Cash flow troubles cause 80 percent of business failures, according to Dun & Bradstreet, and are behind a recent surge in crash and burns. The company’s latest research links a 25 percent increase in business failures in 2010 with a similar increase in the number of days business customers took to pay their bills — the peak average of 53 days is almost twice as long as the standard 30 day payment terms. That’s almost two months, which is a long time to wait for your money, especially for small, home-based and micro-businesses!
So how can you get your debtors to pay on time?
Here are some tips not just to reel in that much-needed cash, but also to prevent overdue invoices in the first place.
Only Give Credit Where it’s Due
Most bad debts come from new clients. A credit application form is a handy screening tool, and allows you to stipulate trading terms. It should include:
- The applicant’s details, such as business name, business type, ABN, postal and street address, telephone and email, and the names and contacts of all owners, partners and directors.
- Financial information, such as bank name and branch, the amount of credit required and the name of the person in charge of accounts payable.
- Names and contact details for two to four trade references.
- Terms and conditions, including how many days from the date of invoices payment is due, and additional charges for overdue accounts, such as interest and administration fees.
- Signatures and dates from all parties.
Gimme, Gimme, Gimme
Develop a process for dealing with debtors… and stick to it! You’ll be more likely to get your money and will also train clients that you’re serious about your trading terms. First, you need to track when payments are due. As the owner of an accounting software company, any system worth its salt should show when an invoice was created and delivered at a glance. Some experts recommend a polite email or phone call the day after payment is due, while others advocate chasing all overdue bills at once when you do your monthly bank reconciliation. Whichever you choose, a neat conversation opener is, “I’m doing my accounts and notice your account is overdue….”. The aim is not just to remind, but get a positive, concrete outcome. When will they pay? Is there a problem? Can you arrange a payment plan? How can you help them pay on time in future? If the account remains unpaid, escalate the pressure. Call more often or visit your client in person. If the client is a regular, decline ongoing work or withhold supplies until at least part payment is made. However, always keep your cool… resorting to bullying will achieve nothing but a close relationship with their solicitor. Your final resort is a letter warning the client that you’ll hand the matter to your own solicitor or a debt collection agency if the account is not settled by a specific date. Make it clear that the client will be responsible for all fees incurred. Then never work with that client again!
Prevention is the Best Cure
Now that I’ve explained all the nasty stuff, here’s some good news… you can put a dozen or so practices into place to reduce the chance of late payment. Try these simple ideas:
- Allow for human error… sometimes mistakes or misunderstandings cause late payments.
- Outline payment terms when you first establish a trading relationship. Be flexible… discuss client preferences and negotiate a win-win situation.
- Also make payment terms very clear on your invoices.
- Provide customers with a number of payment options and ask which they prefer.
- Ask clients to tell you if something will delay a payment… you can then adjust the due date or offer a payment plan.
- Develop client relationships, which turns you into a living, breathing person, rather than an anonymous company. This can be as simple as contacting clients to make sure they’re satisfied with their latest order, scheduling meetings near payment due dates, setting lunch dates, or sending cards for birthdays and other special events.
- Issue invoices promptly, with goods and services, if possible.
- Ask about client payment cycles. For instance, some companies pay bills on a particular day of the week, while others follow standard industry procedures. For example, 90 days is the wine industry standard, which is three times longer than the more common 30 days.
- Consider discounts for early or upfront payments.
- For large projects especially, ask for a deposit or break the work into a series of milestones, with a part payment due as each is achieved.
- Ask for a purchase order or written confirmation for every project… I know someone who lost payment for IT training because the company claimed they hadn’t ordered it and no documentation existed to prove otherwise, even though the service had been happily received.
