Managing receivables-goods and services provided to customers on credit
Australian small businesses are in a cycle of unhealthy cash flow with 62% of accounts being settled late and firms taking on average a shocking 54 days to pay bills according to the latest Trades Payments Analysis by Dunn & Bradstreet. The report also reveals that 28% of business executives view outstanding accounts-receivable as their biggest barrier to growth. How do small businesses get their customers to pay on time, break the cycle and improve cash flow?
We recently spoke to Luca Mercorella from Mercantile Credit Management who helped us get back to basics and develop these five simple steps to managing receivables and improving cash flow in your small business.
1. Clearly define your terms and conditions.
You must clearly set out the rules and obligations that govern how you will do business with your clients. This needs to be done at the very beginning of your relationship with the new customer and followed up with written confirmation. Make sure the terms and conditions document is concise and outlines the basis for any debt recovery action. And make sure the client signs this paperwork!
2. Know who you’re dealing with.
It is really important to use a solid credit application form as well as your terms and conditions documentation with your clients. The essentials to have on your application form are the name of the entity, the ABN or ACN, their place of business, their postal address and the name of the contact person. You could also ask the client to provide a list of referees whom you can contact to determine their history with making payments. It is important you do this as soon as you consider offering credit to a client.
3. Keep Accurate Records.
Make sure you keep track of all invoices and payments made by clients. A great way to do this is by using invoicing software. This will show any overdue accounts-receivable, and help you keep track of when customers normally pay their accounts.
4. Send your invoices out on time.
You have to do your bit too! Send out your invoices promptly and in accordance with your terms and conditions. Easy small business accounting software like Cashflow Manager can help you automatically generate invoices, which can then be emailed or sent by post. The sooner you send the invoice, the sooner you will get paid!
5. Establish a follow-up system.
Once a payment is overdue, make sure you start your follow up procedures right away. This may include a warning process for example letters, phone calls, or emails and some sort of consequence – this all depends on the process you have determined. If they are still not paying you could look at other options such as bringing in a collection agency that deals with debt recovery like Mercantile Credit Management.
If you start putting these things into practice, you will find you have a strong credit management process which can be applied to any industry. You will find that if you remain vigilant about credit, you will not only keep your suppliers and clients happy, but you will also maintain a healthy cash flow in your business.
Watch the full webinar with Luca below.