Want to increase your chances of ultimate business success? The secret lies in being proactive about your debtor management strategy and systems. Here is the Victor Bimrose step-by-step guide to help you get started today:
Create a Debtor Management Strategy that details how your invoicing and receiving processes will work. This includes covering how you will communicate with your debtors, what the process will be if things go wrong and what systems you will use to manage them. (Going over each of our points below and expanding on them in detail will be a BIG step to creating this strategy.)
Set your payment terms and conditions and then stick to them! Will you be offering payment in 7 days, 14 days, end of month, bi-monthly or something else? How much of a deposit is required? And will your terms change based on the amount of the invoice? For example, with larger invoices, some businesses require a larger deposit and more frequent payments to ensure cashflow remains steady.
3. Credit Checks
While not necessary for smaller debtors, if you will be invoicing for large sums of money, it is wise to include Credit Checks as a standard procedure in your Debtor Management Strategy. While this is a small initial outlay, this creates greater peace of mind in your business relationship going forward.
Get a solicitor to review your strategy and terms to ensure they are legally enforceable should the unthinkable happen. They should also be able to advise on common risks within your industry.
Adopt an information management system, such as MYOB or QuickBooks, so your debtor’s information is always at hand should you require it.
Tell your clients your terms upfront and put it in writing to confirm the verbal arrangement. This will avoid any confusion down the track and makes it very clear as to your expectations of them.
While this may seem like a no-brainer, it is surprising how often this point is not considered from the client’s point of view. Make it easy for them to pay you! Do not make your clients jump through hoops or search. The quicker and easier the process for THEM, the quicker YOU get paid.
Get the information right on your invoices, quotes, and statements. Have you included their latest payment? Have you included the GST portion? Your ABN? Your payment details?
Keep everything up to date and record things as they happen, especially if you have a separate department recording the payments and sending the reminders. This avoids sending out reminders to debtors who have already paid.
Regularly monitor your debtors and look for anomalies. This allows you to be proactive and spot where your client might be having financial difficulties before it becomes a problem. Sometimes all it takes is a phone call and a friendly chat to solve the situation.
Do not be stingy on the reminders. Be very firm with your Debtor Management Strategy around reminder dates and stick to the reminder schedules you have set.
Avoid concentrated risk, which put simply, is having a large portion of your outstanding invoices sitting with one client. This leaves you open to a potential cashflow issue (or worse) should the client be unable to pay.
Remember to make provisions in your budgeting for bad debtors so your cashflow accurately reflects each reporting period. It’s advisable to be safe and get a better than expected cashflow report!
If you regularly invoice large amounts and are aware there is potential for bad
debts, consider buying Credit Insurance and having a Debt Recovery Service on hand to help manage the risks.
Above all else, remember that you are effectively in a relationship with your client and, as with any relationship, communication is the key to long-term success.
By following our step-by-step guide, we know you will start being proactive about your debtor management and, in doing so, improve your cashflow. And if cashflow is improved, then ultimate business success is assured.
At VBA we specialise in strategic tax advice, offering tax and financial reporting for individual income earners, family businesses, tradies and construction companies.
General Advice Warning: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.