It’s a dog-eat-dog world out there. In the wake of the financial crisis there’s a tendency to do anything to win business. But businesses that take this approach open themselves up to the very real risk of toxic debt in the same way the US found itself in the grip of the subprime mortgage crisis – lenders were so hungry to win market share they were prepared to lend money to anyone, without properly investigating whether the mortgagor could really pay back their loans.
We all saw where that approach ended up and it’s important not to expose your own business to this dynamic.
Here, we look at ways you can increase the likelihood that the people with whom you do business will be able to pay their debts.
1. Have a solid contract, terms and conditions
Establish a clear legal relationship with all your customers right from the beginning. Clearly state in writing your terms and conditions of trade and when payment is required (your credit policy), making sure that the terms are relevant to your business and industry.
Include your terms on all quotes, estimates, agreements and related documentation.
Make sure that you are dealing with a correctly identified legal entity, whether it be a sole trader, partnership, Company or Trust, and have the proper documentation in place, and correctly signed.
2. Know your customer before you deal with them
Extending credit is quite simply giving someone a loan – In our day to day life, we would think long and hard before handing over any money to someone we didn’t know based on a handshake promise of being repaid, but sadly in business, particularly small business, owners can be too eager to close the sale and skip the due diligence process required to make an informed decision on the risks associated with the transaction.
A simple and inexpensive credit check will ensure that businesses are able to clearly weigh up the risk and reward of a new relationship, whether they should extend credit to a customer, how much credit and on what terms.
Reviewing historical credit repayment behaviour is extremely effective in assessing the risk of future default – the early detection of credit risk will reduce costs attributed to bad debt collection and write offs.
A company credit report will give you access to trade history accumulated over a five year period and will include information such as: company details, payment defaults, court judgments, public notices security interests.
The cost of knowing a prospective customer’s credit history will never go beyond the impact that can potentially be caused by making poor credit decisions
3. Invoice promptly to get paid faster
I have had the pleasure of working with many skilled trades people and professionals over the years and the recurring theme of cash-flow woe often has its roots in the invoicing process.
The pressures faced by business owners and managers of doing business and getting the work done can mean that the administrative actions required to close the sale can be pushed aside to when time permits.
Getting the invoice out promptly and ensuring the details are accurate will improve cashflow, customer relations and even retention in no time.
The introduction of Smartphone technology for sales and invoice software can streamline the process incredibly.
Remember to add important details such as the amount due along with the date and preferred payment method.
Including a specific payment date will see you paid faster than the standard 14 or 30 day terms.
Be sure to also include your full terms and conditions on the back of your invoices and always try to resolve invoice queries or disputes quickly.
Aim to be easy to deal with and easy to pay by considering flexible payment methods such as EFT and credit card payments as well as traditional methods such as cheque or cash.
4. Monitoring your debtors
Develop a good record management system and keep records up to date so you can quickly identify who owes you money, how much is owed and whether they pay on time or are stretching the credit friendship and developing slow payment / high risk traits.
Take a proactive approach to credit management by contacting clients a few days before the due date to remind them a payment is due and ask if they foresee any problems with meeting their obligation.
Implement your debt collection practices the minute a debt becomes overdue and ensure clients do not exceed their credit limits.
For many, it’s not easy asking people for money, especially if the account in arrears relates to one of your best customers, so it is essential to give the person in your business with the responsibility of collecting past due accounts the right training to do their job confidently and effectively.
Training staff how to appropriately collect past due accounts and creating a guideline for them to work within when escalating collection matters will make a big difference to the length of time the account is outstanding and to your business cash flow.
5. The bottom line…
Being vigilant about your accounts receivable is vital. Where there has been a breach of your agreed terms you need to follow up promptly and effectively.
There is a clear connection between the age of the debt and the likelihood you will be able to collect payment: the older the debt, the less likely it is you will be able to collect it.
Author Bio: Angela McDonald is Director of Optimum Recoveries, which provides debt prevention and management solutions to businesses across Australia. To learn more about Angela, view her profile.
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February 9, 2010
