Tips to manage cash flow with customers

We are fast approaching one of the most challenging times of the year for small businesses in terms of cash flow – Christmas!

In order to keep on top of finances, small businesses should start planning now to ensure they do not end up waiting until sometime in February to get paid for work completed in November.

These are a few tips and guidelines not only for the Christmas cash flow crunch, but also to get you ready for the new year and moving forward:

1. PLAN AND BUDGET

Prepare a detailed cash flow plan. Your budget should take into account your complete financial position, so it is important to make a list of all your expenses. We suggest you speak to your financial adviser or accountant who can provide some useful tips and tools to get you started.

In addition, the ATO has some great tips on their website under “Starting and running your small business”.

2. SEND INVOICES EARLY

This is vital in any small business. You won’t get paid unless the invoice is issued and sent. Don’t wait till the month’s end. Make sure your payment terms are clearly stated on your invoices.

Standard credit terms are often 14, 21 or even 30 days. If you do provide credit, it is advisable to review payment terms regularly to help manage your cash flow.

3. DISCOUNT FOR EARLY PAYMENT

Christmas is a time of giving, so why not offer a discount if the invoice is paid on time or prior to Christmas? This will save you time chasing delinquent debts in the new year.

4. PAYMENT PLANS

Work with your debtors and extend the time to repay the debt over a reasonable period. If this is an option you choose, then you should document the arrangement formally.

Ensure that you enter into a formal agreement that incorporates the following:

• The original debt
• Date of invoice
• Invoice number
• Due date of the payments
• Frequency of the payments (e.g. weekly, fortnightly, monthly)
• Offer direct debit / BPAY / credit card details for ease of payment
• If there is a default in any instalment, the full amount becomes due immediately
• If stated in your terms and conditions, provide for the ongoing accrual of interest if applicable

5. RECOVERY OF DEBTS

If all else has failed and communication has ceased, and invoices are now 90 days or older, you need to take action.

A letter of demand allows you to formally document and reinforce the details of overdue invoices. It also enables you to outline the actions that will be taken if payment is not made by a specific date.

If the debtor does not respond to your demands, it’s time to refer them to a debt collection agency.

We work with you, merging seamlessly with your organisation to ensure that your debts are collected in a timely and efficient manner. DSA Collections runs on a commission basis, ensuring that you only pay upon a successful outcome.

6. LEGAL ACTION

If we do not receive a response to our letters of demand, or if the debtor refuses to repay the debt, we can begin to take steps to recover the debt via the Courts and/or VCAT.

Before proceeding with any legal action, we will discuss the costs and procedures with you and obtain your authority prior to commencing any action.

7. RISK AND CREDIT TERMS FOR NEW CUSTOMERS

Offering credit increases your risk of not being paid or being paid late, so it is important to perform credit checks vigorously on all new clients and those late payers. You should also consider obtaining a director’s guarantee, so that if a company gets into financial difficulty, you can pursue the directors personally for the debt.

A complete credit application form should include the following:

• Full name, address and contact details of the applicant
• ABN, ACN, business details, and director/partner/owner information
• A minimum of three supplier references
• A signature confirming they have read and agreed to your terms and conditions
• Written permission to conduct a credit check

When you decide to progress the application and provide credit to your client, you should advise them in writing of the following:

• The credit limit
• The credit terms
• The default or penalty terms and conditions

How can DSA Law help?

If you have a commercial law issue and believe you could benefit from expert legal assistance, please contact us or one of our Commercial Lawyers at DSA Law on (03) 8595 9580.