Small Business

Putting in place credit procedures for a small business is much harder.

Many small businesses do not have any formal Terms of Trade, formal Credit Applications etc. Much of the business is done on trust with the shake of a hand. A verbal contract is a binding contract but to make it stick you need to be able to prove it. How? Put things in writing or by email and keep a copy. If the issue comes up in front of a Judge or Disputes Tribunal referee then the person with the best evidence usually wins. Document it, even if it is a file note recording the agreement, signed and dated by the business owner. Get into the habit of documenting everything and then you will seldom need it.

Remember “a sale is not a sale until it is paid for” is as true today as it was 30 years ago.

Good credit management is about managing one’s outstanding accounts (debtors) to maximise your cash flow while at the same time retaining your clients. You can’t pay your suppliers unless you get paid or you have a very accommodating bank manager.

In a perfect world a business would send out invoices and/or statements and the money would just roll in. Why does this not happen and what can be done to fix the problem?

There are a number of good business practices that can be used to collect your money faster:

• Look to put into place simple Terms and Conditions (one page maximum) and have these included with your quotations/estimates and on all information that is given to your clients. Make sure these terms are printed on the back of all invoices (or attached by separate page). These terms must go out with every quote, even every faxed quote must have the terms included (the fax machine doesn’t fax the reverse side so get into the habit of a separate page).
• Make sure you get your clients to return a signed acceptance of the service or goods. If verbal acceptance, then confirm the acceptance by email and/or document the conversation.
• If your business is growing it probably can’t afford a full time Credit Manager/Controller. Obtain the services of a part time person or out source the position but get the most experienced person you can.
• Post invoices promptly, don’t wait until the end of the month. A small business should invoice at least weekly and post out invoices regularly. Don’t hold the invoices until the end of the month to save postage, as a lot of customers pay on invoice.
• There is a direct correlation between the number of working days after the end of the month the final invoices are sent out and amount of cash collected that month. The final invoices should be sent out no later than 2-3 working days after the end of the month. This is very important.
• Send out statements as soon as possible after the end of the month. Statements need to be in the mail by the 3rd working day at the latest. If you are not sending out statements look to start doing this.
• Look to reduce your terms of credit. Have your regular clients due on 20th of the month following the month of invoice but all others on 7,10 or 14 day terms (choose one that suits your industry). Often it can be more cost effective to offer a discount and move smaller customers to cash accounts.
• Put a due date on your invoices: “This account is due for payment on (date, e.g. 10/6/2010).” Not “This invoice is due for payment on the 20th of the month following the month of invoice” or “This invoice is due in 10 days”.
• Use statement stickers or hand written post-it notes on overdue accounts. Make sure the account is actually still overdue and the client hasn’t paid before sending the statements. If you don’t produce statements, look to start doing this or print a copy invoice and place the post-it note on the copy invoice.
• Look to start charging interest on overdue accounts. Rebate back if necessary but explain that we will credit this time but if the account is overdue again then interest will be charged. Businesses must have a signed agreement from client to enforce this and this can be by a signed quotation (see point number 1 above).
• Don’t invoice until the supply or service is complete (i.e. don’t send out the invoice 3 days before the job is finished, don’t sent out the invoice when you can’t deliver the total order. Only invoice when the job has been FINISHED and you have checked with the client that everything has been done and they are happy). All your great client rapport you have built up can be undone in a second by sending out the invoice before you have checked that job is finished. It is a simple phone call.
• Regularly telephone overdue accounts 4-7 days after due date, don’t leave until the next month. Start slowly and build it up. If you are not happy doing this get someone who is.
• Check new clients on the Companies Office website, phone around to see who has been dealing with them previously, build up a network of contacts to check out new clients. Be aware of the Privacy Act ramifications when checking out individuals.
• Only give credit to credit worthy clients. Obtain a credit report on new clients and learn how to read these reports. Obtain access to the Veda Advantage credit reporting, it is not expensive ($300 per year and $15-$25 per report). If a new client has been involved in a previous company that has gone into receivership or liquidation etc then don’t give the new company credit. If a client has gone bankrupt there is a 50% chance that they will go bankrupt again. You will need to take expert advice on how to set up these procedures.
• Work out how you are going to deal with “special clients” (e.g. those that buy large, get the biggest discounts, never pay on time and usually make the most noise). What will this debt do to your business if it doesn’t get paid? Is it worth the worry and trouble? The unfortunate fact is that many small business owners don’t review this and don’t look past the sale, hoping that the client will pay.
• Belong to trade groups and listen to the problems that your competitors are having and learn the lessons.

These are all common sense rules that you can put into practice.

Credit management is not hard but many sales people and managers/owners are afraid they will upset clients by asking for your money to be paid. While it is true that nothing happens until someone sells something, it is also true that accounts must be paid on time for the business to function effectively. There is a very fine line, but strong credit management will usually produce better profits than giving extended credit.

If you do nothing else at all, remember "The Golden Rules of Credit"...

• Know who you are dealing with (Are you dealing with an individual, trust, partnership or company?)
• The squeaky wheel gets the oil (If you don’t make a noise you won’t get paid.)
• A leopard never changes its spots (A bad credit risk is always a bad credit risk.)

The best indicator of what a man or woman will do tomorrow is what he or she did yesterday.

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Remember, knowing 'how' to do it and 'doing it' are two very different things.

If you want help in improving your debtor’s ledger or implementing the above, please phone Gary Whiteside or one of our consultants.

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