Recently, the Australian Small Business and Family Enterprise Ombudsman released the findings of the Inquiry into Payment Times and Practices in Australia. The results paint a worrying picture on late payments for SMEs, with one in two reporting more than 40 per cent of their invoices were paid late last financial year.
As any small-business owner knows the slightest delay in payment can significantly affect cashflow, and ultimately the health of your business. The inquiry also revealed almost half of small business are owed more than $20,000 from late payments, and a staggering 14 per cent are owed more than $100,000.
While these results are startling, unfortunately, they are a common occurrence for small businesses across Australia. Similarly, our Canary in the Coal Mine survey of almost 600 SMEs found almost half reported collecting debts has become more difficult in the past year, and more than a quarter said they are spending longer on debt collection.
Not surprisingly, the inquiry found large and multinational businesses were the major culprits of delayed payments for SMEs. While this is concerning, there is something we can learn from these big businesses: the importance of implementing a proactive approach to debt collection by ensuring your business has the correct procedures in place to ensure you have consistent cashflow.
Following these five steps will make sure you have the right processes in place to improve your cashflow and reduce your risk from bad debts.
1. Implement a new customer application
The best way to check a new customer’s credit history is to have all new customers or clients fill out a new customer application form. Before you grant credit it is critical that you determine their credit risk by having them provide their relevant information. This will not only prevent most accounts ever going into default in the first place, but also ensures you have the necessary information to assist should an account default.
2. Define trading terms
Any business offering credit should have professionally-written trading terms to define the relationship with your clients. Incorporate your trading terms in your new customer form so when a new customer signs the form, they acknowledge and legally agree to these terms. Most importantly, these terms should also include a provision that, if the customer fails to repay their account, they are liable for any collection costs for you to recoup payment. This will put you in a stronger position if they default on their payments and means you can refer the debt to an agency without fear of having to pay any fees.
Stay tuned next week for the second half of our checklist to avoid the stress from late payments.