Give credit where it's due

February 2013

When cashflow gets tight, often the first inclination is for people to review all of the bills they have coming due. i.e. They focus on who they owe money to. What they overlook is a review of who owes them money. This is particularly relevant for those in small business.

Small business is a tough job. Typically the operator of a small business is passionate about what they do, be it electrical work, building, selling flowers or completing tax returns. What they are rarely passionate about is the associated paperwork. Quoting, invoicing, BAS etc. are all things that get in the way of doing what they really are focussed on. And because of this things can fall behind.

The people you owe money to won't let you forget! Expect a late payment reminder from Telstra five minutes after your bill becomes overdue. The bank will add some penalty fees and some interest to your credit card and send out a reminder if you miss a payment. But few people will remind you that they owe you money!

It is up to you to keep on top of collecting payments. Here are a few simple strategies to tidy up the credit management of your small business:

1. Don't offer credit – This might sound simple but too many businesses rush to offer credit where it may not be necessary. You wouldn't expect to pay off a meal at a restaurant over a 3 month instalment plan but people still eat at restaurants. If you can avoid giving credit it will help your cashflow greatly and take a lot of stress out of your business.
2. Outsource your credit facilities – Rather than taking on the risk of non-payment, the pressure on your cashflow and the hassle of chasing up those who owe you money, have a third party provider offer credit to your customers. Some of these providers may even pay you for introducing new customers to them.
3. Set strict timeframes – Too often I hear clients say "this customer has pushed us out to 90 day payment terms." You should set the terms of when your customers pay, not your customers. There are exceptions of course and very large customers will have some bargaining power, but if they negotiate longer timeframes for payment, they still need to pay on time!
4. Set credit limits – Each individual customer should have a preset limit on what you are prepared to have them owe you. The better their payment history is and the more secure they are, the higher the limit you can set for them. If you are going to complete work for a customer that will exceed their credit limit, have them pay a deposit before starting work, or make progress payments to keep them under their limit. You shouldn't let someone owe you more than you are prepared to lose.
5. Have a process for those who don't pay – Different industries will have different processes for collecting outstanding debts. Make sure you know what your process is – and put it into action as soon as a bill is overdue. It may be as simple as a reminder phone call in the first instance and a reminder invoice sent out a few days later. It is much easier to collect money that is a week overdue than money that is 2 months overdue.

A lot of small businesses are reluctant to tighten up their terms or chase customers for money because they run the risk of losing customers. My suggestion would be that customers who don't pay for your goods or services are customers worth losing.

With a number of significant businesses being placed into administration recently, the flow on effect of this will result in previously very solid businesses also facing cashflow pressure. This highlights the importance of knowing who owes you money...and keeping them on a short leash!

This article is for general information only. Any advice in it has been prepared without taking into account your objectives, financial situation or needs. You should therefore not act on it without first taking those things into account and seeking professional advice. While all reasonable care is taken in the preparation of this article, to the extent allowed by legislation, WHK Financial Planning Pty Ltd ABN 51 060 092 631 AFSL 238244 accepts no liability whatsoever for reliance on it.