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Outside help with cash flow - includes related information on invoices

Entrepreneur Rob Case of Houston doesn't have to worry about preparing a company payroll. For the past five years, he has used an outside service firm to do it. The firm prepares payroll checks, files paperwork with federal and state agencies, pays taxes, and stays abreast of federal tax and employment regulations.

Case and his partner, Kevin Campbell, operate teaching franchises called The Princeton Review. They pay about $12 a year per employee for the service. They have about 25 full-time employees and 300 part-timers.

Based-in Houston, Case and Campbell own franchises in 12 Southwestern cities, where they train high-school and college students who are preparing to take standardized college and graduate-school admissions tests.

Because of its expertise, the service firm can handle all payroll details for the company, Case says, and "there are no surprises concerning penalties caused by errors or late tax payments."

There are several nationwide payroll services as well as some smaller, local ones. The large nationwide firms include Automatic Data Processing (ADP), based in Roseland, N.J., and Paychex, in Rochester, N.Y.

Payroll companies account for just one segment of a service industry geared to helping small companies improve their cash management. Banks play a role through programs such as daily account reporting and expedited-movement of funds. Credit-checking companies, too, are helping small firms reduce-their operating costs.

Outsourcing for such types of cash management works well for small firms, says Linda A. Grandstaff, executive vice president of KeyCorp Management Co., in Cleveland, because "these firms can't afford financial staffs and must spend a great deal of their time focusing on their primary business."

A recent survey of 392 fast-growing small companies by the Coopers & Lybrand accounting firm found that the functions and services most frequently delegated to outsiders were payroll services (68 percent of respondents) and tax matters (48 percent).

Outsourcing offers small companies a number of benefits, says Dick Dole, vice chairman of process management for Coopers & Lybrand. "It gives them needed outside skills and actually saves money that can be otherwise usefully applied to a company's operation." In addition, he says, it businesses. managers stay focused on the core businesses.

Moving The Money At The Bank

Besides contracting out for payroll services, Case uses cash-management services offered to clients by the Post Oak Bank, in Houston. Among other things, he says, the bank service has helped his company double interest earned on funds. Higher earnings are achieved with the help of computer reports from the bank. The reports include information on the company's checking account activity, enabling Case and Campbell to tell which checks have cleared and have been posted to their account. They also find out quickly if they must make a deposit to cover checks they need to write,whether the company has excess funds that can be used to pay down a loan to reduce interest charges, and whether any excess funds can be swept into an investment account to earn interest.

Case and Campbell have worked out a specific minimum-balance requirement for their bank account, which helps them avoid many bank transaction fees.

A number of banes are now offering such cash-management services-to small and medium-sized firms for a fee. Many also provide a service that enables customers, through the use of touch-tone telephones or personal computers, to get account information.

Like Case in Houston, David Rasmussen of Milwaukee, owner and president of Turbine Consultants, an engineering firm, uses both a payroll firm and a bank's cash-management service. Unlike most cash-management firms, which work off-site, the one used by Rasmussen prepares his firm's payroll in the offices of Turbine.

"Outsourcing the payroll function allows us to concentrate on what we do best," says Rasmussen. Under the cash management service he has worked out with his bank, he says, "all excess cash in our account is swept out at the end of the day to a money market account where it can earn interest. This way we get maximum use of our funds."

Reports Via Software

Automatic Data Processing, the payroll company, has developed a cash-management software service, Business Express/ PC, for small firms to use with personal computers. The service is offered to entrepreneurs through their banks and allows them to receive six types of reports: checking-account status, balance summary, detail of-check transactions, check inquiry, historical averages of account balances, and checking-account statement reports.

Small-business owners can also transfer funds between their accounts from a computer at their desks, says Andy Vasher, marketing manager for ADP's Network Services Division, in Ann Arbor, Mich. In addition, they can send payments electronically to suppliers. The service is a time-saver, Vasher says, and it costs less than $40 a month.

Credit Checks

Another way that small firms can help improve cash flow is to use outside credit-checking services, which I guide them in determining whether to extend credit to new customers.

Dun & Bradstreet's Credit Recommendation Service, for example, provides small-business clients with credit reports on individual companies. (D&B does not do credit reports on individuals.) These reports include a prospect's credit-payment history, information on outstanding lawsuits, judgments, or liens; collection agency referrals; and bank balances.

Larry Winters, head of D&B's Small Business Services, says some large companies are routinely paying their bills as much as 90 days after receiving-invoices. Such a lag in payment can seriously disrupt a small supplier's cash flow.

One D&B credit check on a business costs $60; the price drops to $46 per report if five are ordered. The firm's small-business advisers first provide the credit information by phone, then follow up with a written report.

Lock-Box Processing

To improve cash flow substantially, a small business can use a lock box, says Robert W. Page, vice president of Amalgamated Bank of Chicago. With lock-box processing, payments are directed to a post office box rented in the business's name. The bank picks up checks several times a day, and the checks are brought directly to the bank for processing. Checks written to the company are photocopied to maintain a record of the transaction, and they are immediately deposited into the business's bank account. "As a result, remittances are deposited in a company's account two to three days sooner than they would be if the checks were sent directly to the company's address," he says.

By getting the money into the bank more quickly, Page says, "this translates into higher earnings through higher investment income or lower debt expense."

Information regarding these daily payments is forwarded to the company by mail or messenger for accounts-receivable posting. The monthly maintenance charge for a lock box is about $75 to $80, and there is a charge of 25 to 40 cents for each check processed by the bank.

When a small company selects an outsourcing partner for cash management, experts say, it is important to ensure a good fit. Says Dick Dole of Coopers & Lybrand: "The ideal outsourcing relationship should be one that represents a workable partnership."

The service providers must have relevant credentials, experience, and financial stability. In selecting a bank it is important that it be especially attuned to the cash needs of small and medium-sized firms. Above all, according to the experts, look for evidence that the third party can help you gain greater control of your cash flow, cash management, and ultimately your business.

RELATED ARTICLE: Clearer Invoices' Faster Payments

If your business is having cash-flow problems, take a look at the clarity of your invoices, says Stanley Tollman, president of Tollman & Associates, a cash-management consulting firm in Atlanta.

Making sure that invoices are easily understood is critical. Too often, he says, invoices are difficult to comprehend and get put aside in favor of those that are easier to understand. Payment can be slowed, for example, if the bill-paying clerk cannot discern the total amount of the invoice or if it doesn't list product numbers.

Clerks often are required to ensure that the company has received all of the items it ordered before an invoice is paid. A clerk who can't tell because of confusion in the invoice which items have been shipped is likely to delay processing of the invoice. In such circumstances, a help telephone line can be especially useful, Tollman says. It provides the customer firm's clerks with a way to get questions answered quickly.

Tollman also recommends that you list only one address on an invoice to avoid confusion.