Close

Contact MGI South Queensland to talk about what you need and how we can help.

BOOK A CONSULTATIONEXPLORE OUR SERVICES

Our Offices

Brisbane

Level 1
200 Mary Street

Brisbane QLD 4000

GPO Box 1087
Brisbane QLD 4001

PH: (07) 3002 4800

Fax: (07) 3229 5603

Gold Coast

Ground Floor
64 Marine Parade
Southport QLD 4215

GPO Box 3360
Australia Fair
Southport QLD 4215

PH: (07) 5591 1661

Fax: (07) 5591 1772

Enquiries

When you’re busy growing your business it can be easy to neglect managing your debtors – but good debtor management is critical to ensuring your business has enough working capital to reinvest and grow.

Here are six simple steps to help you effectively manage your debtors.

1. Have a credit policy and terms of trade in place

Many businesses supply goods and services on the basis of informal arrangements. Unfortunately this means that disputes often arise that could have been avoided if there had been clear, written terms of trade from the start. Having clear terms of trade is an excellent way of minimising and preventing bad debts.
Make sure you complete thorough credit history and business reference checks before you offer credit to new customers. Clearly articulate to your customers up front, in writing, your terms and the credit limits (so they know you are serious about your collection program) and ensure that they sign acceptance of your terms. It’s important that all your staff understand and follow this credit policy.

If you decide to implement new payment terms and conditions, begin with new customers or customers who wish to extend their credit limit. You may find it more difficult to introduce new terms to existing customers, especially those who have been loyal in the past or who you know personally and don’t wish to upset!

2. Provide the right information on quotes, invoices and statements

If you provide the right information on your documents, and invoice promptly, you are more likely to be paid on time.

All quotes, estimates, invoices, contracts, agreements, purchase orders, and related documents should refer to your terms of trade and credit policy. Invoices and statements should show clearly:

  • the amount owed
  • the payment due date
  • the billing address
  • your bank account details.

Include any extra details that a customer might need, such as the purchase order number, contract/account number, and details of who placed the order. If necessary, contact the customer before billing to check exactly what information they need to expedite payment.

A good way to discourage late payment is to show details on your invoices and statements of the collection charges you may apply to overdue accounts.

3. Make sure your systems are up to date and monitored

The secret to good debtor management is well-maintained information. There are many software solutions available to help you with your credit management, and increasingly more of them are cloud-based. Good software solutions can relieve you of much of the administrative and management pain associated with debtor management.

The best way to minimise issues is to monitor your debtors ledger closely – by keeping close track of the days outstanding you’ll be able to spot adverse trends and take prompt action before they start to have an impact on your cash flow.

4. Implement robust accounts receivable processes

It is very important to have a robust collections process in place, with set timescales for the various stages of communication (letters, emails and phone calls). Map out your process clearly and make sure it’s understood by all your staff. Here are some key points to consider:

Check your delivery systems and keep signed delivery dockets so that you can prove delivery.

  • Invoice as early and as often as possible, as receiving invoices late encourages customers to delay payment.
  • Automatically send 30, 60, and 90 day reminder letters and highlight your trade terms where these are not being met.
  • Regularly follow up on all slow payers to encourage payment. Once customers know you will always make contact if payment is late, you are more likely to get priority when they schedule payments. Don’t finish a follow up call without obtaining a firm commitment to make a payment. Follow up again if it is not paid on the promised date – or better still, arrange a visit.
  • In the event of debtor disputes, insist on the payment of any undisputed amounts to maintain your cash flow while you resolve the issue. Always deal direct with your customers’ decision-makers.

5. Don’t over extend credit and avoid concentration risk

It’s critical that you regularly review the credit limits for each of your customers. Look out for warning signs that they are experiencing financial difficulties. Regularly check for any changes in their buying habits and increasing levels of debt – the new business the customer is giving you may be the result of other suppliers removing credit facilities. Long-standing customers can be the greatest credit risk, because no one thinks to check on them.

High customer concentration (i.e. doing a large proportion of your business with any one customer) carries substantial risks, which can far outweigh any benefits in the long term. Be careful when handling any requests for extended credit, and keep an eye on customers who appear to be expanding quickly. A growing customer may help your sales, but rapid growth also puts pressure on their ability to pay. Make commercial decisions based on their behaviour and any available information – industry gossip about a company’s financial position is often surprisingly accurate.

Stick to your payment terms and immediately stop supplying customers who haven’t paid accounts on time. When you stop credit, discuss the situation with your customer, and reach an understanding about payment for past supplies. You can use the fact that they need your goods or services as leverage to get paid promptly and set conditions for new supplies. This might cost you some business, but it will also reduce the risk of being exposed to bad debt.

6. Bad debt provisioning

Have your terms of trade reviewed by your solicitors to make sure they are legally compliant, so there will be no impediments when it comes to recovering debts.

You may want to consider using credit insurance products and debt recovery services to manage the risk and effects of bad debts. Don’t put off sending professional demand letters or threatening legal action – and be prepared for the possibility of going to court.

Credit management is about safeguarding your profitability, so you should make provisions for bad debts in your annual or ongoing budgeting process, and act swiftly if your debtors begin to exceed your provisions.

Bad debts can quickly spiral out of control and have a serious impact on your cash flow. These six strategies will help you set up robust credit relationships with your customers from the outset – and give you the tools you need to identify and respond swiftly to individual risks or dangerous patterns in your receivables.