Cash is King
By Phil Mortimer
There has been plenty of talk about Australia entering into a recession. Technically, a recession is two consecutive quarters of negative GDP growth. But with the COVID-19 lockdown the likelihood of this is very real.
Australia has been lucky as this hasn’t happened here since 1991. Even during the GFC we avoided a recession. So now there are many amongst us, business owners and employees alike, that have never had to deal with working in such economic downturns. A recession can be for six months only but the consequences can linger for quite some time afterwards.
Recessions highlight the axiom that “cash is king”. Profitability, though important, takes a back seat to cashflow. The ability to pay your suppliers, employees and yourself can suddenly become arduous if your clients are not paying you. In some cases, clients may not be able to pay at all. Dealing with debtors who are slow in paying is demanding not only on your bank account but your time, business relationships and, in some cases, on family and friends. It may cause you to wind down your own business to the point where layoffs occur or, worse, complete closure.
The best way for businesses to avoid bad debts is to ensure that they never occur in the first place. Selling goods and services on credit is an accepted model. Many businesses operate this way. The sale itself can be easy and quite satisfying at that time. But it’s not a done deal until its paid for. There needs to be in place procedures to reduce the risk of non-payment.
If you are selling on credit you are in essence providing a loan. As such, you need to think like a bank. You need to be upfront and clear of your payment terms. This includes when you expect payment, how to pay and the consequences of not paying. Interest penalties and late fees should be clearly stated on your invoice when payment is not received within your time limits. These should also be mentioned to the customer when talking to them. Where possible, encourage a deposit when placing an order. At least you would have received part of your money. Better still, of course, promote full payment on order. Make paying as easy as possible with EFTPOS facilities, including the ability to pay online, is a must for all businesses.
If after all this has been applied and payments are not forthcoming then there are other actions available to you. The first would be to cease selling to clients if they can’t pay for existing goods. In some instances where they are reliant solely upon you then this can be very effective. However, this may see the client take their business elsewhere.
If still no payments are received other actions need to be taken. We are not suggesting your client gets a visit from Guido the Killer Pimp and his good friend The Toe-cutter but a systematic (and legal) approach is required.
We have developed our own debtor management system and the process we follow is outlined below. If you don't have anything in place as yet, this may be a good starting point for you to adopt, naturally adapting the process where needed to suit your business:
Send out invoice for goods/services provided
30 days later send out statement
Follow up with a phone call and letter after another 15 days
Send out monthly statement again, this time highlighting the amount owing after 60 days from sale.
After another 15 days a further call and letter
Another monthly statement again highlighting the amount owing after 90 days from sale
Again, a phone call and letter after another 15 days
A final letter, this time, a much firmer response mentioning legal actions after 120 days from sale
Proceed with legal action 15 days after the last letter
Our guide to debt collection has examples of the letters you could use along with scripts in talking to your client with the various follow up calls.
The likelihood of having to go through to legal action will be mitigated by the constant follow-up we are advising. No one wants to get lawyers and courts involved if this can be at all avoided. But by following these steps you will find this very effective in collecting those funds that are rightly owed to you.
Always remember cash is king. Be sure you are following up debtors regularly, during the good times and the bad.
If cashflow is becoming of concern please contact us to help you get the cash flowing in the right direction back to you.
Upcoming webinars to help you get back on track
Now that our restrictions are easing and some of us are returning back to normal trade (and some of us are being overwhelmed with additional trade), it’s time to consider some learnings from the last few months and see what business improvements we can put into place.
This is beneficial in two main ways – easing our reliance on some of the support that business has been receiving from the government as well as operating in a leaner way – creating a resilient business that can weather another storm.
We will be commencing a series of webinars based on the principles of “pivot-adapt” which will hopefully teach you some tools and processes to enable you to recognise any required changes to business practice.
Watch out for more information in your inbox or via our website and social media on when these will start and how to join in.
