A lot of people come here looking for help finding accounting services. The first thing to know is that there are several types of services that are provided by accountants. Some of these services include bookkeeping, tax preparation, audit, and consulting.

A bookkeeping service can be very helpful for many companies. Although it is hard to believe, many business owners don’t enjoy accounting. However, the smart ones realize that it is important. If you fall into this category then it might be a good idea to try and outsource your bookkeeping. This way, you will be able to spend your time working on your core competencies while the bookkeeper handles the dirty work.

If bookkeeping is the type of accounting service that you are looking for, then allow me to give you a few pointers. First of all, bookkeeping is a skill that needs to be developed over time. While it is true that it isn’t rocket science, you still need to have some analytical skills and an understanding of basic accounting principles to get the job done well. You’ll want to find someone that has some experience doing this type of work. Most accounting graduates, fresh out of college, don’t actually have any experience using accounting software (I know because I was one of them). The last tip I’d provide is to ask other businesses what they do. There is a good chance you can find a great service for a low price.

Tax services are another very popular service provided by accountants. Unfortunately both individuals and businesses have to file taxes every year. Finding a good accountant to do this for you will save you time, money, and serious headaches.

Although accountants aren’t normally considered as visionary, the truth is they can provide a lot of consulting value to your business. Many accountants have spent years tracking financial metrics. They know how to get a business on a budget that can lead to success.

Online Accounting Services

Online services are an excellent way to outsource your accounting. These services are often very inexpensive when compared to hiring a full-time bookkeeper. Prices vary depending on the size of your company, but there are some accountants that offer their services for less than $200 a month. Good luck finding a full time accountant for that much money. One word of advice is to find an online company with a good reputation.
Now you have a brief overview of some of the more common accountant services available. Whether you’re looking for help with your record keeping, tax preparation, or overall company strategy an accountant is here to help.

Let’s be honest, most people who open up a restaurant don’t do so because they enjoy accounting. In fact, most of the time new restaurant owners have no idea that accounting exists. It is typically the case that they get their restaurant operations running and find out that they have to pay taxes. Soon they find out that there is more to accounting than just taxes.

A restaurant owner has to worry about several different types of accounting. Taxes are a big deal because you’ll need to calculate sales tax on every item you sale. You’ll also need to worry about taxes at both the State level and the national level (a major pain). Other tax/payroll items you’ll need to worry about include employee tax deductions and FICA. You can learn more about that at this site: http://www.tax.gov/virtualworkshop/. It’s the flashiest site you’ll ever see on taxes.

Another form of accounting that is very beneficial to restaurant owners is managerial accounting. This type of accounting is used for analysis and decision making purposes. It is an exciting type of accounting service. This is used to gather information on costs and revenues. For example, a restaurant manager may want to know how much ingredients cost and what dishes are the most profitable. Armed with this knowledge the manager can make decisions that might lead to higher profitability. Who said accounting was boring?

Now, if all of this accountancy talk sounds a bit dry to you, you may want to look for a company that offers accounting services for restaurants. The benefit of outsourcing your accounting is that you can turn all tax and compliance issues over to someone else. I wouldn’t personally recommend turning over all managerial accounting to a third party. You will at least want to be semi-involved so you can understand the information to make decisions. However, feel free to get rid of all your compliance and tax accounting services.

Here is a list of companies that offer restaurant accounting services.

Murphy Accounting: http://www.murphyaccounting.com/

Murphy isn’t specifically geared towards restaurants, but they are geared towards small businesses. I’m assuming you’re a small business owner if you are reading this because large businesses already know the importance of accounting.

Indevia Accounting: http://www.indevia.com/

Indevia is another company that can handle all of your accounting. They are based in California, but you don’t have to live in California to work with them. You just send them the numbers and they do the rest. However, it should be noted that they outsource most of the work to India.

RAS: http://www.restaurant-accounting.com/

RAS is another great option for those owners who just don’t want to manage all of the tax and compliance issues. The good thing about RAS is that they are specifically designed to handle restaurants. Knowing the industry helps.

If you know any other services that should be added to the list or any companies that offer restaurant accounting software, please let us know by leaving a comment in the box below.

