As the COVID pandemic continues to impact business revenue an inevitable result is customers will be slow in paying their accounts or worse not pay them at all.
Getting paid quickly is crucial to your cashflow. For a business to survive, grow and prosper it is essential to have a strong credit process in place which designed to secure payment.
How can you get your bills paid more quickly?
If you follow these 4 steps, I guarantee you will reduce your debtors and get paid quicker.
Step 1 – Make sure you have the right contact details for your customer
It might sound obvious, but we constantly find that when it comes to chasing a debtor our client doesn’t have the full contact details of their customer.
You must make sure that you have the correct details of the business. Does your customer trade as a sole trader, a partnership, a company or a trust? You should also have the full name of the contact person, address of the business (not the PO Box), an email address and a phone number. Once you have the information check that it is right.
Step 2 – Who are you dealing with?
This step is related to the information gathered in step 1. Is your customer a sole trader, a partnership, a company or operating through a trust? Check the ACN and ABN. Why is it important to know who your customer is?
The reason it is important is this information it impacts on the wording of your bill. You must bill the right party. Ultimately if you need to sue your customer you need to know who to sue and you need to be certain the person or company you supplied your goods or services to is the same person or company that your accounts were sent to. We have had many situations were a credit application is in a company name and the accounts are in a person’s name. This can be dealt with, but it slows the recovery process down and complicates and complicates it. Also having the wrong party on the bill will increase recovery costs. Getting it right at the start can save a lot of time and money down the track.
Step 3. Terms of trade – The must have step
You must have well drafted terms of trade that are tailored to your business. Do not copy a competitor’s terms of trade. Why? Because they may be out of date, reference old legislation be tailored to their business or worse copied from the terms of trade of a business that operates in an entirely different field. All too often businesses either have no terms of trade, terms of trade that are out of date or terms of trade that are simply wrong. If the terms of trade are wrong, it will delay payment. At a minimum your Terms of Trade will:
- Set out what the service or product you are supplying and the warranties you are giving.
- Clearly set out your payment terms.
- Allow you to charge interest on overdue accounts.
- Allow you to recover administrative, legal and debt collection costs.
- If you are dealing with a company or a trust include a guarantee from the directors, so they become personally liable for the account. Sometimes it can be commercially difficult to get a guarantee from a director, but it is always good to include it in your terms of trade.
For more information on terms of trade see our article “Protecting your cashflow- the importance of your terms of trade”
Step 4 Proper Credit control – the single most important step
Credit control is difficult but without a doubt it is the single biggest reason for poor debt recovery. Not following up customers on a regular basis and not having a process to deal with debtors means payment terms get stretched out. By following up regularly you quickly identify where the problems are and how to deal with them.
A typical creditor control system would be an automated system that sends a reminder notice 14 days after an account is due. If that doesn’t produce a satisfactory result, then the next step is a telephone call. Typically, a call should be made 7 days after the reminder notice was sent. There is no doubt that following up debtors is time consuming and potentially uncomfortable, but it must be done. If you are too busy to send out reminder notices or not comfortable following up debtors, then outsource that task to someone else. There are many sole operators and organisations that can provide this service at a very affordable price. If you need help with this step, we can recommend some organisations that can assist you with this process.
Credit control is simply a process. But it is a critical process which is easily put in place. It can be done by you or by an outsourced service provider.
If you follow these four steps you will reduce your debtors and you will get paid quicker.
If you or someone you know wants more information or requires advice credit control land terms of trade or help, please don’t hesitate to contact us for a chat on (03) 9600 0162 or email us at email@example.com.
About Andrew Lord
Andrew has 30 years in legal practice specifically advising clients on all aspects of commercial law and small business law.