Managing debt collection for maintaining a strong cash flow position
Many managers are all too aware of the statistic that 50% of businesses close in the first year of operation. Of these businesses, 82% of closures were due to poor cash flow*. Companies may have seen positive sales, however the key driver of this failure were that they simply mismanaged their cash flow and failed to get invoices paid on time. Another study reported that of invoices issued by companies, 62% take more than 60 days to get paid. Combining these two facts, it is obvious that the most common mistake a company can make is failure to manage their debt collection and cash flow. With this, it’s essential that invoicing and payment should be taken seriously and not underestimated to safeguard the longevity of your business’ operations.
Considering the large implications this has on the success of many Australian businesses, we have outlined some simple, yet effective ways to help you take control of managing your cash flow.
The easiest way to ensure consistent cash flow is to request for a deposit or full payment before work is started. Naturally this may be difficult in some industries, but by collecting payment upfront there is no debt for a company to collect. Alternatively, perhaps consider requesting payment once certain milestones are completed. This is where a client would pay the company a certain amount based on progress of work completed. This for example could be 25% of the budget upfront to start, 50% of the budget when the project is halfway and 75% when work has been completed. This strategy ensures cash flow throughout the project, and especially useful for long term projects that may take weeks or even months to complete.
To encourage a company’s invoices to be paid promptly, clients should be briefed clearly on the payment terms, costs and how best to deliver the payment. Payment deadlines can be anything from ‘due from receipt’ (meaning it is technically overdue immediately as soon as the invoice is issued) to up to thirty days. Payment terms over 30 days are not recommended, as in line with the above statistics, this may put your cash flow at risk.
Key Stakeholder Delivery
Correctly addressing the invoice and delivering it to the right department or person will generally speed up payment. For example, whilst an order might be from the client’s marketing department, returning to them an invoice is one additional step in-between the invoice being paid. Consider asking politely for a client’s accounts payable department and include them in on all invoice communications. This small, yet effective approach will put more eyes on the invoice and gives the company multiple people to contact to follow up if need be.
Clients are people, and people can forget invoice payments. Following up once an invoice with a friendly email or call is ideal and whilst may seem overzealous, it can be very welcomed from a busy client. If an invoice has gone unpaid and requires follow up, a company should be persistent, not aggressive. Being persistent and contacting them every day will result in the client taking the easier option of settling the invoice.
Maintaining a good personal relationship with a client is an excellent way to ensure future payments. This can be as simple as maintaining regular contact, recurring monthly bills, to offering a small unexpected gift or lunch to a good client. This is known in psychology as the ‘law of reciprocity’. It is the idea that people are more likely to do you a favour (Pay that invoice) if in the past you have done them a favour.
If an invoice remains unpaid past a reasonable time frame, it might be worthwhile to engage a debt collection agency to collect the invoices on a company’s behalf. However, remember that a company’s reputation is still attached to this process, and overzealous collection practices may impact a company’s brand negatively. Ensure that the agency that is retained operates in the most ethical methods and sticks to the national collection guidelines.
By keeping these key strategies in mind, a company can be vigilant about their debt collection, maintain a positive cash flow and not become another statistic.
If you ever need help recovering unpaid debt and would like to speak to Australia’s leading debt recovery agency, please feel free to contact us for a FREE debt appraisal today or call 1300 136 271.