Getting your restaurant to work well and getting it established in the community is a tough job to do especially when you are still a beginner. Some beginners may not be able to get things right until they know about these three elements of a successful restaurant.

Most restaurant owners know how to run a restaurant. They make a restaurant not just to gain money but to bring good, quality food and service to the public. It is a very simple goal to think about and knowing the basics will make you reach your goal. There are three elements that an owner should and must always take into mind when starting a restaurant and these are food, people, and systems.

A restaurant is all about food. Good, quality food must always be served to the customers as it is the soul of the business. Quality is all about how fresh the ingredients are and how they are prepared. Food preparation is one of the biggest investments owners make for the restaurant as it is the main money maker for the business. Food presentation is also one of many things to consider in order to attract more and more customers to dine.

Another thing to consider in terms of establishing a successful restaurant business is the people whom you will be working with and these are the customers and employees of your fine restaurant. Though food would be the main focus of the business, you should make it a top priority that the employees are happy and satisfied. You should also make sure that payroll is accurate, well managed, and that they are well compensated for their time. An unhappy employee can make a customer feel that they are unhappy. So make sure your employees are well satisfied so that they can perform their best. In making customers happy, make sure that they get the service good enough to keep them satisfied while not being pampered to a point that they are or will be abusing the services.

One of the most important things to consider having in a restaurant is a good system of management and accounting. This involves various hardware and software tools that should be installed in the establishment. What makes a restaurant work properly is good management. Many restaurant owners implement good quality restaurant accounting software to do most of the job for them in terms of data processing and analysis. Inventory is also managed through these hardware and software tools used by the management.

In getting any type of business to become successful, there are always key elements to know about and work on. With these three elements, restaurant managers who will just be opening their first restaurant can be successful.

When you think of an auditor, you probably picture some combination of a lawyer and an IRS agent, which is not a pretty picture. You may think of that annoying guy who came to audit at work last spring, when all the while you’re wondering why on earth anyone would want to pay someone to be so pesky and condescending. Well, we have good news for you; telecom auditors are not like that guy.

For one thing, telecom auditing isn’t necessary. It also isn’t something that you necessarily need to have every year. You can decide what time of year your telecom auditor comes (which is important if your business is cyclical and you’re really busy for a few months of the year), and how frequently. As a result, a smart telecom auditor will be much more customer friendly and try to add value because the auditor will want you to want him/her to come back.

While a telecom auditor can provide many different services, the main two are consulting advice and bill auditing. These two basic options are just general categories, so if there’s something else you can think of to have your telecom auditor check for, let him/her know.

It’s easy to see why you’d be skeptical of asking an outsider to come into the company that you know so well and offer advice. However, telecom auditors aren’t going to help you with your inventory or receivables, they’re only going to help you with your telecommunications. Being so specialized means they’ll be more knowledgeable about something you probably haven’t had time to check into much, because you were so focused on your arguably more important things (like inventory and receivables). In fact, some firms are so convinced they’ll be able to help you out that they won’t charge you anything unless they find a way to save you money.

It’s a good plan to let your telecom auditor look at your bills specifically. Be honest here – have you ever read and understood the whole thing? Telecommunications companies make it confusing purposefully, and telecom auditors are trained to sort it all out. They’ll be able to tell you where your company may be able to cut back and save a few bucks. They may also be able to show you if you’re accidentally being overcharged for something, or if you’re paying for something you don’t use. Be sure to show them a copy of the contracts you’ve signed with telecom companies, because they’ll also be trained to read the legal jargon and tell you exactly what it means to you and your budget. Of course this is a good idea to do yourself, but keep in mind that someone with this specific type of experience will know more about areas that are commonly problematic.

Occasionally you’ll need to ask your auditor about FCC compliance issues, but it’s not a common thing. If you’re worried, bring it up with him/her, but don’t be surprised if they tell you that it’s nothing your company needs to worry about.

If you’ve still decided that one auditor a year is already too many, we don’t blame you. However, in our humble opinion, almost every company (and even some families) could benefit from a good telecom audit. Usually the one-time cost of the auditor will be paid for in all those monthly telecom fees you’ll save.

