How to prevent bad debt

9 tips to protect your business from outstanding invoices

 

Bad debt can significantly impact successful businesses, sometimes resulting in the business having to cease operating. With outstanding debt having a direct correlation to cash flow, it’s no surprise cash flow is the number one issue facing business today – particularly SME’s.

Research by The Invoice Market highlights $76 billion in outstanding invoices nationally – that’s two million businesses dealing with unpaid bills. Their Cash Flow Crisis Report shows each of these businesses are owed a staggering $38,000 each, with corporate customer excuses ranging from it’s ‘lost in the system’ and ‘in dispute’ to ‘being reviewed internally’ and ‘being processed offshore’.

Not only is this an enormous drain on resources, but it can severely impede your cash flow – making or breaking you’re business. When it comes to outstanding invoices, prevention is always better than cure, so it’s crucial that you have systems and processes in place to protect your business.

So, what are some safeguards you can put in place to protect your business’ future?

 

Put checks and balances in place.

Credit reporting companies can provide a financial health check on your clients, be they a business or an individual, and should be mandatory in any onboarding strategy. It’s important, too, to know who you are going into business with. Be sure to speak with past suppliers and industry colleagues so you ensure you have the full picture.

 

Make upfront payments your policy.

Small Business NSW recommends taking partial upfront payment. You can take this one step further and present a payment schedule on engagement – for example, 25% up front, 25% at a key marker in the project and 50% on completion.

These payments reduce the amount owing, meaning that even if your client should fail to pay the final installment, you have recouped the majority of costs. Asking a client to pay by milestone installments is especially helpful for smaller businesses who rely on regular cash flow.

 

Set your payment terms – and stick to them.

It’s key to always set your payment terms in writing with each client. This creates a clear understanding of the conditions of the relationship but it also protects your business – these terms should detail that any costs associated with recovering outstanding invoices fall squarely with the client.

Be sure, too, to reiterate your payment terms on invoices so it’s always on hand. This will also avoid customers choosing to pay on their own terms.

The shorter your credit terms, the more immediate the need for your clients to pay them.

 

Offer incentives for early payers.

Within your payment terms, there could also be scope to offer incentives for timely payment, such as a small discount. Structuring your payment terms to encourage prompt payment is a more favorable approach over issuing late fees and penalties for outstanding invoices – as these are likely to get your clients offside and make them recalcitrant to pay.

 

Up to date systems and processes

Have systems and processes in place that deal with how your business deals with late or missed payments.

Stop supplying goods / services until the invoices is paid. This might cost you additional business, but in some cases its better than costing you time and resources – a cost in some cases that might prove difficult to recoup.

 

Stay in touch.

Your relationship with your client is just like any other in your life – you need to work on it. You need to check in with them regularly, or even pick up the phone for that matter.

Most people have unfortunately been exposed to different scenarios. Could it be that they simply forgot the bill was due? That they’ve had a staffing change in accounts? Or that they are in financial distress and will need to negotiate terms. It’s important to have the whole picture so you can best resolve the situation and stay on top of your own cash flow. For example, if they are experiencing financial difficulties, you can perhaps agree to a partial payment or even a delayed payment arrangement.

Be sure to send prompt and polite reminders on invoices and stay in touch around the time invoices are due. Chances are they will pay your invoice over someone they haven’t heard from in a while – if only to get you off their backs!

 

Prevention is better than collection.

It’s crucial that your accounting systems and processes give you an accurate representation of who owes what at a glance. There are plenty of software providers that offer this for you – the key, though, is to ensure that customer’s details and invoices are always kept up to date. This will empower you to identify trends of clients who are regularly carrying outstanding invoices, and who owes you money.

 

Send out your invoices promptly

It’s important to make sure you send out your invoices on time – the sooner you send them, the sooner they are due. Late invoices can be missed. It’s also good to be aware of your clients’ payment cycles – some businesses only pay monthly, so it’s crucial to send your invoice to catch the right payment schedule.

Once payment is overdue, ensure you have the systems and processes in place that will ensure you can recover it effectively. This might be as simple as picking up the phone or it might be working with a debt collection company. The latter option leaves you free to work on your business and saves you the headache of chasing invoices.

 

Work with the professionals.

A professional debt collection company does just that: collect debts. They are specialists in their field and rely on and employ effective, efficient and ethical systems and processes to best recover monies owed. While their fee structure can vary, for example; a flat fee or a percentage of the amount recovered – it’s important to consider them an investment, not an expense. Many businesses choose to work with a professional debt collection agency for all outstanding invoices, handing over this important aspect of their business to a trusted partner to allow them to focus on running their business.