Avoiding a cash flow crisis: Managing debtors in your small business

Many small business owners are finding it increasingly difficult to manage their debtors. With payment times in Australia being some of the longest in the world, it’s more important than ever for small business owners to take proactive steps to protect their cashflow.

A lack of a cashflow is a serious issue for any small business, often leading to stalled growth and increased financial pressure at a time you are trying to seize new opportunities to move your business forward. This is a growing issue in Australia, where delays in payment dates are among the longest in the world. Recognising this, in late 2018 the Australian Small Business and Family Enterprise Ombudsman announced a review of payment times to measure the effects of late or extended payment on the cash flow of small businesses. While the Ombudman’s findings are likely to be no surprise, there are number of steps that savvy business owners can take to set themselves apart and increase the likelihood of being paid on time.

Be well prepared

There are several simple actions small business owners can take from the outset to avoid debtors spiraling out of control.

1. Perform credit checks on prospective customers – A simple credit check can identify red flags with potential customers, assisting you to assess whether there is likely to be an issue with securing payment down the track. Don’t be afraid to say no if a credit check doesn’t stack up.
2. Know who you are dealing with – Is your corporate customer who they say they are? A search of the Australian Securities and Investments Commission (ASIC) register can help you determine this. By comparing the information on an ASIC report against the information you have received from your potential customer you can avoid unscrupulous dealings that will impact your bottom line down the track. It is not uncommon for creditors to discover that customers carrying debts did not exist, months after the product/service has been supplied.
3. Get your contracts in order – Make your life easier with standard business terms. If you don’t have a standard contract in place, or if it hasn’t been recently reviewed, now is the time to do something about it. This is more important than ever since the legislation on unfair contract terms has recently changed. By ensuring that customers have signed your standard terms before you deal with them, you are clearly defining the nature of the contractual agreement each party is entering into. When paired with a separate credit application form, a standard contract will put you in a strong position should non-payment become an issue later down the track. You should also consider including your terms on your website and documentation including invoices, statements and billing reminders to prevent a customer claiming “I’ve never seen this!”.

Go electronic

Never put invoices in the post if you can avoid it. Since a customer doesn’t require a printed invoice to claim a GST rebate, there’s no need to get the postman involved and end up with a client who claims an invoice was never received. Instead, make use of modern on-the-go e‑invoicing offered by companies like Xero and QuickBooks to speed up the process and automate payment reminders.

There is no doubt that e-invoicing is the way forward for Australian businesses, with the Australian Government currently working to set the direction of the roll-out of e-invoicing to achieve more streamlined payments, grow the digital economy, and to help small business owners save time and money.

Make it easy for customers, and yourself

It might sound obvious, but don’t make paying your bills harder than it needs to be. Between traditional payment methods (cheque, direct deposit, BPAY, credit card) and more recent payment options (PayPal and PayID), it’s never been easier for your customers to settle their invoices. The more choice you can offer, the better. Don’t forget to gather all the data your customer needs to see on their invoices when you sign them up so you don’t leave them with a simple reason not to pay you.

The customer should receive your invoice the day you process and issue it. Don’t wait weeks (or months) after a job is completed before sending an invoice. Your cash flow will hit rock bottom in the meantime. Start the clock ticking immediately and again, make sure all the payment options appear on every invoice.

Negotiate, negotiate, negotiate!

On long supply jobs, negotiate progress payment terms – then document them. This elongates your cash flow, as well as your customer’s, rather than having lumpy payments that might be too much of a stretch by that point.

Despite how tempting it may be, don’t provide early payment incentives or discounts, as the cost is usually too high for the cash flow of a small business. More importantly, it sends the wrong message that you’ll always discount your price. A better idea is to penalise late payment and charge interest in accordance with your standard terms. And don’t shy away from actually charging the interest you say you will. Most creditors have interest charges in their terms and never enforce them, on the principal that “something is better than nothing” or “I didn’t want to upset them”. If you are being treated like a bank, you should act like one. Add the interest charge to the next invoice.

Tighten credit terms

Do you really need to offer any credit? Especially to new customers? One-off accounts should never be given credit. They should be a repeat customer before being offered credit. Again, your business is not their bank.

Consider reducing the required time for payment from 30 days to 7 or 14 days. Some customers only pay 30 days after receiving a statement and this translates to 60 days if you are invoicing monthly. By this stage its likely to be a long road before you receive payment from an unsecured creditor.

Timing is everything

Do your staff know the procedures for recovering debts? Do you even have procedures? Now is the time to get this process sorted.

Aim to be consistent with all your customers, otherwise your staff will never know who to chase or when. Sure, you’ll usually have late payers, but that is no reason not to enforce your processes. As a starting point, you should:

• Gather all relevant records;
• Make an initial phone call contact (an email will always be deleted at the other end). You should ask if there’s a reason for the late payment, as you may be able to help with a solution;
• Issue one statement (no more than one);
• Send a simple letter of demand (including any stop-supply);
• Commence legal action as a last resort

Don’t delay on this. Keeping on top of late payers gets you paid quicker – it’s just human nature. The squeaky wheel gets the grease. If you don’t chase, they won’t pay. And if your customer knows you will chase them, they are more likely just to pay on time in the future.

If you want a reputation in your industry (and who doesn’t want one?), then do not be known as a soft touch on your invoices. Your clients should already know what to expect if they are late in paying you. There should be no surprises for them. Hopefully that alone encourages them to pay on time. Build that reputation.

When do you “go legal”?

It’s time to involve a lawyer when you have exhausted your internal procedures. However, the debt has to be of a sufficient size to make legal action economical. You cannot recover your legal costs in a letter of demand issued by a lawyer; this is only possible once you have issued an served court proceedings. On significant debts (ie over $10K) a simple legal letter may get a quicker result than using a collection agency, who usually charges a percentage of the amount recovered, and rarely go “fully legal”.

It’s a simple rule: the longer you wait to recover, then less likely you’ll recover.

Other tips

There are many strategies you can implement to manage debtors in your small business. These include:

• Documenting all interactions and payment agreements with customers
• Confirming the outcome of a discussion by email is a simple way of doing this. Written records make good evidence; conversations are much harder to prove.
• Requesting money upfront from new customers.
• Withdrawing credit and revert to cash on delivery when payment is late.
• Diarising your follow ups and sticking to them.

There are also other actions you can take upfront, including taking security, directors’ guarantees and trade credit insurance. An experienced lawyer can explain what these options offer you, and whether they are the best course of action for your business.

Conclusions

The simplest advice is often the best when managing your business debtors:

1. Check out your customer before exposing your business to risk;
2. Have a solid contract in place;
3. Enforce your contracts terms – sooner rather than later;
4. Don’t be afraid to chase debtors early with your lawyer’s assistance; and
5. Consider your other options of registered security, directors’ guarantees and trade credit insurance.

All small business owners know that cash-flow matters. By managing your debtors from the outset, you’re putting yourself in the best possible position to protect your business.

This article is intended for general information only. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.