The word “Audit” strikes fear into every business owners’ heart, whether you’re just having an internal team look at your books or hiring someone from the outside. Even a telecom audit is scary. However, here are a few steps you can take to prepare for whatever kind of audit you’re facing. These steps will make your auditor’s job (and thus, your life) much easier.

Step 1: Use your brain. You work here – you’re going to know a few things that outside auditors (or even possibly inside auditors) won’t. If you think something may be amiss, write it down to bring up with the auditors. Of course you’re not a telecom auditor yourself, so you won’t have the experience and knowledge the auditors will come with, but your common sense can still go a long way in helping your company save money in the telecommunications area.

Step 2: Define the scope. The scope of your audit is important to define early on. Your scope is how deep you want these auditors to dig into your telecom information. If you have a large company, maybe you want them to visit every location and do an analysis of every phone and internet contract. If your company is smaller, maybe you can just give them some receipts in a shoe box. Regardless of what you want, it’s best to decide early and tell them right when they arrive, so that everyone is on the same page from the start.

Step 3: Prioritize. The auditor’s time will be money spent for you, so after you’ve decided how in-depth you want the audit to go and have pinpointed some areas that may need extra work, you need to list out everything in priority order. If your internet is your biggest telecom expense, maybe you think that’s the most important. If your pretty sure there are issues with your phone contract, then maybe that’s where you want the auditors to start. If you’re not clear with your priorities, you can’t very well complain when the auditors don’t start with what you think is important.

Step 4: Gather the documents. Your auditor’s greatest tool will be the documents (receipts, contracts, bills, invoices, etc.) that you give to him or her. If you already know what you want audited, then you’ll easily be able to gather the relevant documents. And if you’ve already gathered the relevant documents when the auditor arrives, you won’t have to pay for him or her to sit and watch you do so. Your auditor will also be more efficient in finding errors this way because he or she won’t have to waste a lot of energy asking for your information, because you will have already provided it.

When you take the time to really look at it, you may discover that your telecommunications costs are one of the biggest you have. An auditor can help you look at this cost, make sure you’re paying for things you really need, and find ways to save you money. Your auditor will also be able to tell you if you’re not using all the technology you’re paying for. Either way, a telecom expert is usually worth their weight in gold… so long as you don’t hire one who’s too heavy

Today’s generation finds it harder to work on someone else’s dream. In the past it was normal for a person to work for years and years in the same company. The company provided a comfortable lifestyle for the employee and the employee devoted his time and energy to fulfilling the company’s vision. However, comfort no longer seems to be enough for employees. The new generation wants to dedicate its time and energy to its own vision.

In the past, the average accountant would perform mind-numbing work for a company. The accountant would do this for years and years, helping the company to reach its own goals. However, nowadays this is no longer good enough for accountants. Many want to start their own bookkeeping business. Sure they are performing the same monotonous tasks, but they are doing it with their own vision in mind.

Vision

Owning your own bookkeeping business requires vision. Vision represents the ability to steer your own organization in the right direction. When you were an employee, it wasn’t your responsibility to have vision, but as an owner it is paramount that your new business is heading in the right direction. Having vision requires a clear mind and the ability to take a step back from your day-to-day tasks to evaluate challenges and opportunities.

Managing Skills

Now that you are the boss, it’s not only your responsibility to tell the business where to go, but it’s also your job to tell the employee(s) how to get there. When you are starting out a new bookkeeping business, your only employee is probably yourself. This means that you have to take time to plan and schedule out where your time will be most effectively spent. A certain sector of your brain has the vision firm in mind, now a different sector must plan out how to accomplish that vision.

Execution Skills

You’re the owner, manager, and employee when your bookkeeping business is just starting out. Sometimes accountants who take the plunge and start their own business, find it extremely hard to perform all three tasks. You can see why big businesses separate these three functions.

If you are to have an effective business, somehow you have got to dig deep and learn how to execute. It’s a lot of fun to be a visionary and a manager and all too often new business owners spend all of their time envisioning and managing—and they are left wondering how they failed. The bottom line is if you don’t get any work done, then you can’t really expect to make any money. The old saying goes “a bad plan, well executed is better than the worst plan poorly executed.” There is at least some truth in that saying.

