Sometimes the hardest thing in business is not finding customers; it is being paid for the product or service you provide. As Australia’s economy slows, the average age of accounts receivable is stretching many smaller and emerging businesses to almost breaking point.
Extending credit creates real costs for your business, including any interest you incur in operating an overdraft or line of credit through, as well as the loss of productivity (and, frequently, considerable stress) in chasing customer payments.
Before we examine ideas for ensuring fast payment of invoices, it is important to acknowledge that the best defence against unpaid invoices is not giving credit in the first place. You should not offer credit unless specifically asked. Before extending credit, you should explore other payment alternatives (such as having customers pay by corporate credit card). Finally, except in rare instances, you should not extend credit to new customers until they have demonstrated a capacity to make timely payments over several transactions.
Be clear about credit terms
While many people feel uncomfortable about discussing money and payment issues, it is important that you clearly communicate the terms upon which you are offering credit:
- Agree clear payment terms up-front. While many people believe there are industry “standard” terms they must offer, credit periods are, in fact, wholly discretionary. Decide the maximum period you are prepared to accept and document the terms in the original quotation and the subsequent invoice. You should also clearly communicate your payment terms in person to the customer.
- Charge interest. Your documentation should explicitly state that interest (calculated daily at a stipulated rate) is payable on any invoice outstanding beyond its due date. You can decide whether to press for payment of interest on a customer-by-customer basis, but it is important to have the right to collect interest from particularly recalcitrant customers.
- Request part payment in advance. In order to minimise your bad debt exposure, you should seek partial payment in advance, particularly for new customers yet to demonstrate a history of reliable payment. For large deals, you should opt for staggered payments, such as a percentage paid upon placing the order (or requesting the service), a percentage paid at the time of delivery (or tied to two or more delivery milestones if it is a longer-term contract), with the balance payable at an agreed date.
- Stand by your terms. Some clients will try to alter payment terms unilaterally by having their accounts payable department insist it is “company policy” to pay invoices only after a certain period. Make it clear you expect the customer to adhere to the previously agreed payment terms.
The key to ensuring prompt, trouble-free payment is making sure your own house is in order. You and your staff should maintain a solid, working relationship with customers, and be as responsive to customer needs as you expect them to be to yours.
Some additional tips for ensuring prompt payment include:
- Invoice promptly. Ensure invoices are issued immediately, according to the agreed invoicing intervals. Check that invoices are free from error, clearly itemise the products or service sold, contain payment details and clearly indicate how much is payable and when.
- Monitor your debtors list regularly. Your accounting system should enable you to pull up a list of outstanding invoices at any time. You should review this list monthly, at a minimum.
- Issue a reminder. A payment reminder should be issued for each outstanding invoice seven days prior to its due date, together with a note expressing your appreciation of prompt payment. Many companies now accept electronic invoicing, which makes sending follow up messages much more convenient.
- Make prompt contact after due date. The longer an invoice remains unpaid beyond its due date, the less likely it will be paid. If your terms require payment within 30 days, then you should call on the 31st day and reach an agreement about payment.
- Down tools. If a customer is moving too slowly in paying an outstanding invoice, you should consider refusing further supply until payment is made. Being in a position to withhold supply is a strong negotiating position for ensuring payment, but this is a tactic that should not be adopted without first considering the potential impact on the customer relationship.
Your best weapon for achieving payment is to remain fair and reasonable at all times. Do not lose your temper, make threats or abuse customers (or their staff). Be prepared to accept a reasonable compromise. Take the time to explain to customers the impact of non-payment both on your business and your prices in future, and ask for their help in finding a solution. You would be surprised at how quickly customers come about once you apprise them of the situation and ask, “What would you do in my situation?”
Mark Neely is a lawyer, technology commercialisation consultant and author of ten books, including The Business Internet Companion. You can read his blog at www.infolution.com.au. You can view his LinkedIn profile at www.linkedin.com/in/markneely