Getting paid on time has a huge impact on your cashflow.
This credit management guide is designed to help you to manage your accounts receivable. It focuses on key processes that can reduce your business’s exposure to credit risk, including your Terms of Trade, how you conduct credit checks, how you bill and accept payment from customers, how you automate invoicing and payments, and how you manage your accounts receivable.
Your credit management strategy should focus on:
Reviewing how you’ve managed credit in the past will help you identify any weaknesses in your current systems and improve your processes so that your business is more sustainable going forward.
You must have robust Terms of Trade in place before offering credit to your customers.
Your Terms of Trade depict the terms and conditions of a sale, forming a contractual relationship between the buyer and seller. Specificity is key to ensuring your customers know their rights and obligations and that you have grounds to take appropriate action. Your Terms of Trade can help you maximise your margin and profit and therefore your cash position.
Ensure customers accept your Terms of Trade before they first buy from you. Customers must acknowledge in some way that they’ve read and accepted your Terms of Trade; it’s not enough to simply send them to customers. You can change your Terms of Trade as you go but you must point out changes to customers and get them to confirm that they accept them. If you don’t, changes to your Terms of Trade may be unenforceable.
You can read our Terms of Trade blog post here.
Review your Terms of Trade and ensure that they cover:
1. Delivery (how, when, cost, late delivery).
3. Limits on liabilities.
5. Details of each party.
6. Payment terms and late payment implications (interest on late payments, cost of pursuing debt).
7. Personal guarantees from company Directors or Trustees of a Family Trust.
8. Price and matters that impact price (tax, estimates vs quotes, variations).
9. Reservation of title.
10. Risk and insurance.
11. Other relevant items (indemnities, governing laws, force majeure, privacy, credit checks, etc.).
After reviewing and updating your Terms of Trade, share them with your customers, highlighting key changes.
While any updates won’t apply to current accounts receivable, it will ensure you have clear terms for customers to adhere to in the future. You must enforce your Terms of Trade; don’t let your customers avoid paying you on time, as this will have a material impact on the sustainability of your business. Cash is the oxygen your business needs to survive, so ensure you have sufficient cash coming into your business from your customers. Contact us if you need help updating your Terms of Trade.
It’s essential to invoice your customers immediately after supplying the products or services to minimise the time between delivery and receipt of payment.
Utilise online billing software, such as Xero, to invoice customers. Clearly identify the amount due, due date and payment options on each invoice. Make it as easy as possible for the customer to pay.
Review your current payment terms. Consider:
Ideally, customers would pay on receipt of invoices, however, many businesses struggle with cashflow so you may need to offer them additional flexibility, for example:
Automation of billing and payments
Invoicing directly from your accounting software can enable faster payment. Xero allows customers to pay their bill directly from their invoice using credit card, PayPal or Stripe; ensure you’ve enabled this option if using Xero.
Create invoice templates and set up automated email reminders. Remember, you should contact the customer as soon as their invoice becomes overdue, so set the first reminder email to go then.
If you invoice some customers regularly, set up repeating invoices to automate this process.
Define your debtor management process
Your process should cover:
Review your debtors
Ensure debtor information is current and all payments have been reconciled, so that for each debtor you’re clear on:
When you have all this information, prioritise the follow up of your debtors, starting with those most overdue
Record all contact with debtors
Ensure your process includes recording all contact with customers relating to overdue payments in your CRM or Practice Management system, including:
Schedule required follow up in your email calendar, for example, if a message is left on the customer’s phone, schedule a reminder to follow up.
Customers with overdue accounts must be followed up as soon as they become overdue. As emails can be missed or ignored, we recommend using our phone scripts and making contact via phone call. It’s important to plan what you’ll say and how to respond to what the customer says. Our script template encourages you to find out how your customer is and show empathy, professionalism and respect when positioning a request for payment.
If the customer doesn’t answer the phone and you need to leave a message, you must ensure you understand the law surrounding privacy with regard to the detail you include in your voice message.
Generally speaking, if leaving a message on an individual’s mobile phone, only mention the debt if the person’s voicemail message states their name.
If contacting a company, only mention the debt if you’re calling the contact person’s direct extension.
It only takes one customer to turn a call into a major problem if you don’t abide by privacy rules.
Subsequent follow up
If the customer hasn’t paid by the date they agreed, follow them up immediately with a phone call. Find out why they haven’t paid and discuss alternative arrangements. Give them another chance to settle their debt. Remain empathetic, but gain commitment to ensure payment is made.
If the customer still fails to pay, consider your options. If they genuinely can’t make a payment, consider whether you could accept a part payment in full and final settlement of their debt. It’s important to retain customer relationships. Taking enforcement action against customers may cause irreparable relationship damage.
Referral to an external debt collection agency
It may be reasonable to refer some customers to a debt collection agency if they repeatedly fail to pay. If a customer is unable to make payment, it might be pointless doing so; weight up the potential brand damage.
Additional strategies to maximise prompt payment
Consider implementing the below strategies to encourage prompt payment: Be upfront from the beginning, explaining ‘how we do it here’
Quantify prices in advance
If the work required spans a period of time, consider progress billing
Provide payment options
If a service provider, consider agreed fees
Follow up debts systematically and frequently
Articulate the value of the work provided
Build a strong relationship with the customer