The new generation of accountants doesn’t want to spend its time working on someone else’s vision. Because of this many of them are trying to start their own businesses. However, if they are to be successful, they will need to learn to envision, manage, and execute their own plans. Most new business owners find it extremely difficult to compartmentalize these three necessary processes when they are just starting out.

Small businesses don’t need a huge, clunky bookkeeping system. In fact, such a system could be a hindrance to the success of small and start up businesses. That being said, small businesses do need to keep track of their financial information. The key is to balance the time and effort spent to gather this critical information with the time and effort it takes to do other key business processes.

Why a Small Business Should do Bookkeeping

The obvious reason here is that it is mandated by law. Unfortunately, even small businesses have to pay taxes, with the obvious exception of those companies who are not making a profit or are carrying forward losses. If you’re not making a profit, then bookkeeping may be the least of your concerns.

Bookkeeping for small business is important because business owners must make decisions. If you’re not tracking key financial information, then you’re probably not making the right decisions. At this point there are probably a few skeptics out there saying, “I’ll just rely on my luck when making important decisions, it has worked in the past.” If you fall into this category, it is time to wake up. Even when you have a lot of the information, you can never have all of the information and will need to rely on luck to some extent. If you are relying on luck alone, then you won’t stand a chance against those who are doing everything possible and then relying on luck. Bookkeeping for a small business is essential.

Tools and Tips

Now that you have been convinced that your company needs to keep track of financial information, we’d like to offer a few tools to help with your small business bookkeeping.

QuickBooks: This software is relatively inexpensive and it is known worldwide. Customer support and training are not a problem. If you are looking for training, try visiting the Intuit website. Another resource often mentioned is qbalance.com. This software isn’t that expensive and it will work perfectly for small businesses.

QuickBooks can also create the reports that investors and banks will want when they are considering a loan or an investment.

Many entrepreneurs have no idea how to do bookkeeping. However, when a company is small it is hard to hire a full fledged accountant. Here are a few ideas of what to do if you find yourself in this situation:

Learn Basic Bookkeeping Skills. A real handy guide for picking up everything you need to know in a short amount of time is reallifeaccounting.com. The guy who runs the site has developed two courses that are excellent for small business owners. The first one is a four hour course about basic accounting, it costs $50. The second course is entitled Accounting for Non-Accountants, it costs $100. These courses will teach you everything you need about bookkeeping. The real reason we recommend this site over hundreds of others is that the courses are available online and can be taken at your own speed. Small business owners don’t have time to go to real classes.

Hire a Small Business Bookkeeper – Look for a local college student that understands small business bookkeeping services. Depending on the number of transactions that take place within your business you may only need the student to work a few hours each week.

Outsource your Bookkeeping – This can be a great option for small businesses because it frees up valuable time to work on the things that keep small business alive – sales. The small business outsourcing service that we recommend is book2taxes.com. You simply scan the documents and they take care of the books.

Remember that bookkeeping isn’t rocket science. Don’t become overwhelmed and think that you need some complex bookkeeping system. Find a system that will keep you in compliance with the law and that will provide you the information you need. Use the tools above to reach your small business goals.

The health industry is an important industry in business, politics, and our personal lives. The success of the medical industry as a whole is paramount to all of us. Although doctors have provided excellent health care in the United States, their ability to run successful businesses has been questioned.

Many people wonder why it is important that doctors run successful businesses. This is probably a question that wouldn’t have been asked 10-15 years ago, but nowadays many extremists are pushing the idea that businesses are evil and don’t provide as much value to society as was previously thought (see Michael Moore’s movies). Doctors need to run successful businesses so that there is an incentive for the best and brightest to become doctors, so that medical centers will have enough money to purchase the best equipment and medicines, and so that supply will equal demand.

One area where medical centers have been particularly porous in the past includes collecting accounts receivable. Over the period of 1991-2001 the average collection period for medical centers was between 67-71 days. This data is a bit outdated, but it is hard to believe that much has changed in doctor’s collection habits over the past nine years.

It is hard to say who is to blame for these long collection periods. Some experts blame the doctors for being lackadaisical about collecting while others point to the fact that insurance companies are taking an ever increasing role in the payment process. The truth probably lies more towards the latter. Insurance companies are becoming such an important part of the health care industry that there is little doctors can do to make the agency pay faster.

