Most small business owners will tell you times are tough.
Customers are tightening their belts and costs are going up.
This is having a ripple effect through the small business community with many small business owners asking for guidance to improve their cash flow, or reduce their aged receivables, which is often business speak for help to get paid.
As business and residential customers downstream spend less or pay late, this has a knock-on effect through entire small business supply chains and ecosystems.
While there is no way to squeeze blood out of stones, there are a few strategies you can employ to ensure more prompt payment from debtors who do have the ability to pay and we are going to look at some of these.
The first is to make it as easy as possible for customers to pay you.
If you have the sort of business where people consume your product or service regularly and predictably, like a gym, swim school or app, consider requiring customers to sign up to a direct debit agreement.
You will sacrifice a small amount of profit for each customer because of the cost of outsourcing to the direct debit provider, but often this is more than made up for by the decrease in late payments or non-payments.
If your business does not lend itself to direct debit agreements, then make sure you are issuing invoices that clearly tell the customer how much to pay, when they must pay, and how to pay.
A confusing invoice may be put in the too hard basket and stay there for as long as the customer can avoid thinking about it.
Also, give customers as many options to pay as possible, don’t be picky.
Give them BPAY details, give them direct debit details, give them PayPal details, tell them they can turn up at your office with cash.
The easier you make it for a customer to give you money the more likely they are to pay quickly.
However, some customers need additional motivation to pay on time.
This is where you need to think about carrots and sticks.
Everyone likes a discount, so offering a discount for early payment can be a powerful motivator.
Likewise, you can also charge reasonable interest on an overdue invoice as an incentive to pay on time.
Courts have ruled that about 10 per cent per annum charged monthly is generally a reasonable interest rate.
However, you do have to make sure this is a term contained in the contract you have with the customer, and you need to be aware that charging interest on a late invoice may damage your ongoing relationship with the customer so if a good customer pays one invoice late you might want to consider waving this interest for them.
If a customer doesn’t pay by the due date, you will have to send them an overdue invoice, and perhaps make a polite phone call to ensure they received the invoice and discuss the overdue amount.
Often that can be enough because sometimes invoices get lost or things get forgotten.
However, if this doesn’t work, you will have to consider a letter of demand that will include the threat to take some sort of action to recover the amount.
In practice you have two avenues, and neither is great.
The first is to commence legal action in the Queensland Civil and Administrative Tribunal (or equivalent) which after a sometimes lengthy and complicated process may end in you obtaining a court order for a bailiff to cease the debtor’s property to be sold on your behalf.
Often matters are resolved before this point though.
The other is to place the debt in the hands of a debt collection agency, or to sell the debt to a debt collection agency.
In either case you are unlikely to recover the full amount because of fees or the need to sell the debt at less than its true value.
Cash flow issues caused by late payments and bad debts are a continuous problem for small businesses and it’s not likely to go away.
You can reduce the risk by getting paid up front if possible or using direct debit agreements.
You can also encourage people to pay early or on time by making it as easy as possible to pay and giving incentives to do so.
And you can create disincentives for paying late.
Ultimately you need to do everything you can do to avoid overdue invoices because while you can take steps to recover overdue debts the results are often mixed at best and both you and the debtor will end up losing after all the time and expenses are added up.
If you have a question about starting a business or running your existing business, we’d love to hear from you because we’ll select a new question to answer here every two weeks.
You can submit your question to james@qsb-consulting.com using the subject ‘CQToday’.
