How to stay on top of debtors
by Greg Carroll www.attitudefinance.com
While it's great to have booming sales, it counts for nothing until you get paid. If your debtors list (clients who owe you money) is growing and you have plenty of slow payers then you are heading for trouble. Small businesses are not particularly good at following up payment. They get busy, they don't have systems in place or they feel uncomfortable asking to get paid.
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. Have 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
Display your terms on your invoices
Your invoices should clearly state when and how you expect to be paid. You can also go a step futher by adding a clause to deal with disputes and disagreements. For example a statement such as "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".
Be proactive rather than reactive
Have a systematic procedure for following up invoice payment. For example if an account is not paid by the due date you may send a reminder notice. If after 7 days you have heard nothing you may make a follow up call. Once clients understand you have a system they are more likely to pay promptly because they know you will keep following up if they don't. "The sqeaky wheel gets the oil".
One important tip - don't just send reminder notices. At some point you need to make telephone contact. People are more likely to pay once they have spoken to you, generally because they will have made some sort of commitment. Also talking to them allows you to guage their reaction and behaviour. There might be something in their tone that starts ringing alarm bells and means you can start taking action before you go deeper in debt.
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.
Consider debtor financing
For example let's assume you have secured a new account but were required to provide credit terms of 45 days. You raise invoices in the first month of $100,000. With debtor financing $70,000 would be banked into your account in 24 hours. So you now have working capital to fund your business. In 45 days the invoices are paid and you receive $28,500 equating to the balance of the funds less an agreed service fee of 1.5%.
The service fee can generally range between 1.5% - 3% and is assessed on a case by case basis. If you consider a business that is offering a 5% discount to clients for early payment they are still ahead.