Having to wait more than two months to collect payment is challenging for both new and established health centers. Paying doctors, assistants, and other employees can be difficult when the practice doesn’t have cash. This is an especially frustrating experience when the medical center is always busy with patients, has thousands or millions of dollars locked up in receivables, but just can’t collect right now.

There are several solutions to cash flow and receivables problems, but this article will focus on medical receivable factoring.

How It Works

There are two ways that factoring works in the medical industry. There are subtle differences between the two methods (which will be described below in detail) but in essence the methods are the same.

Method 1

Under this method, the medical facility actually sells its receivables to a third party investment company—the Factor. Receivables in the health industry are different than receivables in other industries. An account receivable in the health industry probably means that the insurance claim has not yet been paid. In other industries it usually means that the customer has not yet paid.

Under this method of medical receivables factoring, the medical facility approaches the factoring company with its insurance claims. The financing company will pay the medical practice anywhere from 60 to 90 percent of the value of the receivable. The Factor then collects the insurance money from the insurance agency and remits the remaining 10 to 40 percent to the medical firm, minus a fee of course. The fee for this service is usually anywhere from one to four percent per month.

What does the medical factoring company look at when determining advances/fees?

The number one factor for the advance rate and fee that a medical practice will receive from a Factor is risk of collection. The higher the risk of not collecting the full amount of the insurance claim, the lower the amount the medical firm will be advanced. Unfortunately insurance agencies don’t have a strong reputation for trust built up so this damages advance rates.

Insurance policies can become extremely convoluted and this complicates advance rates. Even though a practice might believe that it has a $100,000 receivable, the insurance agency might not see it that way (any doctor who has been in this business for long knows that insurance agencies don’t always see eye-to-eye with medical firms on payment issues). A medical factoring company will heavily scrutinize insurance policies and claims before deciding on how much to advance.

The financing fee charged by factors depends on the collection period and the amount of factoring being done. The longer it takes for the factor to collect the insurance claims, the higher the fee.

Factoring companies usually want to have a semblance of a long-term relationship. They aren’t necessarily thinking decades, but they’ll usually want to keep a health-care firm on board for a year or two. After the factoring company has worked with the medical firm for a few months, the factor has a good idea on the risks associated with collection from that particular firm and may be able to offer better advances and fees if it finds the firms insurance claims are always paid in the correct amounts.

Method 2

The first method of medical account receivable factoring consists of an actual sale of the receivables to a third party. The second method, not as common in practice, is using insurance claims as collateral. The idea is that a third party financing company will open a line of credit for the practice based upon the amount of receivables outstanding. The amount of the credit line is usually somewhere between 60-90 percent of the alleged value of the claim (note that this is the same amount that is advanced under method 1). Under this method there is also a financing fee that is between one to four percent per month.

Here is an example of how this method works. A patient comes into a medical facility and is treated. The patient’s insurance company plans to pay for the treatment within the next few months. The facility now has a receivable or claim. The medical firm takes this claim to a factoring or financing institution and asks to open up a line of credit based upon this claim and other claims. The financing company extends a line of credit between 60-90 percent of the face value of the accounts receivable. There is usually a charge for simply opening the credit line, and obviously interest is charged when money is borrowed. The medical practice borrows money using its credit line. The insurance agency pays its claims to the medical practice. At this point the practice usually pays off some or all of its credit line. Note that the credit line can be increased if the practice brings more claims to the factoring company and they work out a new agreement.

This method is sometimes known as medical invoice discounting or receivables discounting. It differs from the aforementioned way of factoring in several key ways:

(1) This is a loan, not a sale. Under the first method, the practice is actually selling the insurance claim. Under this method the practice is potentially opening up a floating credit line that moves according to the amount of claims outstanding.

(2) Another difference between these two methods is that under the discounting or second method, the practice doesn’t have to borrow all of the credit line. The practice has a bit more flexibility under the second method, because under the first method the claim is sold and the money has essentially been “borrowed.”

(3) Another big difference between these two methods is who performs the collection services. Usually in a medical factoring agreement where the receivables are sold to the factor, the factor will collect. This has advantages and disadvantages. One advantage is that it frees up time and resources, one disadvantage is that the factoring company may not handle the insurance claims or receivables the same way that the medical practice would.

