How implementing these 5 easy to follow steps will help your business avoid bad debts in 2020
Cash flow is one of, if not the main reason why small to medium sized enterprises fail in Australia. When studies show that approximately 97 per cent of all new businesses fail in Australia, it brings the issue of cash flow into even sharper focus. Without regular income, your business cannot operate, nor expand, so it’s understandable why it is the top concern amongst small business owners and operators.
It’s important to highlight that cash flow issues can be caused by a number of factors, such as, a decrease in sales revenue, high spending levels, limited focus on cash flow management processes, and more worryingly, late payments from customers. This emphasises that for businesses to thrive and be sustainable long-term, they need to constantly analyse and improve their current internal processes that directly impacts their cash flow position.
As outlined earlier, there are many factors that cause cash flow issues, however in this article we are going to focus on the most concerning issue facing small businesses today which is customer late payments. Staying on top of customer payments is essential to avoid writing off unpaid invoices as bad debt. Here are five easy to follow steps that will help you avoid bad debts and facilitate to being in a better financial position.
- Understand who your customers really are
Every customer should be seen and treated as an individual. Although there needs to be a standard set of operating procedures and terms of doing business, these can be varied according to the circumstances of every customer.
With information now more accessible than ever, you can learn more about who you’re doing business with by referring to a number of different online resources. Using the company’s Australian Business Number (ABN), you can review the Australian Business Register to understand the company’s corporate structure or check if the company is registered for Goods and Service Tax (GST) for example. You can also check the Australian Investments and Securities Commission (ASIC) website for additional details like how long the company has been operating for, which may prove invaluable in determining trading terms of new customers.
It is also now possible to carry out a thorough credit check online thanks to the introduction of comprehensive credit reporting (CCR) in Australia. The new reporting changes what type of information can be collected by credit bureaus and used by various credit providers to assist with making lending decisions.
Introduced on 12 March 2014, comprehensive credit reporting moves away from what many previously described as a negative reporting system, whereby the only information available was a company’s or individual’s credit enquiries, payment defaults and serious credit infringements, essentially providing a limited amount of information for credit providers to make effective lending decisions to minimise risk.
With more positive data now included on credit reports, business owners now have the most up to date information on a potential new customer to not only determine if they want to engage in the first place, but to also help define suitable trade terms to minimise their risk on the business relationship.
Although the access of useful information is now easily accessible, it obviously won’t safeguard you from externalities that are out of your control. Situations like an unexpected economic impact to your customers industry or perhaps a change in their trading conditions, for example, they themselves lose a customer that hinders their ability to pay you on time, it’s important that you have the right procedures in place to help minimise the impact on your business.
- Set suitable terms of trade
It’s important that contract terms be set for each individual customer based on the information you have gathered about their business.
Conducting due-diligence allows you to vary the payment terms as you deem appropriate. Shorten the payment period where there is doubt about a customer’s creditworthiness and offer more favourable terms where there is a strong payment history.
Depending on your line of work or industry, you may want to consider requesting a deposit where a customer’s credit status warrants it and perhaps offer settlement discounts to encourage early payment and minimise any potential issues in the future.
- Send invoices promptly and don’t delay
Account receivables should be a part of your day to day business operations. This includes making sure you’re sending invoices to customers on a timely basis. The sooner you send an invoice, the sooner it can be paid.
Avoid unnecessary delays and excuses by making sure invoices contain all the necessary information to facilitate easy payment. If the customer requires a purchase order number to be attached, it could be a good idea to create a specific invoicing template for this specific customer so it’s never missing.
Consider offering multiple payment options to provide convenience and reduce excuses. If you not using online accounting software like Xero or MYOB, you may want to consider on boarding such technology to support automation and reduce manual invoice processing to save time and money.
Nowadays, a large majority of small businesses are using accounting software, so if you haven’t considered it yet, don’t get left behind as it will dramatically improve efficiencies across this business function.
- Implement solid credit control measures
Its imperative that you don’t solely rely on integrity of your customers and trust they will pay you on time. Your accounting process needs to include solid credit control procedures which includes ongoing reviews to identify when payments are overdue and customer payment trends to determine if specific customers are always late.
Alongside knowing when and who not paying on time, you should have a clear process to follow for outstanding payments. This process should layout a step by step process from when an invoice is overdue to when a debt has been reconciled.
Credit control takes up a significant amount of time and effort, but is essential to maintaining a positive cash flow position. Depending on the type and size of your business, you have essentially two options to make sure you have the right foundations in place to minimise bad debt – either you employ resources to manage this function internally, or you can outsource to a reputable debt collection company. Either way, a strong accounts receivable function relies on consistent and efficient processes to avoid bad debts occurring.
- Partner with a professional debt recovery agency
If you don’t wish to manage the credit control function within the business, whether this is due to limited financial resources or little desire to manage additional staff, the alternative option is to engage a reputable debt collection company.
A debt collection company can offer a number of services related to the accounts receivable function. Depending on your requirements, you have the capacity to engage them to manage your entire accounts process, or you can simply employ them to be a valuable extension of your internal accounts team to facilitate the efficient collection of bad debts.
There are many benefits of engaging the services of the professional debt collection company, however their ability to leverage industry leading technology and implementation of proven collection techniques is what makes then so effective. Many businesses don’t have access to such technology, so having a business partner with such capabilities will ultimately save you money and avoid bad debt from occurring in the first place – which is the key objective of any business.
Consistency and Control
The best way to avoid bad debts is to try and prevent them. Implementing a good accounting process that issues invoices on time and has steps to follow up when invoices remain unpaid is vital. Be diligent about credit control and understand your options when a customer does not pay on time. By following these easy to follow steps you’ll no doubt start 2020 off on the front foot.
About Marshall Freeman
Marshall Freeman is Australia’s leading debt collectors and recovery specialists. We have been servicing over 20,000 businesses throughout Australia for over 15 years, which has set the foundation of deploying industry leading knowledge and collection techniques that simply delivers results that are unrivaled. Whether you need assistance with slow payers or collection of bad debt, we offer a transparent and stress free collection process that makes your debt a priority to get you paid faster.
If you’re looking to partner with a result driven debt collection agency, please feel free to call us on 1300 136 271 or get an obligation FREE debt appraisal by filling in the form on this page.