Top tips for managing customer risk and avoiding bad debts

There has never been a more challenging time to operate a small business. The pace of technological advancement continues to increase exponentially, customers’ consumption habits are transforming, banks are tightening lending rules and the hangover of the GFC still weighs heavy on the minds of many business and political leaders.

In our efforts to keep on top of things in our own businesses it is easy to forget what our customers are experiencing. Like us, our customers are constantly being disrupted, as are their customers, and on it goes. We tend to monitor what our customers are doing but their ability to pay us depends on how well their customers are performing. Taking the time to get to know your customers better and understand the pressures they are under will greatly improve the working relationship and efficiency of transactions and can even increase word-of-mouth referrals. Some techniques for getting to know your customers and their behaviour better include:

  • Focusing on the customer’s pain points and how you can remedy those, rather than just selling your product or service.
  • Matching your solutions to your customers’ changing needs.
  • Putting yourself in their shoes and looking at your business from that perspective. Are any of your customer facing staff a bit grumpy? Could your premises do with a lick of paint?
  • Analysing customer data from your customer relationship management system (CRM). This information is a valuable source of insights about customer behaviour and preferences but also about your own performance.

Customers are important assets but they can be high risk assets. Every business must ensure, where possible, that they have the right clients, and the appropriate policies and procedures to manage them. As with any critical asset, it is prudent to have a continuity plan in place to manage any disruptions that might arise. There are some simple procedures and policies a business can implement to mitigate the risk of a client default:

Implement a process for selection and assessment of new clients

  • Check the ABN on the purchase order, service agreement or contract you have with your customers.
  • Always ask for a credit application to be completed with the buyer’s ABN on it.
  • Conduct an appropriate credit search on the ABN (not the trading names).
  • If necessary, conduct a business name search.

Monitor payment behaviour and take action if necessary

It is good business practice to monitor customers’ payment behaviour. Those who are constantly late with payments need to be dealt with quickly. The longer an invoice goes unpaid, the greater the chance of a default.

Ensure that your customer base is diversified

Review your debtors ledger. Is your ledger concentrated on one industry or a particular market? What is the likely impact on your business if that industry or market was to slow down? Are your debtors affiliated or interrelated, exposing your business to the domino effect?

Could you offer your product or service to a similar industry? Consider replicating your business or servicing a different geographical market.

Protect your interests

There are various forms of business and credit Insurance, such as trade credit insurance and business credit insurance, that can reduce your financial exposure to client payment defaults and failure of your business.

If you sell stock, register your interest in accounts and proceeds on the Personal Property Securities Register (PPSR). This may help recover more of your debt if your customer goes into liquidation. Working with a business consultant or debtor finance company can also assist with strategies for managing client risk.

Greg Charlwood, Managing Director, Australian Invoice Finance

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