Under the second method (the credit line method) the physician’s practice almost always collects from the insurance companies. As mentioned above, this has advantages and disadvantages.

Advantages and Disadvantages of Medical Receivable Factoring

Advantages:

•    A medical practice’s net cash position improves. When using factoring a medical firm knows exactly when it will be receiving cash. This makes it easier to budget and make important business decisions. Instead of taking 70 days to receive money for work done today, practices can receive money within one to two days. Having cash sooner creates opportunities for growth.
•    No set limit on amount of money “borrowed.” Under traditional financing methods (going to the bank to get a loan) a medical institution can only borrow a specific amount, there isn’t much flexibility. In fact, if a practice goes back to the bank and ask for a larger loan, the bank will think something is amiss with the practice. However, with factoring, a health institution can take as many or as few claims to the factoring company as they want. This means that if a medical facility is doing a lot of business, it will be able to borrow a lot of money from a factoring institution.
•    Possible collection outsourcing. Working with insurance companies to collect claims costs practices extraordinary amounts of time, money, and energy. Depending on the factoring agreement, the factor might actually be the one that collects the money. This means that they deal with all of the headaches of working with the insurance agencies.
•    May be easier to qualify for a factoring loan, than a traditional loan. This is due to the fact that with factoring, there is collateral (the insurance claim), whereas with normal loans, there often isn’t any collateral. Note that with factoring the receivable isn’t really collateral, it is actually an asset being bought, but it is referred to as collateral here for pedagogical purposes.

Disadvantages of Medical Accounts Receivable Factoring

•    The biggest disadvantage to the medical office is that it won’t be receiving 100% of the insurance claims it is entitled to. It will be receiving somewhere between 95 to 98 percent.
•    Another disadvantage often cited towards medical factoring is the abnormally large financing fee. If the factor charges two percent per month that’s an annual rate of 24 percent. That is an insanely large interest rate (read below to see why anyone would consider factoring).
•    The collections process may be outsourced depending on the factoring arrangement. This disadvantage is unique in that it is also cited as an advantage above. Most medical offices become well-versed in working with insurance agencies (they have to in order to survive). The factoring company may not have the same working relationship with the insurance agencies as an individual practice does. The factor may not have as much expertise or incentive to collect the full amount. For example, if the factor advances 75% to a medical practice, and the insurance agency decides to only pay 80% of what the practice thought they would pay, the factor doesn’t have as much incentive to collect as the practice does (either way they get their fee). This is rarely an issue in practice, but theoretically it could happen.

Why anyone would pay the large annual factoring fee?

So a 24% annual loan doesn’t sound that great to you? Well, you’re not alone. The high interest rate charged by medical factoring companies has scared plenty of doctors away. High-interest traditional bank loans are usually only around 10-14 percent; these rates make factoring look incredibly expensive. So with that in mind, let’s take a look at why intelligent people are using factoring. An example of Jim’s medical firm should help explain.

Jim’s medical firm is always busy. They have plenty of doctors and patients and business seems to be going well except for one thing: cash flows are sparse. Jim wants to continue paying his employees and he wants to continue growing his practice. In reality he has two options: a traditional bank loan or accounts receivable factoring. Jim’s average collection period is 60 days.

The bank offers Jim a 10 percent rate on a one-year $1,200,000 loan. That means Jim has to pay $1,320,000 at the end of the year when the loan comes due ($1,200,000 for the principal and $120,000 in interest).

Jim’s other option is to factor his insurance claims at 2% per month. Jim will factor $100,000 in claims every month or $1,200,000 throughout the year (equivalent to the bank loan). In month one Jim’s medical firm doesn’t pay a factoring fee because this is usually paid when the Factor collects the money (remember that Jim’s average collection rate is 60 days or two months). At the end of month two the medical practice pays ($100,000 *2%*2months)=$4,000 in interest or financing fees. They end up paying this factoring fee a total of 12 times so the total interest for the year is $4,000 interest fees times 12 months equals $48,000 in interest. Let’s compare the two methods.

