policy clearly stated on the contract and on your website.
  • Provide accurate descriptions of your services.
  • Get authorization for your charges with a valid signature.
  • Keep your contracts and agreements updated.
  • Credit cards should always be valid. When possible, get a signature when customers update their cards.
  • Get a signed proof of delivery for products.
  • Talk to your customers to resolve issues before they talk to the bank. That personal touch can go a long way in dealing with and preventing chargebacks.

So You Received a Payment Dispute, Now What?

Chargebacks are unfortunately something every small business owner faces at one time or another. So let’s look at what to do when you receive one.

The lifecycle of a chargeback can start two different ways.

  1. Retrieval: In the event that you receive an inquiry/dispute or “retrieval,” you still have a chance to avoid the chargeback. Disputes are most likely from a customer not recognizing the transaction on their credit card statement. In an ideal world, customers call the number that is associated with the transaction to determine the merchant, but in many cases, this does not happen.
  2. Dispute: If you receive an inquiry, retrieval or dispute, immediately respond with a signed contract or agreement confirming the charge. In most dispute cases, the transaction is confirmed, the bank is satisfied, and no further action is needed.

Managed Billing Services by Member Solutions

How Does Your Billing Company Handle Chargebacks?

If you’re a Member Solutions billing client, we handle the chargebacks for you.

Here’s the process:

When we receive an online request from the credit card company, we look up the customer account to see if we have a contract on file. If we do, it is immediately sent to the credit card company with an explanation of who is billing the customer. If we don’t hear back from the credit card company, it means they accepted our documentation and the case is closed.

On some occasions, credit card companies ask for further documentation or clarification. We contact you, the merchant, if necessary. If these steps are not taken in a timely manner, the dispute will most likely become a chargeback.

If the customer claims the transaction is a fraud or that they canceled the services or product, the bank will issue an immediate chargeback with a chargeback fee of (in most cases) $25. However, we, at Member Solutions, still respond immediately with an explanation of the charge and a signed authorized contract or agreement showing the valid transaction. It can take up to 45 days before we know if the bank will send a chargeback reversal. A chargeback reversal is when the bank agrees with our documentation and gives back the money.

There are, of course, instances of true fraud. In those cases, that money will be lost. We sometimes receive a chargeback reversal, and in another 45 days, the bank will send a second chargeback. This means the customer and/or bank has decided that the charge is invalid and that decision is final. We must then take the money from the merchant account. At that point, the case is closed.

This, of course, isn’t what any of us want to see happen. Your best action is to be clear with your customers about their contract and services—and keep in constant contact to make sure that the customers are satisfied.

What’s an ACH/EFT Chargeback?

It’s important to know that there is another kind of chargeback: an ACH/EFT chargeback. ACH/EFT stands for Automated Clearing House/Electronic Funds Transfer. Automated Clearing House is an electronic banking network used for direct deposit and electronic bill payment.

In the case of an ACH/EFT chargeback, the consumer notifies their bank that a payment initiated by a merchant is not authorized. In most cases of ACH disputes, Member Solutions receives a request from the bank telling us a customer is disputing their ACH/EFT payment from their checking or savings account.

What Happens When You Receive an ACH/EFT Chargeback?

The merchant has 14 days to respond with a signed contract or agreement stating that this payment is valid. The burden of proof is with the merchant to prove the customer signed an agreement authorizing them to debit the customer’s account.

Again, if you’re billing with Member Solutions, we send the bank a copy of the contract or agreement with the checking account or savings account information with a signature in hopes that the bank is satisfied with the proof we have provided.

In most cases, this will save a chargeback. If there is no proof sent in the 14 days, the payment will be charged back. This is just another reason for why it is important to establish that relationship with your customer.

Membership Agreement Contract

Make Sure Your Membership Agreements Contain Important Information

Your membership contracts or agreements should show the cardholder’s name, address, and phone number. It also needs clear contract terms and a concise cancellation/refund policy. Be sure you have an authorized cardholder signature—and at a minimum—the last four digits visible of the credit card number that is tied to the disputed charge. These things make a successful attempt at avoiding a chargeback.

As always, we’re here to help. If you would like more information about the chargeback process or have any questions, please don’t hesitate to contact Member Solutions Client Services at 888.277.4407. We’re happy to assist you.

Good luck and strive to be chargeback free!

About the author: Ursula Carter is the Finance Manager at Member Solutions. Her experience includes an exclusive two-year focus on chargeback management, where she worked with credit card companies and individual merchants to prevent payment disputes and resolve chargebacks. As Finance Manager, Ursula assumes direct responsibility for the day-to-day billing operations, which includes ensuring the correct system functions for all billing-related processes, and working with appropriate personnel to correct system issues, client interaction, payments, and client funding.