How to avoid bad debts

Want to know how to avoid bad debts in your business?

How well you handle invoicing can make or break your business.  Every business has different methods and issues … so let’s look at some of the key factors in running a successful ‘Accounts Receivable’ process in a typical business.  By typical business, I mean one that offers credit terms to its customers and sends out invoices.

 

Here are the steps:

1. The When and How of Sending Invoices
2. Giving Customers Options to Pay.
3. Terms of (Business) Trade and Credit

 

1. The When and How of Sending Invoices?

When you do your invoices can have a huge impact on your cash position.  You may be staggered to hear that one business owner said …

… he sends out his invoices when he runs out of money!  

It’s easy to get sidetracked with sales, marketing and delivering a product or service and fail to collect payment.  This is probably the biggest factor in business failure.  

If you don’t keep the cash coming in, you quickly struggle to run other aspects of the business, like paying suppliers and your staff etc.  If you can get a systematic process for invoicing, you are well on the way to good financial management. The sooner you invoice customers, the less money you need to borrow to cover running expenses.

How you do your invoicing is as important as when.  

If it’s hand-written, on scrappy paper, it is likely to be treated casually by customers.  If it looks professional and contains all the details, it is more likely to be treated seriously.  

Each and every invoice should have your Credit Terms or Terms of Trade i.e. how many days the customer has to pay.  You would be amazed how many businesses omit this from their invoices.

The problem with not showing your credit terms, is that customers will make up their own!  They will decide to pay you when they feel like it … or when they can.  Other suppliers, who have put credit terms on their invoices, are likely to get paid before you, so give yourself a head start by putting terms on your invoices.  Even better, put the date the payment is due, rather the number of days credit, then there can be absolutely no room for misunderstanding.

2. Giving Customers Options to Pay.

Giving your customers various methods of payment, will help to speed up payment.  Some prefer to directly pay to your bank, others like to pay by credit card.  Credit card merchant fees can be expensive, but not as expensive as waiting 60 or 90 days.  There are many methods of payment available, so why not offer them to ensure you get paid.

3. Terms of (Business) Trade and Credit

It’s easy for some business owners to get excited about their product or service and forget about getting paid.  Getting paid means that business is done  … not just getting started with the sale.  

This means ensuring your customers understand how much, when and how they should pay.  The best way to do this is to have a simple ‘Terms of Trade’ or ‘Terms of Business’ document.  

This can be given to the customer when you have finished the sales process.   That way there can be no excuses for non or late payment.  A good ‘Terms of Trade’ document should contain a clause about ownership of any goods until they are paid for.  See https://www.ppsr.gov.au/ for informatoin about the Personal Property Securities Register if you aren’t already using it.

PPSR can save a business from ruin, where a big customer goes into liquidation holding onto unpaid goods.  If you have registered goods with PPSR, you will have the right to retrieve goods that are unpaid for.

Credit Checks are a really good way to deal with potential slow payers.  If a customer can’t give you at least three credit references, perhaps you may be better off avoiding them.  No sale or a discounted cash sale is always better than a bad debt!