Traditional Medical Loan From Bank

Money Borrowed: $1,200,000
Interest (at 10%): $120,000
Final Payment:  $1,320,000

Medical Receivable Factoring Method

Money Borrowed: $100,000 a month for 12 months = $1,200,000
Interest: $48,000 –see above for calculation
Final Payment: $4,000

Further Discussion

With a traditional loan the money is all received up front. This means that large purchases can be made at the beginning of the year. It also means the money can be disbursed however the medical practice decides throughout the year.

It is interesting to note that a medical practice actually pays less interest using medical receivables factoring. This is a little bit deceiving because Jim’s medical firm is actually receiving twelve $120,000 sixty day advances. Instead of getting the money a year in advance, they are getting it 60 days in advance. This is a very important point and it illustrates that these two types of financing are very different indeed and comparing them is more complex than simply extrapolating and comparing annual interest fees.

Another advantage of factoring illustrated in the above comparison is that the final payment is much easier to swallow with a factoring arrangement than with a banking loan arrangement. With factoring, at the end of the year, there is no huge principal payment that has to be made. The medical firm has already sold the receivables and simply has to wait for the Factor to collect from the insurance agency.

Hopefully this conversation has at least enlightened some people who seem to think that factoring should be lumped alongside payday loans. Factoring can be a better way of financing than traditional bank loans. If a medical practice needs to buy a multi-million dollar piece of equipment then perhaps a traditional loan is better. However, if a medical firm simply needs to stabilize cash flows, improve the working capital of the firm, and grow through making “smaller” purchases then factoring very well might be a better financing option. In the above example Jim’s medical firm is receiving $100,000 advances (60 days ahead of time) twelve times throughout the year, and the factoring arrangement was less expensive than simply borrowing $1,200,000 at the beginning of the year and paying it back at the end of the year with 10% interest. Needless to say, you’ll want to get your best financial people together to come up with a complete analysis of both of these options before simply dismissing one or the other. You’ll also need to ensure you know exactly what the medical firm needs. Here’s a spreadsheet created by Sam Thacker, an expert in factoring, that will give your experts some ideas on some of the fees that might be charged in a factoring contract: http://www.lesliethacker.com/Resources/Blank%20Factor%20comparison%20worksheet.xls

What Happens if the Insurance Company Doesn’t Pay?

This is a frequently asked question by responsible doctors who enter into factoring agreements. The answer depends largely on whether your company enters into recourse or non-recourse factoring arrangement. A recourse arrangement means that the factor can seek payment from the medical institution if the insurance agency claim is not paid. In other words, if your insurance company or your customers don’t make the payments to the Factor, then your medical practice will have to.

In a non-recourse arrangement the medical receivable is completely sold along with all rights and obligations. This means that if the insurance agency doesn’t make payment, the Factor has to eat the money.

There are several advantages and disadvantages to choosing a recourse or non-recourse agreement. Recourse agreements usually come with lower interest rates because there is less risk for the financing company. Non-recourse agreements are advantageous because the receivable is sold and the medical firm never has to worry about it again. Another issue to consider here is how your customers and the insurance agency will be treated. In a non-recourse arrangement the Factor can get nasty with your customers in order to receive payment (note that this isn’t as big of an issue in the health industry because normally the Factor is dealing with insurance agencies instead of customers). Typically in a recourse arrangement the Factor won’t collect as aggressively.

Collecting receivables has long been a problem in the health industry and it looks like it will only get worse under the new health-care plan. Nobody really knows what’s in the bill (including the politicians) but the basic message seems to be that medical centers will receive less money for the work they perform, and it’s going to take longer for them to receive the money. One way for medical practice to combat this problem is medical receivable factoring.

Sources:

http://www.ccapital.net/html/medical_factoring.html

http://answers.google.com/answers/threadview/id/98822.html

http://factormoney.com/factoring-company-for-you.htm

http://www.bestinvoicefactoring.com/

http://www.allbusiness.com/company-activities-management/operations/12804979-1.html

More and more companies are turning to what is known as invoice discounting in order to improve their company’s cash flow position. This method is slightly different than invoice factoring where there is an outright sale of the accounts receivable to a third party, known as a Factor. However the difference is so small it has been giving accountants headaches on how it should be handled. This article will discuss three ways that companies use discounts on their receivables to improve their cash flow position.

