Tired of slow payers impacting cash flow?
Good debtor management is critical to ensuring your business has sufficient working capital to meet expenditure requirements, reinvest and grow.
We recently wrote an article about the 7 Drivers of Cash Flow and identified debtor days as one of the key ratios to monitor to achieve positive cash flow in business (you can read that article here if you missed it). Managing debtors really is one of the easiest and cheapest ways you can improve your cash flow. Essentially, if your business isn’t collecting cash quickly, then you are funding the customer’s business as well as your own. The downside to slow-paying customers also includes:
- The more overdue an invoice becomes, the more likely it is that it will never be paid;
- Customer relationships become strained;
- Cash flow becomes unmanageable;
- Capital is tied up giving interest free loans and not being invested back into the business.
Setting payment terms
Your payment terms send a clear message to customers about when and how you expect to be paid and will help you maintain good customer relationships.
- You are not obliged to offer a credit option. Upfront payment or payment via instalments is quite normal and allows you to get the cash coming in at the same time as you are outlaying expenses.
- If you decide to offer a credit option, you should make it your policy to conduct a credit check to manage the risk of bad debt. Have your customers complete and sign a credit application form or agreement to collect the following information:
- Signature confirming that they have read and understood all terms and conditions and agree to abide by them;
- Contact and identification details of individuals, or contact details of all directors/partners;
- 2 to 3 trade credit references;
- Once you have evaluated the information you can decide on a credit limit for the customer and ensure you communicate this to them when you advise the outcome of the application.
- Consider giving early payment discounts if a payment is made before a certain date.
- Late payment penalties can also be a strong motivator. If you are going to go down this path, ensure your customers are made aware of it and it is clearly stated in your terms and conditions.
- You will need to decide whether or not you will absorb the cost of processing credit card payments or whether you will pass these on to your customers as a payment surcharge. In February 2016, the Competition and Consumer Amendment (Payment Surcharges) Act 2016 became law to prevent businesses from charging excessive payment surcharges. That is, you cannot charge a customer more than what it costs you to process a payment.
- Communicate your payment terms before you begin providing a service or send your product, make sure your customers know how long they will have to pay your invoice. A lot of us avoid having conversations about money but the more you do it, the less awkward it will become.
Invoice the customer, get paid. It sounds simple but the reality is that businesses often have cash flow problems because they aren't sending invoices in a timely manner. Don’t wait until the end of the month or the end of the week to issue your invoices - issue them as soon as the work is complete (or regularly throughout the job if appropriate). Here are our tips for best practice invoicing:
- Make sure the invoice is clear and easy to read and understand. If a customer needs to query or clarify your invoice it will mean a delay in being paid.
- Send the invoice to the person in the organisation who is responsible for accounts payable.
- Don't send an invoice with other correspondence – it may be overlooked amongst the other documents.
- Give your customers as many payment options as possible so there are no excuses for non-payment. If appropriate, consider carrying merchant facilities with you, such as mobile EFTPOS or credit card devices.
- Clear up any questions about payments as soon as possible. A follow up phone call after the invoice has gone out is a good opportunity to sort out any issues or confusion a customer has.
- Set up automatic invoice reminders through your accounting software. You can customise the wording of these and set the frequency so that customers get a reminder after 7 days, 14 days or 30 days etc.
Tighten up your debt collection process
- Consistency is key when chasing up debts. If your customers know you won’t follow up early, or won’t follow up consistently, they may take advantage of your inaction. If you offer payment terms of 30 days, we suggest you begin following up debtors when payments are 7 days overdue.
- Ensure your accounts receivable staff are trained appropriately and that the collection process is professional and polite, but firm.
- Ensure your accounts receivable staff are kept in the loop regarding matters relating to invoice disputes, informal extensions of payment terms etc.
- Keep detailed records of all conversations relating to quotes, acceptance of terms and account payments as you may need to rely on these at a later date.
- Negotiate payment plans for customers who are struggling to pay. When an agreement has been reached, immediately send an email or letter documenting what was discussed, and the terms of the agreed payment plan.
- Even the best customers can forget to make payments so you might consider issuing routine emails reminding customers of upcoming payment due dates. For example, “Hello, just a heads up that this invoice is due in 2 days’ time. Simply making sure you are aware of it and it is in your system for payment.”
- If there are ongoing problems with late payments, review the customer's credit terms. You may decide to stop supply on further goods or services until outstanding bills are paid, or require upfront payment in the future.
- Be aware of debt collection laws that specify what you can and can’t do to persuade your debtors to pay.
- If the debt is not settled and communication breaks down, you may want to consider engaging a debt collection service. Debt Collectors and legal action are expensive though and should only be considered a last resort.
Get expert advice
We understand that small business owners enjoy a hands-on approach when it comes to running their business, but if cash flow is a growing concern, it may be time to speak to a professional advisor to help get your finances back on track.