Sin number 9 - Not managing your debtors
By Greg Carroll
While you might be very good at what you do, and may even be very successful at making sales, if you don't get paid for that work then you will quickly be in trouble. The fact is there are many businesses that do not pay their bills on time. Unfortunately there are also some that just don't pay their bills at all. So if you think getting paid is simply a case of issuing an invoice and waiting for the money to come in, you might be in for a rude shock.
There are many reasons why people won't rush to pay you:
You rank lower in importance
They may have a number of other bills to pay that will rank higher than yours, like bank interest or the telephone. People know if they don't pay these bills the action taken by their creditors will be swift and without mercy.
They know you won't do much about it
They know you won't do much about it initially. When it comes to dealing with small businesses, people know that they don't have a lot of clout, and therefore know there is little that will be done if they pay late.
They won't pay unless you ask
Some businesses will have an unspoken policy of not paying until you chase them for it. Many business owners know that small businesses are notoriously bad at following up for payment. They may have the cash available to pay, but won't release payment until you phone up and ask for it. So if you just send your invoice and wait, you could be waiting a long time.
They have a system in place
Some businesses will put systems in place that deliberately slow down payment. This a process used very well by big business and government departments. These systems generally require that every job commissioned must be quoted first. Once the quote is obtained and agreed to, a purchase order specifying the quoted work and the price is issued. To get paid you record the Purchase Order number on your invoice and submit your invoice to the appropriate section. The invoice is then matched up with the original purchase order and is paid. Usually under this system there is only one payment cycle a month. The potential problems for you with this system are many:
· If you don't submit your invoice on time you could miss the payment cycle which could suddenly see your payment time frame blowing out from 30 days to 60 days
· If you don't quote the purchase order on your invoice you won't get paid
· If for some reason there is a difference between the original quote and the amount invoiced and you don't have an additional purchase order for the difference you won't get paid
In other words every time you do something that doesn't fit exactly within the payment system, you go to the back of the queue. Also under these systems you are generally never told anything is wrong. You find out when the cheque doesn't show up and then start making enquiries. Under this system the person you are trying to get payment from is often different from the person who contracted your services. They have no knowledge of the work you have done and do not have any relationship with you. Sounds like a great system hey. Again these organizations can get away with it because they are so big.
There could be a dispute over the invoice
If there is a question over the cost of an invoice or over the goods or services rendered this can hold up payment. Sometimes this can be genuine; sometimes this can be used as a tactic to delay payment. I have seen situations where a business may hold up payment to a supplier on $50,000 worth of invoices, because there was a question mark over one of the invoices for a few hundred dollars.
They don't have any money
The heading says it all. Not much you can do here except hope they eventually pay, but the likelihood is slim because they probably also owe a lot of other people money as well.
Maybe after reading this you are now beginning to understand why I said, double the amount of money you will need. Business is a game and many businesses will play the game of stretching payment because it helps their cash flow. Unfortunately if you happen to be at the end of a very long payment chain - like being a subcontractor in the building and construction industry you can be waiting a long time to get paid.
The good thing is there are a number of steps you can take to improve your chances of timely payment; and it can be done in a professional manner without disrupting your relationship with your clients.
Build the expectation from the start
Ensure that at the very start of your relationship with the client you make it clear that you expect to be paid on time. This doesn't mean blurting it out in the first 5 seconds of a meeting, but it does mean having a method of communicating your payment terms early in the process. This may form part of your contract, be included as part of your quoting system or discussed with each individual client. Many people find it difficult to discuss the issue of payment, but if you deal with it in a professional manner up front, it will save a lot of hassle down the track.
If you have a client who has difficulty discussing payment then this could be an early warning sign that they will be a difficult payer. I would suggest asking more questions to find out what the issues are. Chasing clients for payment can be a time consuming and stressful process. If you get a bad vibe it may be better to walk away or to revise credit terms so that a portion is paid up front.
Have a credit assessment procedure
While this has become more difficult under the privacy laws it should be a standard procedure in your business if you are going to provide credit. Providing credit terms to someone means you are lending them your money. Would you loan money to someone without having some certainty that they will pay it back? Any reputable business will have a credit assessment form as part of credit process therefore you are following standard business practice.
At a minimum your form should be seeking the following information
- The legal entity to be invoiced
- Their ABN
- Their years in business
- Address for invoicing
- Person/persons authorized to request goods or services from your business
- Their bank
- 3 trade references
- Authorising person or persons signatures
The form should also contain a Privacy Policy Consent to allow you to contact their referees, and provide details of your trading terms and conditions. Your terms and conditions are particularly important. If you have to chase your client for money you can direct their attention to the agreement they signed. People are more likely to honour an agreement they sign.
Display your terms on your invoices
It almost goes without saying, but your invoices should clearly state when and how you expect to be paid. Another one I have seen many businesses introduce is a clause in relation to disputes and disagreements. For example "If you have any questions or believe this invoice is incorrect you must notify us within 7 days from the date of this invoice, otherwise it will be taken that the invoice is acceptable". Now this probably wouldn't stand up in court, but it acts as another reminder that you intend to get paid, and that you aren't interested in playing games.
Be proactive rather than reactive
For sake of space I haven't been able to cover every trick in the book in terms of delaying payment, but I can assure there are many. Being proactive is an almost sure fire way to make sure you get paid promptly. Here's a great little system that a previous business I was in used:
STEP 1 - Make a phone call to the accounts department or person who will be receiving the invoices a few days after they have been posted, to confirm receipt. If they haven't got them, tell them you will fax them a copy. You've now successfully removed delaying tactic number one. You've also put the person on notice that you expect to be paid.
STEP 2 - Wait a few days and then make contact again to make sure the invoices have been checked and to see if there are any issues/questions. If there are any you can deal with these promptly to keep the payment process moving. You've have now removed delaying tactic number two.
STEP 3 - About one or two days before the due date call again to make sure everything is right for payment. If there will be any delays this will at least give you some warning.
I guarantee if you follow this simple system you will get paid more promptly in most instances. This is because you have educated your client that you want to be paid on time, and the easiest way to stop you ringing is to pay you. "The squeaky wheel gets the oil"
Consider debtor finance
Debtor finance is a solution that can be used to overcome some of the difficulties businesses can experience by effectively bringing forward invoice receipts. The debtor finance market has become a very sophisticated market where it is now generally possible to be paid up to 80% of the value of an invoice with 24-48 hours. For many business this would make a significant difference as opposed to waiting 30 days or longer to get paid and having to carry operating costs through this period.
Consider inventory finance
Inventory finance is like debtor finance in reverse. It is finance used for the purposes of purchase stock or raw materials for a business. This type of facility is generally used as a replacement to the traditional overdraft as it does not need to be secured against property. Therefore it has the ability to grow with a business rather than being limited to the value of real estate.
Get some protection
It is possible to insure for bad debts but it can be relatively expensive. Unless you are dealing with quite large volumes of business it may prove uneconomical. Your other alternative is to simply hold some cash aside to provision for bad debts. Either way it is worth having some cash in reserve so if you do experience late payment you can still meet your other commitments.
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