It is commonly believed by accountants that factoring and invoice discounting are in essence the same transaction. As mentioned above, with factoring, the invoice is sold to the third party Factor who now holds the rights and obligations. With discounting the invoice is not necessary sold, it is borrowed against; used as collateral. In both situations the third party investment company now has the rights to the receivable, and the company now has the cash. It appears that the rights and obligations have passed in both situations and this leads accountants to wonder if invoice discounting should be treated as a sale instead of a loan.

To make matters worse, myriad ways for discounting exist. We’ll discuss three here. The first way was already mentioned. The company basically opens a line of credit with a third party discounter. The company “borrows” up to 90 percent of the face value of their receivables (in England they call this borrowing against the sales ledger). When customers make payments, the amount due on the line of credit goes down (whether this money first goes to the company and then to the discounter is really irrelevant, the end result is the same).

The second method is eerily similar to factoring and is usually referred to as confidential invoice discounting (you might as well call it confidential factoring). Under this method the company sells its receivables to the third party investing company. However the company is still in charge of collecting payments from its customers. Once payments are collected the company sends the money to the third party. The only real difference here between factoring and this method of discounting is that the customer does not know their invoice was sold.

Another way of discounting is to actually offer your customers a reward for early payment. Some companies will give customers two to three percent discounts if they pay within the first month. This method is still known as discounting, but it is quite different from the other two methods in that there is no third party involved.

It’s not hard to see why accountants have had headaches over this topic. There are hundreds of different ways to set up this type of agreement that vary in structure but are the same in principle.

As more and more companies look to improve their net-working capital position, they are finding that not all factoring agreements are the same. Contracts or agreements between companies and factors can vary dramatically depending on what your company seeks and how good your negotiation skills are. One question that often gets asked is whether or not you should work with a recourse factoring company.

For those of you who need a brief refresher on what factoring is take a look at this receivables financing page. Basically, in a factoring arrangement, a company sells its receivables (from customers) to a third party Factor.

Non-Recourse Vs Recourse Factoring

As so often is the case in accounting and business if you say the words slowly and think about what they mean then you’ll have a good idea what a certain term stands for. Recourse factoring means that the Factor has recourse, they can come after you, if your customers don’t pay their bills. This means that even though you have “sold” your accounts receivable, you are still at least partially liable if your customers don’t pay one of the receivables that you sold.

A recourse arrangement has several impacts on your company that should be considered strongly:

(1)    Usually in these arrangements the Factor collects the money from your customers. The Factor owns the receivable so it makes sense that they should collect. Note that this is also a benefit of factoring (a company basically outsources its collection process). In a recourse agreement the Factor is not as worried about collecting from your customers because if they don’t pay the Factor, then your company will have to.

This can be good or bad. In the past factoring companies have been criticized for harsh collection techniques. These techniques led to customers not wanting to shop with the company that sold their receivables to a third party. In a recourse agreement the Factor will not push your customers as hard. If you, as a company owner, know that your customers will pay then you might want to consider a recourse arrangement so that the Factor treats your customers nicer.

The down side of this arrangement is fairly obvious. If your customers don’t pay then you have to; and you aren’t even the one in charge of collections. It’s not likely that the Factor will take advantage of this type of situation, but there is always a chance that it could give a half-hearted attempt to collect and then force your company to do so.

(2)    A recourse factoring arrangement can make it easier for your company to find a good Factor.  In general Factors are much more willing to operate under a recourse agreement. A Factor is a business too and it wants to make sure it gets paid for the receivables it buys. Some Factors may be willing to charge lower fees for a recourse arrangement.

In a Non-Recourse factoring arrangement the Factor has no recourse against your company if your customers decide not to pay. The advantage of this type of relationship is that once you have sold the receivable you get your cash and you no longer have to worry about it. The disadvantage is that you will likely have to pay a higher service fee to the Factor because it is bearing more risk of non-collection. In addition, with a non-recourse agreement the Factor completely owns the receivables and is able to treat your customers however they want. Essentially you have given up all rights and obligations to the receivables and the Factor know has them.

A myriad of different types of factoring arrangements exist. You should seek help from a certified professional before entering into these agreements. Hopefully this article was able to enlighten you on at least one aspect that is important within the accounts receivable financing industry. As always if you have any questions, feel free to leave them below.